Equities that thrive on global change

The newly launched Capital Group UK — New Perspective Fund is a UK domiciled fund, based on Capital Group’s flagship global equity strategy*, which has been time-tested over more than 50 years of global change.

For over half a century, the New Perspective strategy has navigated a broad range of market environments by targeting companies that are driving and benefiting from changing patterns of global trade. Investment Director Steve Smith explains how it is positioned to thrive in today’s constantly evolving world.

Change is constant

If we look back over recent history, equity markets have tended to move in decadal mega cycles, where one major ‘theme’ has dominated market returns.

In the 1970s, energy and commodity companies were dominant, followed by the rise of computing, personal electronics and mobile communications in the 1980s and 1990s. In the 2000s, we saw the growth of global trade driven by emerging markets and China, while digital innovators and scalable internet platforms have dominated since the 2010s.

In recent years, companies who were the beneficiaries of lower interest rates have accounted for a large proportion of equity market returns. This has led to a handful of  US-domiciled mega-cap technology platforms dominating the top positions in equity indices.

However, we believe we have now moved into a different market cycle; one marked by higher interest rates than we have been historically used to, more volatile inflation and elevated geopolitical tensions.

But while change is the norm in the global economy, what is unique – and exciting for investors – about this current point in time is that there appears to be a confluence of several transformational and multi-generational shifts occurring simultaneously.

We currently see three areas of major transformational change. And as our portfolio managers invest on a stock-by-stock basis, these areas are reflected in the New Perspective portfolio, where potentially exciting investment opportunity are identified in companies that could benefit – and thrive – on these long-term shifts in the global economy.

1. Disruptive force of artificial intelligence (AI)

One of the most attractive features of AI for investors is that its ultimate size of the end-market is potentially limitless, due to its pervasiveness across so many parts of the economy. However, it is critical to separate short-term hype from longer-term investment opportunity. We are therefore focused on determining the potential implications of AI and what factors may accelerate or decelerate the pace of adoption.

We arrived at an AI investment framework that focuses on the following areas: compute (semiconductors, or the ‘brains’ of AI), infrastructure (cloud service providers, data centres and networks, which provide the ‘plumbing’), AI model developers, software applications (embedding AI into software and charging a recurring fee), and finally the real-life and end-industry beneficiaries.

Given the multi-faceted nature of the AI ecosystem, there is no single ‘correct’ way to map out the various investable opportunities. However, an investment framework is helping us to define the near- and long-term potential opportunities.

2. ‘Third wave’ of health care innovation

The first wave of innovation was largely about chemistry − simple compounds and small molecule drugs created in labs − that could address everyday illnesses. The second wave moved from primarily inorganic chemistry to organic − involving large molecules or protein-based therapies, tackling more complex diseases including diabetes, cancers, immune deficiencies and blood clotting.

Now we are at the beginning of the third wave − the genetic era. This could be transformative for health care as breakthroughs are leading to the creation of highly targeted interventions to tackle a wide range of genetic disorders. Examples of these treatments include RNA interference (RNAi), gene therapy and gene editing.

These new technologies are paving the way for novel treatments that could address major, but largely untreated, illnesses worldwide such as cancer, obesity and cognitive impairment. As development progresses, these innovative treatments could have profound implications on global life expectancy and quality of living.

3. Industrial renaissance

For much of the past 15 years investors have focused on ‘growth’ companies and largely ignored more  old-economy industrial businesses that make physical things. However, signs are emerging of an ‘industrial renaissance’ driven by several multi-year trends. These include the shift to renewable energy sources, energy security, the buildout of data centres, rising defence spending amid a heightened geopolitical risk environment, and the desire to reconfigure global supply chains.

Essentially, old economy manufacturers could become critical enablers of our future economy and, in doing so, transform themselves into long-term growth companies.

Looking forward, we expect these powerful, transformational forces to drive growth across a broader range of companies. This could provide a richer and more diverse set of investment opportunities that Capital Group UK – New Perspective Fund can draw from, helping it to target durable outcomes for investors over the next decade and beyond.

* The Capital Group New Perspective strategy was incepted on 31 March 1973. Capital Group UK – New Perspective Fund, which is an open-ended investment company (OEIC), was launched on 9 July 2024. An OEIC is defined as a type of UK-based investment fund that is structured as a company in order to invest in stocks and other securities. The fund has the same investment team and follows the same investment approach as the New Perspective strategy.