Until the financial crisis, American Funds outperformed competitors, losing less in bear markets and starting from a higher base in ensuing recoveries. It reeled in hundreds of billions of dollars after the dot-com bubble, vaulting to the top ranks of mutual fund families. Its Growth Fund of America became the world’s largest mutual fund.
As Capital Group thrived, a radical idea was starting to take hold. A growing body of academic research cast doubt on stockpicking. Markets were so efficient that investors couldn’t beat them over the long term. Jack Bogle, a Princeton graduate like Jon and Rob Lovelace, thought investors were being ripped off. In 1974 he founded Vanguard Group in Valley Forge, Pa. Two years later, Vanguard started selling a fund that simply held all the stocks in the S&P 500 index. It was the first retail index mutual fund.
“People are too fixated on fees. They should be fixated on their total return after all fees”
Back in Los Angeles, in keeping with its generic name, the closely held Capital Group blended into the background. Then, as today, it sold its funds through intermediaries such as retirement fund consultants and financial advisers. The company logo doesn’t appear on its headquarters, which occupy 12 of the 55 floors in the Bank of America Plaza building.
The north-facing windows provide a view of the Hollywood sign, but Capital Group has no celebrity managers, and its executives keep a low profile. When James Rothenberg, chairman for almost a decade, died suddenly of a heart attack in 2015, it barely broke stride. “He was a fantastic leader,” says Gordon Crawford, the retired Capital Group portfolio manager who delivered the eulogy at Rothenberg’s funeral. “But you took out Jim and slotted somebody else in, and the funds didn’t get negatively impacted.”
Capital Group installed Tim Armour, now 58, to take over. Like many executives, he’s spent his entire career at the company, having joined after graduating from Middlebury College. He still manages part of the $21.7 billion New Economy Fund, which invests in large-capitalization stocks around the world. It’s returned about 11 percent annually over the past five years, beating 97 percent of its Bloomberg peer group.
Most Capital Group portfolio managers have at least $1 million of their own money in their funds. A group of analysts, including some recent recruits, manage a sleeve of about 20 percent of each fund, adding to the diversity of views feeding portfolios. Women made up almost 45 percent of new hires last year, though they’re still only 23 percent of the money managers and analysts. Compensation awards are heavily influenced by five- and eight-year records, promoting long-term performance. “It’s not possible to build a good record and coast,” says Alec Lucas, a Morningstar Inc. analyst who follows American Funds.
Owned by 450 partners, the company is secretive about its revenue and profitability. After Armour filed for divorce in 2003, it intervened to seal court records that revealed compensation or financial performance. The move surprised Armour, but he says it made sense for the company. “I think the organization did what it needed to do, trying to protect what’s very valuable to us.”
The company offers 36 stock, bond, and balanced mutual funds, a modest menu imposed to avoid confusing customers and to gain scale to keep fees low. It offers no exchange-traded funds, even though it received regulatory approval to do so in 2015. “Nothing seems to move particularly fast with Capital Group,” says Jonathan Nolan, an analyst with Francis Investment Counsel in Brookfield, Wisconsin. “They’re not concerned with any investment fads.”
The financial crisis was a trauma that couldn’t be ignored. Assets under management plunged to $975 billion in 2008, from $1.6 trillion a year earlier. The firm cut 18 percent of its staff over the next three years. Vanguard overtook American Funds to become the biggest U.S. stock and bond fund manager, a position it still holds. Capital Group executives grappled with what to do. They concluded the problem wasn’t with the funds’ investing style. Instead, they decided they had to fix their relationship with clients.