Investing for tomorrow and navigating change: 50 years of investment excellence

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Hi, I’m Joss Murphy, research analyst at FundCalibre. Today I’ve been joined by Steve Smith, investment director at Capital Group. How are you, Steve?

[00:11] Very well, thank you, Joss.

Well, let’s kick things off. The New Perspective Fund celebrated 50 years in 2023. How does the strategy like this one continue to stay relevant year after year?

[00:24] So, I’m slightly biased, but I do think it’s a remarkable achievement for a fund to have been around for 50 years, and I think it’s even more remarkable that a fund has managed to remain consistently relevant for so long.

If we just quickly look back over the 50 year lifetime of New Perspective, it’s delivered on average of 13.3% per annum return – that’s in GBP sterling after fees, which compares to a global equity market return that’s just under 10% per annum. So New Perspective has outperformed the global market by on average about 3.5% per annum over 50 years. So for us, it’s very much our 50 year counter argument to passive investing, and we’re grateful to be entrusted with over 110 billion pounds of assets on behalf of clients in New Perspective from clients around the world.

But to directly answer your question, how does a fund stay relevant for essentially 50 years?

I think there are several reasons. I’ll briefly outline three of them. The first is New Perspective is built to last. By design, we are trying to invest in long-term investment opportunities arising from transformational changes in the global economy. And as we all know, change is constant. So New Perspective is time tested over five decades of changed the investment objective. The investment process has never changed in 50 years. So when you and and clients do due diligence on New Perspective, they kind of know what they’re getting and they know that the key areas like investment process and objective won’t change.

The second reason why a fund like New Perspective has managed to stay relevant and consistent for so long is down to the types of companies that we’re investing in. So the opportunity set for New Perspective is enduring, it’s ever growing, it’s global and multinational companies. So specifically we’re investing in a spectrum of multinational companies ranging from those early stage potential future global champions all the way up to the established global multinational champions of today. So we’re basically trying to build a fund of today’s and hopefully tomorrow’s global champions.

And then just finally I think, and this is really important to the longevity of New Perspective, it’s that New Perspective is what I define as a structurally flexible; we can invest in any geography, any sector, any type of company, we are not constrained. Your capital, the client’s capital simply flows to our portfolio manager’s highest long-term investment ideas. That flexibility allows us to reposition the portfolio over different decades, over different cycles, to invest in the next generation and the next cycle of global economy and stock market leaders.

And Steve, how has the portfolio changed over that 50 years?

[03:02] Well, on the one hand, as I mentioned, not a lot has changed in terms of the investment process, the investment objective, that spectrum of multinational. And I think that’s a good thing. But on the other hand, as I also said, by design New Perspective was deliberately set up to invest in and capture long-term structural change.

So I think the biggest change over certainly the last 50 years has been the parts of the global economy and the different sectors where we found different investment opportunities at different times. So New Perspective has always been well diversified, but over different cycles, over different decades, New Perspective has definitely had peak exposures to different sectors and different parts of the global economy that are very different.

So if I think about the 1970s, for example, as part of a broad global portfolio, we had meaningful exposure to oils and metals. Then in the 70s and 80s, we had a lot of exposure to electronics and computers with the rise of personal electronics and home computing. If we fast forward to the 2000s, again as part of a diversified global strategy, we began investing in the emerging markets and in particular the rapid urbanization of China. In the 2010s, we had quite a lot of exposure to some of the digital innovators and disruptors. And then again today the portfolio remains as ever well diversified and we’re finding it some interesting areas like healthcare innovation. We’re finding interesting investment opportunities in some of the enablers to the energy transition. We’re finding interesting opportunities in continued digital innovation and disruption.

So I think it’s the areas of the global economy and sectors that are very much in terms of where we find long-term investment opportunities have very much changed over 50 years. And that speaks to the flexibility of the fund.

And it’s that time of year where we like to get everyone’s views on the markets and and outlook for the year adds. So, where do you or how do you see equity markets in 2024?

[05:01] So I think it’s, first of all, it’s important to say there is no single house view at Capital Group. A lot of the, or certainly a number of the New Perspective portfolio managers believe that we have entered a new, if you like, economic regime. We think we’ve entered a new reality for equity markets, for stock markets. And by that I mean we don’t think we’re returning to a sustained period of low, stable, well-behaved interest rates, inflation and growth. So I think simply put, the big seismic shifts that many of us saw and felt in 2022 probably weren’t a blip. And we actually think that they’ll likely define the next decade of investing for equities. So just very briefly interest rates, we think most central banks are at or close to peak in interest rates. So the question today is not so much how high interest rates will likely go, but for how long interest will remain high for.

At Capital Group there are again a number of people that have a view that is contrary to the market expectations. There are a number of people that believe that interest rates will unlikely return to ultra low levels. They will probably remain higher for longer. And that’s because inflation will likely persist above central banks’ 2% inflation targets over the medium term. Why?

Well, first of all, current inflation has just proven to be more entrenched and stickier and harder to bring down than most people thought. Secondly, we’re now seeing the reversal of several long-term factors that have kept inflation low for many decades. And thirdly, economic growth in some countries has been surprisingly resilient, surprisingly strong. Higher economic growth often translates to higher inflation. So although we think economic growth will remain reasonably strong next year, we think it will be choppier, it will be more volatile and it will be more desynchronised going forward.

But what does all this mean for stock markets?

There’s three things I’d just briefly like to outline to the audience.

The first is, as economies evolve – and definitely last year and this year, we’ve seen a change in, in the economy in terms of inflation and interest rates – as economies evolve, we often find that stock market leadership also evolves and changes. So again, investing in a fund that is structurally flexible and can capture the next cycle and generation of global economy and stock market leaders, we think is important.

Secondly, we think that the new stock market cycle that we’ve just entered will be less one dimensional. It won’t be led by just a handful of very large successful companies. Simply put, we think there’ll be a greater number, a greater breadth of companies that will lead the global stock market and economy going forward.

And then just finally, I think there are several reasons to be optimistic on equity markets from now. I’ll just mention a couple of reasons. The first is there is a mountain of cash waiting on the sidelines, waiting to be invested. There are literally trillions and trillions of dollars and pounds invested in money market funds and not equity or stock funds, not bond funds, money market funds. That cash will likely be looking for a new home when investors come to the conclusion that central banks have finished increasing interest rates.

The second point in terms of being optimistic on stock markets is that when Central Banks have stopped raising interest rates, historically at least, that has presented good opportunities to redeploy cash into equity funds and equities in themselves. And our analysis suggests that on average, the best returns typically come 12 months after central banks have stopped increasing interest rates.

And then just finally the growth of corporate profitability is a big driver of stock prices and stock market returns. After several years of seeing a deceleration in the growth of corporate profitability, we’re now starting to see a bit of a re-acceleration, which could be a nice tailwind for stocks and stock markets in general.

Well, Steve, thank you very much for your time today.

[09:03] My pleasure. Thanks very much, thanks, thanks for having me.

And if you’d like to find out more about the Capital Group New Perspective Fund, please visit FundCalibre.com. Thank you.