Speaker 1The mindset of the Lovelace family was not optimizing for the Lovelace family. When JBL founded the company, he said in 1931, when my grandkids, who didn't exist at the time, when my grandkids pass away, no one in the Lovelace family should own any bit of Capital Group stock. There's very few founding families that would say that. His point was it should be owned by the people who were working at the company at the time who were driving the client outcomes. That is a very powerful statement to make nearly 100 years ago. It can sound complex, but it's pretty simple. No investor should want to be with a company where you're left with a single individual's 300th best idea. That's what happens. When you're a sole practitioner in a strategy and you're managing a lot of money and you're diversified, you could be left with someone's less high conviction. Parts of the portfolio. The bottom 25% of their conviction names. Why would you want those in a portfolio? You have analysts who are subject matter experts in a certain sector and they have high conviction. You want those stocks in the portfolio. Your analysts who have conviction in their subject matter expertise. Great. Those names make their way into the portfolio. You have portfolio managers, five of them, 10 of them, whatever the mandate would be, all expressing their conviction, all seeing what everyone else is doing, all using the research that we have internally, all having their own individual conviction. What you end up in a portfolio is everyone has the same mandate, but you have the strongest convictions of individuals not being left with any of their lower conviction ideas. Think of it as a multiple portfolio manager and analyst run best idea portfolio as opposed to such a broad, diversified one person's strategy.
Speaker 2I'm Ted Seides and this is Capital Allocators. Today's episode continues our ongoing mini-series covering organizations that have proven to be great training grounds of talent. There may be none larger and quieter than Capital Group, the $3.2 trillion global asset manager, whose 650-person investment team and 9,400, total associates have historically experienced a fraction of the turnover of industry norms. My guest is Mike Gitlin, the CEO of Capital Group, known for its long-term philosophy, private ownership, and multi-manager investment system. Founded in 1931 by Jonathan Bell Lovelace, Capital Group is one of the industry's largest and most enduring active managers. Mike joined the firm as a lateral hire in 2015, after more than two decades across the buy side, sell side, hedge funds, and global markets. Our exploration of Capital Group covers Mike's path through the investment industry, Capital's approach to recruiting and training talent, ownership model, client-centric focus, Capital's system investment model, organization of a large global team, and new product development. We close with Capital Group's five-year strategic plan as it approaches the firm's 100-year anniversary, in 2031. I've been fascinated by Capital for most of my life, as it was the professional home for my uncle, the late Jim Rothenberg, for his entire 45-year career. It's a privilege for me to share this conversation with memories of Uncle Jim in mind. Before we get going, as we turn the calendar on the new year, past guest Katie Milkman reminds us that it's a wonderful time for a fresh start to form new and improved habits. And start small, like the atomic habits James Clear has made so popular. I am going to stop responding to emails prolifically while I travel. My team confirmed that I'm both inefficient when doing so and in a rush to get answers that might do more harm than good. So I'll stop, slow down the decision, and write a funny out-of-office reminder instead. In the event you're struggling to find a New Year's resolution, how about telling someone you encounter about the award-winning Capital Atlas? Capital Allocators podcast. It's true, we've won some awards along the way, but don't worry about that. It sounds really impressive, and you'll sound culturally plugged in for mentioning it. If you do that repeatedly over the next few weeks, you'll form a positive new habit and get in our good graces as we look to expand this year. So you'll have that going for you, which is nice. Wishing you a very happy new year, happy listening, and a warm thanks for spreading the word. Capital Allocators is brought to you by. Here's something for you. Most AI tools today are very good at sounding right. But can you actually trace it back to a filing, transcript, or specific passage that drove the answer? Or are you just trusting the confidence of the output? For allocators, that's not a minor concern. A missed filing, incorrect source, or context that gets lost somewhere in the retrieval chain aren't edge cases. They're how decisions go wrong. AlphaSense is the AI platform built specifically for this. They own the content. Over 500 million curated documents, from broker research and expert transcripts to filings and earnings calls. And they own the retrieval layer on top of it. That means every answer can link back to an exact, verifiable source. Because the answer is only as good as what's underneath it. And with AlphaSense, you know exactly what that is. See it for yourself. Try a free trial at alpha-sense.com slash capital. That's alpha-sense.com with a hyphen in the middle slash capital. Capital Allocators is also brought to you by Morningstar. In a sea of data, you need to know what you can trust. Morningstar's data, analytics, and research helps bring clarity across public and private markets. Connecting independent, research, and data into the tools and AI platforms you use every day. So insights are easier to spot and act on. Morningstar. Nothing in your way. Visit morningstar.com slash game on to learn more. Capital Allocators is also brought to you by Juniper Square, the operations partner trusted by the leading private market GPs. One theme that keeps coming up on the show is GPs that build the strongest and most durable relationship with LPs are the ones that have both strong returns and strong operations. AI raises the stakes on operations. And having Juniper Square as your operations partner helps ensure your data is organized, accurate, and accessible so you can unlock operational alpha. That's why thousands of GPs trust Juniper Square. Learn more at junipersquare.com slash capital allocators. Please enjoy my conversation. With Mike Gitlin. Mike, thanks so much for doing this. I'm glad we got together.
Speaker 1Why don't we start with the capital story? We were founded coming out of the Great Depression, which is a really interesting founding of a company, especially one that's in financial services. So we were founded in 1931 with the view that we can manage people's money in a different and better way. There was a lot of speculation in the roaring, 20s that led up to the Great Depression and the crash of the stock market. Our founder thought before the Great Depression that there were excesses and this didn't make sense. He had written about it in the 20s, liquidated ahead of time, preserved his capital, and launched the entity afterwards. Even though he did that for the first 20-ish years, it was largely a break-even business. He wasn't super successful in scaling assets in the 30s and 40s. It was right after the Great Depression, which happened in the 1920s. Part of the secret of the capital's success is he kept the entity 100% owned by himself until it was profitable. He didn't want anyone else to share in any of the losses that would come in any calendar year. Only after, in the 50s, Capital Group became profitable did he begin to sell little pieces to people at the company to share in the profitability as opposed to share in the losses.
Speaker 2What was, and maybe still is, that original idea of capital? The idea of how you can manage capital better than others.
Speaker 1His view was managing for the long-term as opposed to short-term trading was a better way to generate results, which we all know now. He also, in the 50s, Jonathan Bell Lovelace, had a heart attack, survived, came back and said, we have to manage money differently. We can't have key person risk. What if I hadn't come back? What if I hadn't survived my heart attack? That wouldn't have been great for our clients. Let's think of doing this in a different way where there's no key person risk. And we have other folks also expressing their conviction in portfolios. So the capital system was born in 1958. Coming out of that, the whole concept was, can we have this collaborative research process where there's no hidden secrets? Everyone sees what everyone's doing. And the analysts manage money. They're not credit raters. They're not stock raters. They actually manage real client assets, which is different. Can we have portfolio managers express their own conviction in the same portfolio? Same thing. Benchmark's a mandate, but your own conviction predictions then can we measure folks for the long term as opposed to the short term that whole system was formulated post his heart attack and that was born 60 plus years ago so
Speaker 2let's change since then there are a couple things that have been the same the first in a world that's changing is the business is still private how has that model impacted the
Speaker 1investing we talk about being private as a differentiator but also a competitive advantage in our business of asset management in that it's how we operate the enterprise and how we manage our client assets both in the former we don't have to worry about quarterly earnings when other folks are pulling back and they're trying to meet a quarter we're not going to stop a technology project to meet a quarter i've seen companies run like that in the past that is not the best way to run a company if you don't have to when other people are pulling back we can lean in we can gain mind share and market share and we tend to do that we tend to take the opportunity and market drawdowns to invest in the business why would you ever give up that advantage then the same token on the client side my first podcast i interviewed rob lovelace who is the grandson of the founder jim lovelace also works at capital group he's also a grandson of the founder both of them have been at capital for more than 40 years now i interviewed rob and i said what's your competitive edge what makes you different he said time one word time and he's measured on his eight-year result first and foremost in his quantitative bonus not his one-year result what a massive advantage for you to be calm and build conviction and not have to be so reactive and selling at the whim of someone else's short sale for example you can invest in your long-term conviction he just said my edge is time but it's both how we manage the enterprise but also how we manage our clients assets what
Speaker 2does that do to the culture of the organization when it's set up and that thought process is so much different from what you see most of the time in the business the incentive system drives behavior of any entity
Speaker 1doesn't matter what it is that culture of long-term calm and an incentive system it says don't shoot for the lights for one year and don't risk your client's capital just to optimize your own one-year quantitative outcome it's a whole mindset if you want your clients to do well we know you do better over time if you stay invested that's not a cliche that everyone says it's a statistical fact they're trying to time the markets is impossible to do well so if you have that advantage of being private you can think long term your clients know you manage money for the long term the whole ecosystem is different how you think about five and ten and twenty year outcomes versus every individual quarter of your earnings that is a massively different mindset and that's why I'm so excited to be here with you today and I'm so and it allows your clients to be on that same long-term journey and not say to you, why'd you lag last quarter by 18 basis points? That's not the mindset of what we do.
Speaker 2It's a different way to manage money. On a day-to-day or week-to-week, month-to-month basis inside the organization, what are some of the norms or processes that reinforce that long-term nature? I'll give you an example.
Speaker 1Someone works in a job in their 20s. They go to business school in their late 20s. They come for a summer associate program in business school. We make them a full-time offer. They join Capital Group at the age of 28. And they're an investor because if you join as an analyst, you're managing money right away. Instead of saying, be productive tomorrow morning when you join and manage money, we say, take three to six months. Look at this specific industry. Get to know all the managements of this industry. Look at the history of the coverage of it from everyone who had been at Capital prior. And then initiate your portfolio by sharing it with the entire investment group. That's part of that long-term nature. It's not, you've joined, here's your desk, where's your portfolio? It's you've joined, get to know your colleagues, get to know the managements of the companies that you're going to invest in, and then show us your optimal portfolio six months later, not six days or six weeks later. That's a mindset. It's a process of saying, let's do this in a calm, efficient, long-term way. Let's not rush. To judgment, you can be a quote-unquote productive person tomorrow morning.
Speaker 2If you tease apart that one example, so the first is the recruiting piece. How do employees generally find their way to Capital?
Speaker 1Our process is not an easy one. It takes time. It can take six to 12 months of the interview process to join Capital. We're trying to be quicker on that today than we were 20, 30, 50 years ago, but not too, too quick. We want you to meet a lot of people. We want you to interview us. People stay at Capital their whole careers. This is not a job to leave for another job. This is a job to stay. If you knew at the onset you were going to be at a company for 30 or 40 years, you'd want to do your diligence the way we want to do our due diligence. We're both doing that, and that takes a lot of time and a lot of meetings. Occasionally, could we lose a candidate because it takes too long? Yes. Is it worth it over the long term to find the right people and have the right people self-select into it? An entity that leans into and favors long-term employment here?
Speaker 2Yeah. How do you structure that interview process so that you're learning what you want to learn about that candidate to make a decision?
Speaker 1We try to make sure we have a diverse group of interviewers. One, the candidate doesn't want to see everyone as the same. And two, you want to ask people who ask different questions. We're very intentional how to form that cohort of those who are going to interview. Then we also ask people to ask different lines of questioning. I want you to focus on leadership. I want you to focus on culture. I want you to focus on their investment philosophy. So focus on something different and come to it with a different perspective so that we can come with a holistic profile of the individual. And someone
Speaker 2who comes in and let's say it's out of school and you say, okay, you're an investor, you have three to six months, come back to us. How do they train and get better?
Speaker 1We give them an open door. We give them a mentor. We give them a couple of folks to lean on during those early days so they don't feel lost. And making mistakes is okay. The two standard questions I'll ask to investment professionals on our podcast, which is meant to show the secret sauce of Capital Group and the mindset of our investors. I ask about the investment edge, like I mentioned with Rob Lovelace. Then I ask about lessons learned. And everyone has a story. Investing is a humbling effort. They'll say, I was three years in, I was looking at this consumer company in Brazil. I believed in what the management was saying. And the stock went down 80%. And here's what happened. And here's who I leaned on internally and said, oh my God, am I going to get fired? What's going to happen now? And here's what they said back to me. So everyone has that story of how did I learn? How did I make a mistake? Who put Humpty Dumpty back on the wall after that and said, it's going to be all right. Take this lesson away so you're a better investor in the future. That's really important to be able to be self-deprecating, to be honest, to make mistakes and come back and be better thereafter.
Speaker 2You mentioned that people stay their whole careers. As you look across the firm, how pervasive is that?
Speaker 1The average attrition rate in asset management's 13 or 14%. Ours is half of that. This is across the entire 9,400 person entity of capital group. In the investment group, it's even lower. It's low single digit attrition in the investment group. It's very rare someone would leave capital group as an investment professional and go to another company to do the same thing. They may retire early to do an entirely different career, but they wouldn't go work at XYZ asset management company. It doesn't happen very often. It's not never, but it's almost never. So they come and stay. The average retirement age of a portfolio manager or a capital group is in their 60s. It's tend to be a capital group for the entirety of their career. We do make some lateral high hires, not just out of business school or not just in our early career programs. We've done more of that in the last decade, but they have the same stats. They come and stay forever. It's the same outcome regardless of how they got here.
Speaker 2How do you think about optimizing the talent in the organization? Because you can imagine you're probably not going to have that high of a hit rate on your hiring decisions up front.
Speaker 1Part of it gets back to the incentive system. First of all, you and I manage money in a portfolio. Ted manages 50 billion. I manage 5 billion. If our investment results are the same and our tenure at capital groups the same, our bonus is the same, meaning we don't incentivize a money grab to manage as many assets as you can. You optimize it by allocating it to individuals in the way that best suits the portfolio and their style. You don't have to manage a lot of money to do well for yourself. You have to do well on the assets we ask you to manage. That's part of the culture. We don't pay on assets. We pay on investment results. The other part is we have a lot of data. Because analysts manage money and don't just buy, sell, rate stocks and bonds, you know about them as an investor. By the time you've asked them to take on diversified portfolio management responsibilities 10 or 15 years later, you have a book of record on them that's 10 or 15 years long because they were already managing money. So how you put them in a certain strategy, are they growth tilted? Are they value tilted? It helps you by knowing their history because you can look at their results and their pattern of results. You optimize it by putting the right people in the right portfolios by managing them over the long term, not the short term and by managing a certain number of assets, but not having to pay anybody on the assets they manage. You put that all together and you can generate the right outcomes by putting the right people in the right portfolios.
Speaker 2And what happens with all that data if it's showing that someone isn't performing that well?
Speaker 1Most people, if you give them time and you have the right intake process and the right mentoring process, most people make it. But not everybody. We don't have a standard of perfection where everybody makes it. You can recognize after five to 10 years, if someone's not able to generate differentiated investment outcomes, they won't survive at Capital Group forever. But we give them five plus years. It's not as if we try to make that determination after one or two years or having a great success in a short period of time or great failure in another period of time. We give them the time, we give them the mentoring, we give them the support. And if you do that, your hit rate tends to be a lot higher, but it's not 100%. We know that. What does mentoring look like for an investment professional at Capital? It's two things. It's proactive and reactive. The proactive part is finding that individual as the mentor and spending time with them and asking them questions, almost as if you're the analyst, asking them questions about what's going on in their portfolio, how they're thinking about things. What are things that have gone wrong? What are things that haven't gone as well? Being proactive in that conversation, you'll pull a lot out the same way as if you were interviewing a management team. Then the reactive part is clean up aisle five. Something happens, they come to you and say, how did I miss this? I miss this theme and the stock's down 30% since I bought it or the bonds widen 100 basis points and spread. Something I missed. Let's talk about it. As a mentor, you have to be prepared to be proactive and go in there and try to pull things out and at the same time, be reactive when needed and make sure they know it's going to
Speaker 2be okay. I'd love to turn to the ownership model. As this private partnership, you mentioned that John B. Lovelace sold shares back in the 50s and the business was profitable. How does that work today with a much larger organization and more people involved?
Speaker 160 years ago, it was in the hallway. It is different today. If you become a shareholder of Capital Group, you hold it for your entire career. Upon retirement, over two, four, and six years, you then sell it back to the company and we sell it on to the next shareholder. It's not a liquid holding. It's not meant to be. It's meant to be with you for the entirety of your career. Then it's meant to be passed along to the next generation who will do the same thing again. That's a really important mindset. That is a very powerful mindset. It's not optimizing for the Lovelace family. To make nearly 100 years ago, that means you're so aligned with the client's interest. That was a brilliant thing to do nearly 100 years ago. What goes into determining who can become a shareholder? We don't focus as much on the exact number of shareholders we have because we have a very generous profit sharing program for our 9,400 associates. Not all 9,400 associates can be shareholders, technically, by the rules as well. It's really a very generous profit sharing about sharing and profitability of Capital Group. I don't love to focus too much on shareholder, non-shareholder. It's more profit sharing. And if we're successful for clients, how do we make sure everybody participates? Last year in our profit sharing program, we increased the formula for everyone as well. We try to share the wealth amongst as many people as we possibly can. If you come and work at Capital Group for the entirety of your career, we generally have benefits that are top decile or top quartile. It's a good place to work. It's a good culture. But it's not only about the set number of shareholders or the fluid number of shareholders. It's about everyone sharing the profitability.
Speaker 2So it sounds like you're maybe minimizing that. You think of like a Goldman partnership in the old days. Everybody would aspire to be the Goldman partner. It sounds like maybe that's not quite the same mindset. The mindset that we talk about in
Speaker 1the hallways is one Capital Group. We said this on a town hall when we announced the increased participation in the profit sharing program. We want everybody in the investment group, the client group, and the operating group to be rowing in the same direction. We have three groups, but you all have to row in the same direction for us to have the most amount of client success we can have. If you've joined in technology and you've been at the company for two years, or if you've been a portfolio manager for 35 years, one of the things we ask all associates is what you're doing impacting the long-term strategic plan and impacting clients. In our most recent engagement survey, that came back as one of the highest scores of everybody having a sense of what their job is doing to enhance the long-term strategic plan and to help clients. That's the 1CG mindset. We're not perfect at it, but I think
Speaker 2we get better and better at that. A lot of family-owned businesses start with a Lovelace family. Someone in the family leads it over time. I'd love to hear a bit about your story and coming into what is currently the leadership seat for the organization as a whole.
Speaker 1If you asked me 30 years ago, would I A, be a capital group, and B, be in the position I'm at, my answer would have been no and no. You just don't know in your 20s what you're going to end up doing in your 50s. Too many people think too far ahead and try to figure that out. I'd spend other time on just being good at your job in your 20s and not trying to determine that. I was fortunate in my career that people gave me an opportunity to do different things at early stages. When I was in my early 20s, I got the opportunity to trade the Asian markets overnight. What an amazing opportunity it is to trade billions of dollars in your 20s. Even if you're up in the middle of the night, it's still an amazing opportunity. Some of those opportunities are harder to come by today than they were in the early 90s, but I was able to do buy-side and sell-side and hedge fund and long-only and international and U.S. and fixed income and equities. Over 33 years, I've had so many opportunities to do different things. I've had so many opportunities to do different kinds of things and to live in different places around the world. That makes you a better candidate to do other things in the future. I didn't get to Capital Group at 22 like some folks. I got to Capital Group at 44, but I had an opportunity when I joined to lead the Fixed Income Group, which is an amazing group of people. We had a lot of success as a team, they managing the money, me hopefully adding some value and managing the team. Through that period of time, I've been able to do a lot of things. I've been able to do a lot of things. Through that period of time, I was asked to do some more things.
Speaker 2So in an organization with so many people that have full careers within the same organization, why do you think you were tapped to be the next leader?
Speaker 1I was tapped to be the CEO, but that's one of several senior leadership roles at Capital Group. We are not super hierarchical as a company. Jody Johnson is our vice chair. Martin Romo is our chair. They're my senior partners. We talk about everything all of the time. We have a management committee of 10 people. We meet 25-ish times a year. We talk about everything. It's a super open group. At the end of every meeting, we have a session called What's Up, where we talk about what's up. It's a very collegial group that makes strategic decisions together. And we have so many leaders across the enterprise too. And I'm not just saying that to be self-deprecating or to be humble. It's just the way the company's managed. We're meant to write a chapter of the book together as senior leaders. We're meant as management committee members, as senior business leaders, pass it off to the next group who writes the next chapter. When our previous leadership group was choosing roles, Martin as our chair and Jody as our vice chair, they've both been at Capital Group more than 30 years. It's important for the culture to have people who've been here so long help lead the enterprise. And for me, I've had the opportunity to lead businesses. It was the inflection in Capital's tenure, if you think of the company as a whole, where a full-time CEO who's able to manage a complex global business and work with his senior partners and work with management committee can do all of the above. So I don't think there was anything necessarily special about me other than my experiences. And then being able to partner with folks who've been at the company for decades and decades is a really good combo.
Speaker 2We're going to take a quick break in the action to tell you about Ridgeline, the investment management platform built for firms who are rethinking how work gets done. You're at your desk looking at the screen. You're looking at the screen. You're looking at the line graph of your firm's growth. The line is moving sideways, linear growth, and you know exactly why. You're constrained by your operational bandwidth that's been the same for so long, it just feels like the cost of doing business. Ridgeline is built to change that line's trajectory, to be the inflection point that takes your growth from incremental to accelerated with the team you already have in place. Ridgeline is the only AI native investment management platform that brings together the front, middle, and back office with one set of data and powerful AI agents that automate away operational drudgery so your talent can shift from managing old technology to materializing new ideas. Ridgeline helps asset and wealth managers understand and improve their firm's growth trajectory. To see how your firm compares to 16,000 of your peers, visit ridgeline.ai slash trajectory. If you file Form ADV, your firm is already there. Then talk to Ridgeline about how you can do more with the team you already have. I'd love to dive into the capital system and the investment model. How do you describe how this comes together with analysts managing portfolios, portfolio managers managing portfolios?
Speaker 1That's what happens. When you're a sole practitioner, in a strategy and you're managing a lot of money and you're diversified, you could be left with someone's less high conviction parts of the portfolio. The bottom 25% of their conviction names, why would you want those in a portfolio? Your analysts who have conviction in their subject matter expertise, great. Think of it as a multiple portfolio manager and analysts run, best idea portfolio, as opposed to such a broad, diversified one person's strategy.
Speaker 2How does that come together? You can think of a strategy in terms of number of positions, position sizing. We prevent chaos.
Speaker 1We have this down after 67 years and all of our equity and fixed income and solutions groups, we have an investment coordinating group. They're the ones who decide who's in what portfolio. It's not happenstance. They have a ton of data. Based on people's past history of investing, what kind of investor they are. We have a sizing of the research portfolio. What's the right size in a given strategy is at 10%, 15%, 20%, 25%. We have so much data that we create portfolios in two ways. One is who are the participants in the portfolio? How big is the research portfolio? How many portfolio managers and what are their styles? And then bottom up those people expressing their conviction. So if you think of that top down, bottom up mixture, we make sure the right folks are in the portfolio and those right folks make sure they're choosing the right securities in that portfolio. It
Speaker 2sounds like there could be a quantitative overlay that puts all this together. How much of the way you construct portfolios are that bottom up either the analyst, the portfolio, best ideas, and then a model or something telling you this is how we're going to deliver the optimal outcome?
Speaker 1Our results have always been driven by bottom up best ideas. And we can structure data so much better today than we could 20, 40, 60 years ago. Knowing how people tend to invest, knowing their strengths and weaknesses, knowing how they do in different environments helps you size them in the portfolio. They're not emotional about it because we don't pay people on the level of assets they manage, only on their results. What's unemotional in terms of how much money you allocate to them to manage, you're just asking them to do a great job on what you've asked them to manage. So when you have all of that data about how they've done, interest rates are at a certain level, they're coming up, they were coming down, market valuations are X or Y over the last 20, 30 years. How has this investor done in that kind of environment? You have this kind of data. It helps you size people right in the strategies they manage in. And then you let them run. You do that well, you're going to get good outcomes.
Speaker 2How do you manage that around what's become a very large organization in the last 10, 20 years to make it work at increasing scale?
Speaker 1You have to stay small when you're big. What the company has done over time with that, we do have one fixed income unit that manages about $625 billion. We have a solutions group that manages about $625 billion. In the equity group, we have three separate entities now. One of the reasons we did that was so that as assets continued to grow, the investment culture and communication stayed small. There's about 100 investment professionals in each of those three equity units. There is a Chinese wall. They can't see what the others are doing. It is formal disaggregation, but they also have an environment where they can sit around an actual table and add in the virtual table with our offices around the world and have a smaller conversation than you would be having if you had 300 people as opposed to 97. It was intentional to disaggregate to make sure that as assets grew, we can continue to stay small in the investment discussion. There's not too much noise.
Speaker 2How did 100 professionals become the right size to then start the second organization or the third?
Speaker 1I wouldn't say we know for the next 20 years if around 100 is the exact right size. I don't think we know what that will be. What we have found in the last 20 years is somewhere between 80 and 100 is the right number. And it's about the investment dialogue. How many analysts do you have in the group? How many portfolio managers in the group? How many traders in the group, which are an important third leg of the stool? How do you make sure the communication moves the way around the globe to get the best ideas on the table so that they can be scaled in the portfolio? That's really important. A lot more than 100 people makes it hard. It's just something we found over time. If we ever needed to do something, we would do it. We would do it. We would do it. We would add a fourth equity group because assets were such and we had to, again, reinvent ourselves to stay small. We would do that. We're not at the stage to do that today. But would we do that in the future to make sure we can generate the same or better results? Absolutely. It costs more money. It takes organizational effort and time, but it's worth it to stay small so ideas
Speaker 2percolate to the top. What are some of the ways you've found to make that communication work could be in one of those organizations around the world? Travel a lot. Our folks do.
Speaker 1They travel to see companies. Last year, they did 21,000 company meetings. 21,000. That is a huge amount of company meetings to do around the world in one year. You have to travel. You have to travel together. When you sit at the table with a company management and you hear each other's questions, it makes everybody smarter. So you travel not just to see the companies you own or may own, but also to see your colleagues and travel with them, to build rapport. We have retreats where people spend time together. We have people who do meaningful office stints in another country for a period of time. All of these things keep a big
Speaker 2world small. How do you organize all that information? 21,000 company meetings.
Speaker 1Our technology team has done an incredible job building something called Capital Connect. We've also digitized all 94 years of our written physical library. Now, if someone wrote a report on ExxonMobil in 1957, it would be in the system. Structuring that data has been important. Capital Connect being that system that takes the whole history of Capital Group in 94 years and that proprietary information and makes it available to you in a usable format just makes you smarter. It's also been put on a desktop with other functionality along with trading and position sizing. So the whole technology stack that our investment professional have is so evolved over the last decade in particular.
Speaker 2And this sounds like it's screaming for an application of LLMs. I'm curious what you've done with all that structured information in the last couple of years. It is. You can ask a lot of questions now
Speaker 1and get quicker answers. Preparing for a company meeting. What were the last 20 quarterly earnings reports like? What were the meetings asked in the analyst meetings thereafter? What are the kinds of questions I would ask this time relative to my history and what's going on at the company? That kind of thing. You may take the suggestion, you may not, but the starting point is so much better. Structuring that data. It's not just one of those things of how are you using AI to make your business better, quote unquote. These are real things that are happening. You ask questions of your own style in this kind of environment. What mistakes have I made in the past when we're trying to think about which portfolio managers and how many of them to be in different strategies like we discussed before, using that information to make the business better? At the end of the day, we're still having individuals pick credits, pick stocks, and construct portfolios. But the amount of information we have on them and they have on themselves has never been better.
Speaker 2When you have all of this investment DNA, it's been interesting over the years that capital hasn't had a lot of different products. I'd love to hear about how you think about taking the investment DNA and packaging it into something that investors participate in.
Speaker 1The way in which we've thought about it is how do we serve as a core of a client? client's portfolio. In a client's portfolio, whether it's a wealth management client or an institutional client, there's core and there's satellite. We're at the core. And the core, global stocks, global bonds, how you think of them and putting them together. What we've tried to avoid are fads, super thematic strategies that may be a satellite. That's not where we would add our best value. But taking this very large world of global equities or global bonds and finding a subset that can beat the benchmark of other active competitors over the long term is where we add the most value. We'd rather sit at that core. We'd rather put our resources towards that core and let others float around in the satellites. That's just been a strategy of ours. We don't want to practice on our clients' money. There are some that will launch a multitude of strategies, and if it works great and if not, they'll close them. That's a lot of trial and error on somebody's life savings. We don't want to do that. We'd rather manage in scalable strategies where we can apply our investment resources and our smart folks and put them towards that effort as opposed to the launch it and close it type of thing that can happen in the industry.
Speaker 2So what has to happen internally for something new to get launched? A lot of things.
Speaker 1We're trying to be more efficient in how we do that. We're trying to be more efficient in how we do that, but the hurdle is high for a reason. You have to go through our strategic product development process. Is it good for the clients? Is it sustainable or is it a fad? Do we have the resources where we can add value relative to benchmark and other active competitors over the time? You have to answer a lot of questions before you get there. It's the reason why we'll have $3.2 trillion in a certain number of strategies that in all likelihood is less than all of our major competitors. Because that hurdle is so high, I don't think we're going to be lowering that hurdle anytime soon. It should be hard to launch a new strategy. Sometimes folks launch them just to raise money from clients without thinking, are we going to be excellent at it and is it good for the client? For us, we start there and that's not a sales pitch. It's our DNA. Is it good for the client and can we add value? And is it long-term? If those things are checked, that box, all of them, there's a likelihood something's launched. If you're failing on any of those, we'll let somebody
Speaker 2else launch that. On the distribution side, how do you organize this global effort where you have so many different clients reaching everywhere around the world?
Speaker 1We have segments. We have our North American client group and our Europe and Asia client group. In both of those geographies, you have your wealth management group that serves financial intermediaries, think financial advisors who serve their end clients, and you have your institutional business where you're looking at sovereign wealth funds, defined benefit plans, defined contribution plans and their plan sponsors, public funds. So wealth, institutional, North America, Europe, and Asia. In all of those, you make sure they have the resources that they can bring to bear to the clients. That is super important. There is, in our industry today, the race to relevance. How to be relevant to your client. On the client side, they have unlimited noise coming at them. What they have found, almost bar none in recent years, is dealing with a multitude of asset management companies can be too noisy and hasn't necessarily generated better outcomes. So they are shrinking the number of partners they use. And when I say they, wealth, institutional, U.S., non-U.S., everybody. I love seeing clients. Annually, I see somewhere between 200, 250 clients. Not a single one of them is expanding the number of asset management companies they are working with. They're all shrinking them. And they're shrinking them and trying to say, we need more from you. And that is part of our entire strategy of how to be the partner of choice to clients. Because they want thought leadership and differentiated content. I was with a client. They held up one of the reports that we had put out in Capital Ideas when I went to visit them. And they showed it to me and said, this is different. I have a little tear in my eye. Because differentiated thought leadership and content, how you translate it around the world into the language of where the client lives, how you can add value in portfolio construction, this is what you have to do and what you want to do to be your partner of choice. They're going to shrink those lists. Our client group is set up to be the partner of choice everywhere where we operate around the world. And it's a heavy resource load and it's intentional.
Speaker 2As you look at your period of time coming to this leadership seat, at the highest level of public investing, been a big move to pass? A big move from mutual funds to ETFs. I'm curious how you've thought about what was many decades of tailwinds turning into headwinds.
Speaker 1If you look at what generally both wealth and institutional clients are looking at, they're looking at three components to a portfolio. Broad level. Active, passive alternatives. In general, and this is why I don't love to talk about active versus passive. I like to talk about capital group versus passive. Because it's not a union. The active manager, have not formed a union of active management. Some do not beat the benchmark over the long term. So you don't want to be in that cohort of charging higher fees than passive and not beating the market after fees. If you look at our equity strategies since inception, over 80% of them have beaten the market after fees. In the world of active, passive and alternatives, we're trying to be an active at the core partner to our clients. Acknowledging they will use passive and some will use private markets and some will also, ask us from a solutions perspective to put the pieces of the puzzle together in the right parts and deliver that as an investment solution. The markets clearly evolved from that perspective. Our focus is generating differentiated results at active at the core and then wrapping in passive and private markets in the right proportions to the right client.
Speaker 2There's a long history. I mean, say back to even the founding of Sequoia of some knowledge of private markets in the capital ecosystem. And then as a, it's exploded. I haven't really participated in that. I would love the thought process around that.
Speaker 1Well, Don Valentine had worked at Capital Group before founding Sequoia, and it was determined at the time that it was best housed outside of the four walls of Capital Group to keep the focus on active public management. We don't really have a different view today than 50 years ago from that perspective. When we announced our partnership with KKR, it surprised a lot of people around. The world who were looking at that announcement and they were trying to figure out what are they doing? Why don't they just do it themselves? The answer is we looked at it. The three options we had at the time were very simple. Buy something, build it ourselves or partner. It took us 18 to 24 months of diligence to investigate and research what we would want to do and what would be best for clients. Buying something is hard in our culture. Integration of another entity into the Capital Group culture. Building it ourselves, we have 3.2 trillion of client assets and 400 investment professionals focused on that and them. Taking some of them out to do something entirely different wouldn't be great for our existing clients. Then you'd have to say, what about bringing in teams of people? And again, you run into the risk of cultural disruption, which wouldn't be good for our existing clients. So it left us with partner. The only reason you would want to do that is because you wouldn't end up at partnership is if you wanted to retain 100% of the economics. If you're buying or you're building yourself, in both cases, you keep 100% of the economics associated with the fees. We weren't optimizing for fees. We were trying to deliver the best solution. When we launched public-private credit and we did it with KKR, KKR has done this for 50 years in the private markets. Why are we going to be better at them? By the way, why are they going to be better at the public markets than we are? We just have to be better at them. We have to be better at them. We just had to believe that we found the right culture, the right partner who could generate the right investment results, put it together with what we're doing and deliver a holistic solution. The only thing we had to do to be willing to partner is give up the fees. And that was okay for us to be able to do. So that's how we ended up there. But it started from a investment solutions and client outcome perspective and ended up with the decision to partner as opposed to buyer bill.
Speaker 2And how have you thought about the burgeoning growth of private equity? The private markets are large.
Speaker 1And the question is not as much the size and the growth of those, but in the world of wealth management, as we see the democratization of private markets, what's the right allocation for individuals who typically haven't had access to private markets? From a portfolio construction perspective, it's dependent on the client and their needs. This is why we always say individuals are best suited through financial advisors, because that's a very particular discussion for a unique family. Is it 5%? Is it 11%? How did you arrive at that? And what are your liquidity needs? And what are the expenses? And what are the outcomes you're looking for? And what are the diversification benefits? All of these are not generic. They're customized. Over time, as you see the world of wealth utilize the private markets and go from low single digit utilization to mid single digit and high single digit, it's going to be a huge difference. And I think that's what we're going to see. It's going to be a case by case conversation with a financial advisor and a family. For us, when we put together the pieces of the puzzle, we're not pushing anyone to do anything. We're offering choice. That's what's the biggest change is the mindset of offering choice.
Speaker 2That big change of offering choice, how have you, as you came into this leadership seat, tried to tweak the model for capital or your leadership initiatives around choice? The mindset of
Speaker 1our whole leadership team is we have this intellectual capital. At the base, that's what Capital Group is. How to deliver it for clients in the way they want to consume it and not be judgy about that. It's this vehicle of choice mindset. What's the right investment vehicle? Depends on the tax position of the client, where they live. For us, it was getting over the fact that we would have a multitude of vehicles because that does create time and energy and noise in the system when you have more and more vehicles available for clients. Once you cross that Rubicon, once you're able to say it's all about the client and how they'd like to consume our intellectual capital, it's liberating. And it's ETFs, collective investment trusts, separately managed account, Luxembourg funds, institutional separate accounts, mutual funds. It's not about the vehicle. It's about what's inside. That was the unlock for us is let's just make our intellectual capital available. If you look at our strategic plan and we have these four pillars, one of them is evolve with clients. This is that. This is saying this is what our clients are looking for. How do we deliver it to them?
Speaker 2What are the other pillars on the strategic plan? One is keep
Speaker 1enhancing the capital system. Keep focusing on generating differentiated investment outcomes. It's the core of what we do. Evolve with clients. Another one is simplification and scale. How do we operate this entity of 33 offices around the world, nearly 10,000 people, 3 trillion of assets? How do we operate in a simplified manner? Were we using technology as a tailwind to just being more efficient? The last one is invest in the associate experience and our culture. There's a reason our attrition rate is half the industry. There's a reason people come and stay. How do we keep doing that and not rest on our laurels so we can make the culture even better? Those are the four pillars. But this evolve with clients has been so powerful because it says we are going to be your partner of choice in investment services and business management. How we provide solutions to you and generate those outcomes and how you're operating your business. How can we be helpful in how you manage that day in, day out? Both of those things really fits that
Speaker 2evolved mindset. What's an example of how you've tried to simplify the organization?
Speaker 1How many committees report to management committee? How many committees report to the capital operating group? The number of committees that report to both of those oversight groups is down 50% in the last handful of years. Intentionally saying you don't have to climb up the mountain and come to the top of the mountain. You don't have to climb up the mountain and come to the top of the mountain. You come to capital group management committee and have us bless something. We trust you. It's through empowerment, through structure and governance. We instituted this saber process. Come in semi-annually. Don't come in with 118 pages. Come in with two pages. Tell us what's working well, what's not, and how can we help? Let's have a conversation. Don't gold plate a PowerPoint presentation for us. Let's engage in a dialogue. We'll have oversight of the overall budget of capital group. But once we've made those decisions and we have this long-term strategic plan, do your thing. So that empowerment takes down a lot of the overly complex system that can exist in any company, by the way. It's not just capital group. Most companies have way too much structure and governance. And in some ways that becomes job justification and it doesn't allow people to have the ownership of their own plan. Everyone at capital group, all of our entities took our long-term strategic plan for 2031 and made it specific to their group. Once they have that and we've approved that, you don't have to report back to us every 12 minutes. We want to get out of your way and let you execute.
Speaker 2How about new initiatives for that fourth part of the strategic plan on the associate experience? We launched something called Career Hub.
Speaker 1You can think of it as internal LinkedIn with AI. Not every single job at capital group today will be the same in three years, five years, 10 years. Instead of just acknowledging that as a truth, let's figure out how to make sure that we know what our associates want to do in their career, regardless if their job's going to change or not. They may have a different idea of what they want to do. Create your profile. Here's what I do today. Here's how I came to capital group. Here are my skills and here's what I may want to do in the future. You also have managers before they look externally. Look into Career Hub to see if there's a match of someone internal before they go external. That's an example of investing in culture in the associate experience is, create that internal network and web for people to be able to develop their careers and take a different role internally.
Speaker 2As you're out having these 250 client meetings a year, what are you hearing is most on clients' minds?
Speaker 1One is this consolidation in the asset management industry. They are seeing it as super noisy. They are looking at their partners and it's like trying to hit a moving target because their partners are morphing. They're buying different companies. They're looking at their strategy and they're wondering, are those asset managers still focused on my money and managing it well? I had an institutional client meeting in Asia last year and I remember sitting down with the CIO and I said, look, think of us as a constant in a sea of variables. We're focused on managing money the right way. We're not buying companies. We're not selling ourselves. We're hyper-focused on managing money. He banged the table in this super positive way and said, thank God. Thank God. Everyone else is coming in and telling me why they just acquired this, why they're changing this, why they're cutting resources here because of their own expense base and trying to figure out how to be relevant in the future. Our clients are seeing their asset managers in this state of flux and they're trying to find reliable, consistent partners. They want us to help them with thought leadership. They want us to help them with their enterprise and best ideas and practices. All of that is important to them. It's hard for them to look out five years and assume the folks they're working with are going to be the same because they know they're going to be different.
Speaker 2In the landscape you painted out earlier of passive active and alts, how have you thought more broadly about the interest in alts?
Speaker 1The alternative space has expanded tremendously. The question is, can alternative managers with money flowing into their asset classes continue to generate after-fee outcomes for their clients? At the base of what clients are looking for, they want you to beat the markets after fees in a less volatile way. Can you do that? What people feel about alternatives is the fees are higher, the competition is growing every day, but there still is an opportunity for diversification in a portfolio if you're using alternatives in the right way. Some institutions have long used alternatives, some too much, and they've had to borrow, against some of those holdings recently to meet liabilities, but others the right amount, and individuals who've been closer to zero are moving up to something more than zero. What's the right way to do it? For many folks who haven't used alternatives before, you have to start with education. It's so important. You're not trying to sell a product. You're trying to deliver an outcome. You can't do that unless you talk about what's the outcome likely to be and what's your own risk profile. I just won two awards on education in private markets. I'm much more proud of that than any unit of something we've quote-unquote sold. We're not trying to sell a product. We're trying to educate and deliver an outcome. That's in the alternatives world. The more successful adoption of alternatives will be is how good the education is.
Speaker 2How do you think about it from your lens of the business context where there's more finite market share in the public markets and a growing allocation to alternatives and how do you want to participate in that?
Speaker 1What has been lost in this conversation is how big the public markets are and how well they've done. Whenever I get the private markets question, I have to remind people of the facts. Look back 30 years and someone will say, well, why are you using 1995? And I'll say because I wanted intentionally to bring in two 50% bear markets in the dot-com bubble and the global financial crisis. Both times the S&P 500 fell 50%. Let's use a time period. That includes both of those. If you look over 30 years, the S&P with dividends reinvested has annualized about 10% return. That is super good. If you look at the growth of the size of the public markets in 1995, the U.S. total market capitalization of the stock market was $5 trillion. Today, it's $65 trillion. That's just the U.S. And the U.S. is about 65% of the world index. That's a $100 trillion public market. Big, liquid, transparent, relatively inexpensive, 10% annualized returns. During that 30-year period, if you look at MSCI, all country world, and you do it in Euro terms, I think it's about eight or eight and a half percent return. These are great returns. So can people benefit from alternatives? Absolutely. Can they use them? Absolutely. Is there diversification benefits and return benefits over time? Absolutely. But let's not, as an industry, disparage something that's worked incredibly well over the last hundred years and has, is likely to work incredibly well over the
Speaker 2next 100 years. the last several years is for a long time, people didn't even know Capital Group had the American funds. And it seems like capital is a little more in the public eye now. How have you thought about the brand of the organization as you've come into this seat? If you would have asked people 30 years
Speaker 1ago, they definitely would have bristled at a higher profile. We were under the radar intentionally. And at that stage of our evolution, that was okay. Let the investment professionals focus on managing money. We had an incredible client-facing team doing the work in the field. Let our work speak for itself. To a certain extent, that still happens every day. And our clients are asking us to have a larger profile. And as you launch new vehicles, ETFs, separately managed accounts or SMAs, strategies outside the US, you need to use the capital brand, not the American funds brand. And so linking them and having them both elevate together is a great way to do that. And I think that's a great way to do that. We do it in a tasteful way. It's more than we've ever done. I wouldn't suggest that we're going to be on the front page of every publication tomorrow. That's not our ambition. But we are raising our profile. Our clients are happy to see our name out there more. As you're a global asset management company and not just a US asset management company, using some of those dollars to raise brand awareness outside the US is important. You'll see more and it's intentional. Even if you're not a global asset management company, you're going to see more and more. Even folks from 30 or 50 years ago, I read one internal document from 1963. And it talked about always evolving so we don't risk obsolescence. That was 1963. We've always evolved. Having a stronger brand approach and profile is part of that evolution. And the world has changed. Social media has changed. Brand awareness focus has changed. All that's changed. You could sit there in your shell and say, it's all changed and we're not going to change with it. Or you can break out of your shell and say, we're going to do this. We're going to do this. Do it in a capital group way.
Speaker 2As you look out six years to the 100-year anniversary and then long beyond that, what do you see as the future for capital?
Speaker 1I think if our partners in the wealth and the institutional space, if you walked into their office and said, who are your three or five most important partners that can do virtually anything for you and are super important to you, we'd be on that list. With so many of our partners, we're in that position today. But how do we continue to invest in the future? How do we continue to invest in the future? How do we continue to address the resources that our clients need us to, to make sure we're on more and more of those lists of adding value to our partners? That may be from investment. That may be from business management. We have the ability to have the resources to deliver to them, to be that partner of choice. If globally more and more folks say that because we're impacting their business in a positive way, that would be a
Speaker 2really good outcome. What are some of the downsides of being as big and powerful as capital is today?
Speaker 1If you combine it with the question you asked on public profile being up a bit, there are some benefits to being under the radar. When you're on the radar, you get in the news cycle and the news flow more than you had in the past. Not all of those stories are going to be perfect. We have to condition ourselves to know with a higher profile, you're going to be in the news more often. That's different for us. And to make sure internally that it doesn't distract us from the mission at hand. The news story was out there. Most of them will be good because we're in the news cycle. But if you're in the news cycle, you get in the news cycle. You're a calm, good, long-term enterprise. But maybe one will be a little bit noisy. And to remind our folks internally, focus on the mission. Let the news cycle run its eight hours and keep
Speaker 2moving. In the years that you'll be at the helm until it's your time to retire, what are you hoping to accomplish?
Speaker 1We have to execute the long-term strategic plan. When Tim retired and Rob stepped off our management committee and we added some new members, the first thing we did was work together across the board. We worked together across the board. We worked together organization for the long-term strategic plan. Once you have that document, and we reassess it every 18 to 24 months to make sure it's right. And if it's not, we'll tweak it. But man, when you have that document and you have that strategy and you have empowerment, execute it. Stay out of people's way and leave the organization better than you found it for the next people to write the next strategic plan.
Speaker 2Michael, I want to make sure I get a chance to ask you a couple of closing questions before we wrap up. Our closing questions are brought to you by Old Well Labs or OWL. OWL is the very best software I've seen for allocators to find and track managers, and I've seen a lot of them. If you haven't seen OWL, check them out at oldwell-labs.com slash TED. And trust me, it'll be worth the look. There's a link in the show notes so you can learn more. And here are those closing questions. What's your favorite hobby or activity outside
Speaker 1of work or family? I like to walk. I like to walk more than 10,000 steps, so I'm doing a half marathon in January to force myself to walk. I like to walk more than 10,000 steps, so I'm doing a half marathon in January to force myself to train for that. I just love walking with no headset on and just taking in what's happening in the outside world.
Speaker 2Where do you find time to do that? Late afternoons.
Speaker 1I work early in the morning, so late afternoons I try to do my walking and the
Speaker 2weekends. What was your first paid job and what'd you learn from it?
Speaker 1McDonald's, and I learned not to give away free food or you're going to get fired. When you're 16 years old and someone orders a hamburger and they end up with fries as well, that's not the best plan.
Speaker 2What's the best advice you ever received?
Speaker 1Our retired president, Phil DiToledo, gave me advice that when I joined in my mid-40s, no matter what stage you are in your career, you can always get smarter, always get better if you're willing to learn. Good advice from Phil.
Speaker 2What life lesson have you learned that you wish you knew a lot earlier in life?
Speaker 1Well, we talked a lot about empowerment. Empowerment is empowering not just for the folks that you're empowering, but it's a leader who's willing to empower them. I think that's super important. I've learned that.
Speaker 2It's taken me some time, but I've learned that. All right, my class one, if the next five years are a chapter in your life, what's that chapter about?
Speaker 1Well, on the personal side, my oldest is going to get married next year, so no pressure if he's listening to this, but hopefully it means grandkids as well and entering that stage of life on a personal level for me and my wife. And on a professional level, that will take us really close to our centennial and the culmination of our strategic plan. And hopefully as a leadership team, we can look back and say, we left the organization better than we found it.
Speaker 2Mike, thanks so much for sharing the incredible capital story. Great. Appreciate it. Thanks for having me. Thanks for listening to the show. If you like what you heard, hop on our website at capitalallocators.com, where you can access past shows, join our mailing list, and sign up for premium content. Have a good one and see you next time.
Speaker 3Ted and podcast guests are solely their own opinions and do not reflect the opinion of capital allocators or their firms. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of capital allocators or podcast guests may maintain positions and securities discussed on this podcast.
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