This New Bond Leader Doesn’t Have a King
Actively managed bond funds at Capital Group, a huge but intentionally faceless manager, have attracted $100 billion over five years, twice the total of peers.
When investors think about fixed-income managers, the first names that usually come to mind are Pimco — once synonymous with “Bond King” Bill Gross — BlackRock, Vanguard, or DoubleLine, with its star CEO and CIO Jeffrey Gundlach.
But one intentionally faceless asset manager — which rejects the idea of star portfolio managers and even gives analysts parts of portfolios to run — has heavily invested in its bond business, delivered good returns, and significantly outgrown its peers.
Over the past five years, Capital Group’s actively managed fixed-income strategies have pulled in a net $107 billion, twice as much as any peer. The five asset managers with the largest net flows — including Capital Group’s American Funds, Vanguard, Baird, J.P. Morgan Asset Management, and PGIM — gathered a total of $284.4 billion during the same time period. Capital Group accounted for more than a third of the total.
Stephen Welch, a senior research analyst who focuses on asset managers at Morningstar, called Capital Group’s success attracting new money “crazy.”
But Capital Group said that it’s been laying the ground work for years. The firm may not be a big brand name in bonds, but it has a very large team.
“A lot of work, in so many places, really came together. And you’re seeing that result [in the] flows,” said Ryan Murphy, fixed-income asset class lead at Capital Group.
Jonathan Bell Lovelace founded Los Angeles-based Capital Group in 1931, and the firm became best known for its actively managed stock portfolios. Today, the company says that it’s still known for its equity funds, but fixed income represents almost $450 billion of its $2.2 trillion in assets. Since 2015, fixed-income assets have nearly doubled.
Capital Group lags its peers in total bond fund inflows, primarily because the competitors offer passive investment strategies. A short list of firms, including Vanguard, BlackRock, and Fidelity, dominate that market. But Capital Group has been a significant leader when it comes to actively managed funds.
Murphy, who joined Capital in 2021 after working for 14 years at Pimco, said that Capital Group began to significantly invest in its fixed-income business 10 years ago.
In 2015, it hired Michael Gitlin, the head of fixed income at T. Rowe Price, to lead the same group, and has since lured many managers and analysts from competitors. Today, the firm has 238 investment professionals in fixed income, with the same team-based structure it uses for all assets.
Capital Group doesn’t have star portfolio managers and few singular decision-makers. A team of managers, with one principal portfolio manager, oversees all investment strategies. Analysts also get their own sleeve of a portfolio to manage, a structure fairly uncommon in the industry. The multi-manager structure has resulted in better collaboration and investing, and it incentivizes analysts who often deliver the best ideas out of their research, Murphy said.
Sam Kulahan, a senior analyst focused on fixed-income managers at Morningstar, says that the structure creates career development opportunities that might be less common or even nonexistent at other asset managers. Capital Group’s Murphy has already seen those benefits since he joined the firm.
“Collaborative views — independent views — and having people vote with their feet in the investment process is how you elicit better bottom-up implementation and investing. It’s an acknowledgement that you don’t want one voice dominating the room and you don’t want to run into the perils of groupthink,” Murphy said.
“There’s no one identifiable person that we put forward as part of either our investment process or our business,” he added. “That’s built into the structure of how we manage money and how we operate. More views and more voices lead to better results.”
That might be one reason why employees stick around. According to Kulahan, the low turnover at Capital Group over the past five years is notable. “Very few folks choose to leave Capital Group’s fixed-income team. They are very good at retaining analysts and PMs,” he said.
Those teams are also delivering good returns, which Murphy said makes everything easier. “To our investment team’s credit, they navigated a really varied environment” in recent years, which included the worst bond market in history, the Covid-19 pandemic, and rapid interest rate hikes. The company’s Bond Fund of America, launched in 1974, has beaten the Bloomberg U.S. Aggregate Index in 93 percent of three-year rolling periods and 98 percent of five-year rolling periods.
In 2022, the fund lost 12.68 percent compared to the Bloomberg U.S. Aggregate Index’s 13.01 percent loss, while in 2021, the fund lost 0.95 percent compared to the index’s loss of 1.54 percent. The fund beat the index in 2020 and 2019, with returns of 10.71 percent and 8.02 percent, respectively. Several other Capital Group bond funds also have five- or four-star Morningstar ratings.
The asset manager has been leveraging existing relationships with its equity and multi-asset business to grow its bond business, make new inroads with pension plans and other institutional investors, and grow its liability-driven investing business. It has also invested in its infrastructure and refined its sales process.
Murphy said that he understands that most people think of Capital Group as an equity manager. “Why should folks think of us in the fixed-income space?” he asked. But he added that this makes the manager particularly skilled at understanding the big picture.
“We’re acutely aware of the role of fixed income in larger portfolios and asset allocations,” he said. “Even over the last year, fixed income is [suddenly] a much more compelling solution for a lot of these defined benefit plans. A year and a half ago, you’re getting sub 1 percent for a 10-year Treasury. Today you’re getting significantly more.”
Murphy stressed that there is still room for the growth to continue. Even at $73 billion, American Funds’ Bond Fund of America, one of Morningstar’s top-rated bond funds, is not in danger of running into capacity constraints. Its core bond fund invests in investment-grade U.S. debt. It typically holds less than 5 percent of below-investment-grade bonds.
“Our process is [to not rely] on those higher-octane, less liquid parts of the markets, but [to go after] opportunities in higher-quality sectors. It’s something we always talk about and make sure we test — test internally — but [we’re] not bumping into those limits at this point,” Murphy said.