A (2:37)

That's like your secret sauce, right?

B (2:39)

It is. And I can speak about it. I wasn't alive yet. It was a brilliant concept, but it came out of a moment of challenge. At that time, Our founder had had a heart attack, survived when he came back to the office, said, we can't manage money with key person risk. It's just not good for the clients. And so the capital system was formed where the analysts themselves are investors. They're not credit raiders or stock raiders. They invest real client assets. And then you have multiple portfolio managers collaborate in a portfolio, as opposed to just one person managing all the money.

A (3:21)

Why is that good?

B (3:23)

It's good for a few reasons. One is an analyst who manages money has skin in the game. That's real client assets. It's not a buy rating or a sell rating. It's money. That's a very different responsibility when you're actually managing money.

A (3:39)

So you make sure that more people sleep badly at night.

B (3:43)

So one thing you could do when an analyst manage money is they understand portfolio risk, they understand diversification, they understand how to participate in the new issue or the IPO market. They just have a different way they go about them than an analyst who raised credits. And then for portfolio managers, I think the biggest difference is you're not left with one individual's 300th best idea. You get the strongest convictions from several portfolio managers in the same strategy. Everything's open, everybody can see everything. But you can express conviction without feeling like the weight of the entire portfolio is on your individual shoulders.

A (4:19)

But one person is responsible for each investment.

B (4:23)

Each investment strategy has a principal investment officer. They are the conductor of the orchestra and they have accountability. But there will be a research portfolio and there will also be other portfolio managers alongside, all in the same strategy, all expressing their conviction. It's just different.

A (4:40)

So if one product does badly, do you fire the whole team or you fire one person or what do you do?

B (4:46)

Well, we don't really think about it that way. We think about who's participating in the portfolio, what are their risk characteristics. We try to combine people with complimentary skills. We have so much data on them, so we know their upside, capture, downside capture. We know how they manage money because as an analyst, remember, they were managing.

A (5:07)

Is how much of an increase in a share price do you actually manage?

B (5:10)

Or the. Or the overall market. When the market's going up a lot or down a lot, how much do you participate? Are you more defensive or you're more offensive?

A (5:18)

So you want to participate a lot on the upside and when it goes down, you don't want to participate so much?

B (5:22)

Well, that's right. And not everyone can do that well, bolster sides. So trying to figure that out.

A (5:26)

Does it have learning how does it help learning and knowledge transfer, the fact that you have these people working together?

B (5:32)

I think what you have is you have people sitting around the table in a certain investment unit and everything's open. There's no hierarchy. You're a portfolio manager, I'm an analyst. It's not hierarchical. And so we all share ideas. All the portfolios are open so everybody can see them. And what it does is it gets the ideas all on the table. And because you and I can express our convictions, it doesn't promote an environment of group thing. You might have serious conviction in these names, I and different names. And we can do that in the portfolio because we'll have some diversification benefits from the client on an overall perspective. So it just makes a really open conversation at the table.

A (6:15)

These portfolio managers, they hang in there for ages, right? I mean, is it right that the average tenure is more than 20 years?

B (6:22)

Yeah, our folks stay.

A (6:24)

Why?

B (6:25)

They stay because of the culture, they stay because of the nature of the shareholding. And they stay because they love capital group. I mean they come, we tell people when we're interviewing, if you don't think you're going to be here for your entire career, don't come. So our attrition rate for investment professionals is in low single digits. I mean they do come for their careers.

A (6:47)

Now, who does best at capital? What are the quality characteristics of the best portfolio managers?

B (6:55)

Portfolio managers who get smarter and smarter over time but don't engage in style creep. They know the kind of manager they are, the kind of investor they are, and when markets are really skewed one way or the other, they don't engage in style creep. So that when the market recenters, they're not caught off sides, that's really important we can take care of because we put different portfolio managers and analysts into portfolios. From a top down perspective, we can manage that kind of risk and volatility. What's hard to do is if they change their style midstream, that becomes a problem because then you get a skew in the portfolio that was unintended.

A (7:39)

And when you say style, you mean things like value investor or growth investor?

B (7:42)

Yeah, you're more growthy. Are you more value and dividend and income focused? And in a roaring bull market, have you shifted that style so dramatically that you no longer recognize as the investor we thought you were? Because if everyone did that, the overall portfolio would become way too growthy. So trying to get people to tweak their styles with education in the markets over time, but not fundamentally change it midstream because that becomes more problematic.

A (8:12)

How would you define the investment philosophy of capital?

B (8:16)

I'd say there is not one single philosophy. Every individual has autonomy. If you and I are in one portfolio and we're both managing $5 billion, we're all going to talk about ideas. You're going to go away and you're going to do what you think is best. And I'm going to go away and I'm going to do what I think is best.

A (8:33)

But do you have like a bible? Do you have one way of doing things?

B (8:37)

It's not a bible. We try to have low turnover because there's no such thing as high turnover proving in correlation terms to produce better investment results. So in general, if you were thinking stylistically, we tend to have lower turnover than other managers of people. And also the portfolio, we tend to have people come a long time, stay a long time and not a short time. We have to manage at scale. We do manage $3.2 trillion of assets. So we have to manage at scale, scale. I think those, those are the biggest factors.

A (9:13)

Long termism, how does that come into play here?

B (9:17)

It's interesting. Incentive systems are a very interesting thing. I'm a believer in incentive systems. They drive behavior, period. The number one driver of an analyst or portfolio manager's quantitative compensation is their eight year number.

A (9:36)

That's a long time, huh?

B (9:37)

It's a long time. Well, and in a world where short termism can be favored and create additional volatility, when you're eight years first and then five and then three, and your one year is the lowest component, smallest component of your compensation, it says, don't be a hedge fund manager, manage for the long term. In my podcast, the first guest I had was Rob Lovelace. He's been at Capital Group 40 years. He's also the grandson of the founder. He has excellent investment results. And I said to him, what's your edge? What's your edge, Rob? His answer was simple. He said, time. I have the time to be right. And so you can go against the grain, you could have a conviction that might not start off perfectly but come into play as your thesis comes into play. But the benefit of time is a huge benefit. You don't have that if your one year number drives your quantitative bonus.

A (10:33)

No, but eight year is a long time. And just to put it into perspective, we until recently had three years as the rolling number. And we have, partly inspired by you guys, moved some of it to five year. But to have people think about five year results in this Faster and faster moving world. That's interesting.

B (10:54)

But I think about your people and I think about your goals going from three to five years. Statistically, if you measure that over the next 10, 20, 30 years, I bet you have better investment results by having that slightly longer time horizon. It gives people confidence to have conviction and not be so knee jerk reactive to one thing or another, but stick with it.

A (11:19)

Yep, well, that's the plan. Why is it so difficult to be long term?

B (11:24)

It's difficult. I think it can be difficult because of client expectations. I think the world and everything is so much more short term in people's attention span, the news cycle, everything. And so when you're trying to say well we're saving for retirement, that can't fall into the wave of short termism. We're trying to think of you when you're 38, how you're going to live when you're 70 and 80 and 90. And so it does us no good to look at every single quarterly earnings and make a reactive decision based on a business that's going to grow 12% compounded for the next 25 years, supposedly.

A (12:13)

Compared to 30 years ago. We both speak and walk 10% faster than we did because they measure average walking speed in cities. And when you look at the movies that you liked when you were young, I mean now they are just like a yawn, Right. Nothing happens. And so kind of the cuts gone from minutes to seconds. It's just interesting how the whole speed is accelerating.

B (12:33)

Well, that's why everything streaming is 43 minutes. I mean it's the attention span.

A (12:39)

Yeah, or the TED talks, like same thing 18 or whatever. Now another thing which has changed is the whole kind of active passive strategy. So how do you see that impacting the asset management industry?

B (12:54)

Well, 30 years ago, a little more than 30 years ago, passive didn't exist. So now it's about half the marketplace in equities. So it's massively impactful. And what it's done with flows into passive is it makes a benchmark even more concentrated. When I look at our institutional business, we're seeing our requests for proposals, our RFPs go up to the right. So why is that one? I think it's because people recognize the benchmarks are super concentrated with half of the assets going into passive and fewer amount of assets in active management in relative terms that skews the market and it makes this concentrated benchmark. So people are literally looking for diversification away from a concentrated benchmark. I never thought I'd say that the whole Concept of passive was to be diversified.

A (13:54)

So just so passive, that is you just buy the index.

B (13:57)

Just buy the index. And so for us, I mean, I like to say there's 53,000 seven public companies, there's not seven public companies. And so having the opportunity to move away from the skewed benchmark and find opportunities outside of that globally is a great advantage for active managers. And I think you're going to see that now. It depends on the manager and I'm sure we'll talk about that. But not all the managers have strong results versus the benchmarks. And I think people were seeing low fees and active managers not beating passive. And that pushed some of the assets into passive. And now they realize they have to pick and choose between the active managers.

A (14:38)

Tell me, why is it so difficult to beat the index?

B (14:41)

Well, it was difficult in the last decade because of how skewed it became. And in some rules around, especially in the US and 40 act rules around how funds can be managed, you had concentration limits of how much you can actually own in a single stock. So as the benchmark got more skewed, you weren't even able to do that if you wanted to, and that became an issue. As the market broadens, there's no excuses for active managers not to beat benchmarks. And I think you will see a market broadening. You're already starting to see that the more the market broadens, whether it's in a country or globally, the more opportunities there are for active managers. And we're heading into one of those periods now. But from 2010 to 2020, heavily skewed benchmark, heavily skewed results into a small number of stocks.

A (15:38)

Moving on to AI. How do you use AI and capital?

B (15:42)

Well, it depends. It depends on the group, the operating group, taking commoditized functions, having them go away and having those individuals spend their time on higher value added activities. And the world is doing that. I don't think we're any different in that regard. In the client group, you're going in to see a financial advisor on the wealth management side, hit the Prep Me button. It tells you everything about that financial advisor that you've already put in the system so you can make it a more productive interaction with the advisor. You're not going in there blind. You look at all AI reads all of your notes in the Prep Me session. Just makes it seem so much more valuable. Translation. We put together lots of value added content for our clients. Translation makes it available immediately for everybody around the world in their language. These are Just really easy use cases. On the investment management side, think about 94 years of data. We've digitized our entire library over 94 years. Every single report on every single stock ever written at Capital Group. That's a proprietary advantage. How we utilize that data and structure that data and investors as well. I'm an investor, I've been at Capital Group 30 years. This environment has rates that are coming down. Valuations are relatively high. What mistakes have I made in the past in the similar environments? Goes through all of my data managing money and it tells me things to be aware of as this cycle may be the same or different, but at least it gives me an indication of some of the things I've done in the past. So trying to use all of the data we have to make better decisions. There's a lot of opportunities in that space.

A (17:34)

Another thing which is changing is of course the private market. And you just entered a partnership with kkr. Why did you decide to do that instead of starting on your own?

B (17:44)

Yeah, it's a great question. I mean, we had three choices. We could have bought something, we could have built it ourselves, or we could have partnered. And I'm not being critical of others, but one of the main reasons you would build it yourself or you would buy something is to retain 100% of the economics. That wasn't the driving force for us to build it ourselves. You would then have to be willing to practice on your client's money. Right. Because you don't have it yet. And you'd also have to be willing to either bring in a team, which could be a cultural challenge, or take people on your existing team and tell them to do something different, which would distract them from the $3.2 trillion we're already managing today. So we weren't willing to do that. The acquisition side, again, was a cultural challenge. So the only thing we had to believe in partnering is whoever we partner with could do it better than us. We went through a diligence process, we had a whole team due diligence on a range of managers and we ended up with KKR. They've done it for 50 years. We'll let them do the private portion, we'll do the public portion, we'll blend it together in a client friendly solution that meets their needs and we'll make sure we provide education. So it was just about not needing to achieve all the economics, but but be able to deliver a better solution. It's literally what we were talking about. That's not a sales pitch. That was part of Our management committee discussion of why we did it because it was the best solution for our clients. I think that's very straightforward, but it's not necessarily the path that I think everyone's going to take.

A (19:26)

No, no. Another way you are differentiated is the way you are owned.

B (19:31)

Right.

A (19:31)

So you are owned by the partners. How does that work? Well, how many people would own it?

B (19:36)

I would say it's rented by the owners, meaning the owners own it until they retire and they sell it back to the next generation. The founder, this is crazy to think about 94 years ago, but 94 years ago, he founds this business and says, in three generations from now. So he was thinking about his grandkids who weren't born and saying, when that generation passes, none of my family will own any of this stock. It will all be owned by the people who work at Capital Group at the time. Who would think that 94 years ago? So it's a very. Well, it's really cool. And what it does is say the mentality is, if you're in it, if you're picking stocks and bonds all day long and servicing our clients all day long, it's about you, not necessarily the people who are retired or the people who were integral to the business 50 years prior. So you own it during the period of time you're at Capital Group, and then you sell it back and we start again.

A (20:41)

How important do you think this has been?

B (20:43)

I think it's huge, the way the Lovelace family did it. And now we can say no one owns more than about 1% of Capital Group. So the ownership is really widely dispersed. It just means that all of those individuals who are owners then are participating in the outcome and feeling as if their name is also on the door when they walk into the building. And I think that's really important. And not everyone can be an owner. So we make sure we have a large profit sharing program where all of our 9,400 associates do well if our clients do well. So we do both. But both are important.

A (21:20)

Now, many partnerships have gone public and listed on a stock exchange.

B (21:23)

Right.

A (21:23)

Goldman Sachs and so on. Why have you been close to doing that? Or is it something you cannot do? Well, we could, even if you wanted.

B (21:29)

To, we could do it. We wouldn't do it. Why would you take what may be one of your biggest advantages and willingly give it away?

A (21:40)

Well, some of these other partnerships have.

B (21:42)

Done it and they've done really well as well.

A (21:43)

Right.

B (21:44)

And at the time they did that, there were different reasons why they all may have done that. That's not to judge their decisions at that time. We don't have to do that. We have an incredibly strong balance sheet. We have no long term debt. We don't need to sell the business. Any one of the past generations, by the way, could have monetized. Any one of them. They could have monetized for their own financial gain. It's a mentality thing. We're supposed to take care of the business, make it even better than it is today, and pass it off to the next generation to do the same. We like to talk about writing a chapter in the Capital Group book and then passing it on for someone else to write the chapter. And I think that's if you think of it that way, from the day you join until the day you retire. It's a really interesting mentality of the life cycle of a company.

A (22:33)

Now you started a chapter like two years ago when you became CEO. What were the first thing you did when you took over.

B (22:42)

Capital groups? Another thing that makes this interesting is we're not hierarchical, meaning I'm much less important than you just insinuated as a CEO. We have three senior leaders. We have a management committee of 10. So the 10 of us got together and collectively with the rest of the organization wrote the next long term strategic plan. So 2031 is our centennial. We got together as a group and said we're a new leadership team. Tim Armour had retired. Rob Lovelace still works at Capital but came off the management committee. We had a new group of senior leaders and a couple additions to the management committee and said, let's write the long term strategic plan together. It's literally the first thing we did as a group, which is really liberating. And the departing leaders said, don't just do what we did. Don't rinse and repeat. Do it differently, do it better. Keep evolving.

A (23:39)

Have you started to plan your 100 year party?

B (23:42)

I know I sent one invite. Did you get it?

A (23:44)

Yep. So.

B (23:46)

So we have. We haven't started playing. Yeah, but you'll still be around. So we haven't. We haven't started planning our party, but we planned our strategy.

A (23:58)

And. Tell me about the strategy.

B (24:02)

Strategy has four parts and I'll make it quick because no one likes to bore anybody with a strategy or be bored. Okay, in three points, I'll do three and a half. One is we have to manage money well. That's what we do. So keep investing in the capital system. Two, evolve with clients. We have intellectual capital, how they want to consume it. Institutional, separate Account, collective investment trust, separately managed accounts, ETFs. That's their business. We just have to make sure that as they want to consume that we're able to do that for them. And, and when they want us to blend passive and private markets into our active at the core strategies, we're able to deliver solutions. So keep evolving with our clients. Three is simplify and scale our business. Every business to some extent is bloated by its own bureaucracy, period. So what can we do to operate more efficiently and effectively? And the last one is invest in our associate experience. We have half the attrition rate of the industry. So we want to develop people, keep them. It's disruptive to keep replacing people every two years. So you have to give them opportunities to develop their careers and want to stay at the company. We're not perfect at that, but we have to get better at it.

A (25:28)

Can we drill down a bit more on the culture side? So now I, I'm really lucky. I get a job at Capital.

B (25:38)

It's a long interview process. Are you patient?

A (25:40)

Let's start with that. So how long is it long?

B (25:43)

I mean it can be anywhere from six to 12 months. And I was asked a question in one forum. Someone said, have you ever lost a candidate because the process was too long? I said, yeah, of course we have, but it's worth it over the long run to take that time.

A (26:01)

And can everyone veto and say, listen, I don't like the look of that person.

B (26:05)

The good thing is nobody has veto power on anything. So it's not like that. Everyone has a voice, everyone can weigh in, but nobody has veto power. But it's important because you want them to interview us. Also, if they're going to be there for the rest of their career, they should be interviewing us as much as we interview them. I think that's super important. But we have a long interview process. If you're an investment professional and you're joining, you conduct an industry review, meaning we tell you, don't be quote, unquote productive. Day one. Take three to six months, look at a certain industry, research it and come to the whole group and tell them what your portfolio going to look like as an investor. And so we give people time to do that instead of rushing them into a portfolio. Management. It's just another thing, it's part of the system.

A (26:57)

What are the other cultural things?

B (27:00)

You know, I, if you look at culture, culture is an interesting thing because some people, their eyes glaze over when you talk about culture. They feel like it's so Intangible. Does it really matter?

A (27:11)

It's everything that matters.

B (27:12)

It's everything that matters. I agree with you. And so from us, it's all in the core values, integrity. If you look at financial advisors, we're rated number one in trust. You have to have integrity. It's what you do. It's. Our whole business is built on. On integrity. Diverse perspectives. The capital system's built on diverse perspectives. Long term, we talked about 8 year number driving quantitative bonuses community. We want people to invest in the capital community, but also the community they live in so we can be responsible in that community. And the fifth one is client focus. Are you client focused or are you so focused on your own P and L that you're not? That's a huge thing.

A (27:56)

What are the aspects of the culture that you try to change or try to improve?

B (28:00)

You know, the one thing that we're getting better and better at is not associating excellence with speed or the lack thereof. Meaning at times in our past we would be so slow to do something because we were so measured that we ended up at times priding ourselves on slowness. I think now the whole organization recognizes we can move at pace and still be excellent. That's one of the things we're doing more and more today. I think that's really important. Can you do it well and can you do it at pace? Because the market's evolving. You and I talked about it before. The market's evolving so much you have to move at pace, but you can't give up being really good at it.

A (28:47)

No, that's true. I saw some research showing that organizations which take fast decisions on average take better decisions.

B (28:53)

And we're getting faster. We'll never be so fast that we're not researched, but we're getting better at moving at pace.

A (29:02)

Are you like really soft? Are you just like really nice and kind all the time?

B (29:07)

Who? Capital Group or me?

A (29:08)

Yeah, you know, you like, drink hot chocolate every Friday and have kind of cinnamon buns all over the place.

B (29:15)

I. I don't think that's how people would describe Capital Group and they certainly wouldn't describe me like that. I think we're nice, but minus the hot chocolate.

A (29:26)

How do you share information internally between the teams?

B (29:30)

Generally as much as we can in person and verbally. We're in the office four days a week at Capital Group. We have Friday as a work from home day. We like when people sit around the table together and talk. It's much better than just sending emails. And I think that in person, collaboration Our folks travel all the time to other offices and to see companies. I hope in the world of AI and and other ways to communicate rather than in person, the virtual world doesn't overwhelm what we can do together in a conference room.

A (30:17)

You are in many cases also a bit of an advisor to companies. Right. They ask for your advice.

B (30:22)

They have. Our folks will present at company board meetings regularly. If they ask us to come and do so, to ask us to share. And I say us, I mean our investment professionals, not me. But they ask us to share our views on the industry, our views on what makes that company excellent and what they can do better. So we do a lot of those board meetings for different CEOs that ask us to do them.

A (30:45)

As long as it's not on Fridays.

B (30:47)

Well, probably because probably no one's working on a Friday.

A (30:51)

Tell me, is that something you always had the Friday work from home or is that something left from COVID Post Covid. And if you cancel that and went to five plus, you know, five plus two instead of four plus one, will you get a revolution?

B (31:05)

We wouldn't get a revolution, but I don't think it would win super high marks from all of our associates. But I think. But, but four days going from three to four post Covid was important.

A (31:14)

Yeah, we did.

B (31:15)

I'm glad we did that.

A (31:16)

Same here.

B (31:16)

No regrets. And I don't think our people have regrets on that either.

A (31:20)

No. But one day is important. It's important to have one day flexibility.

B (31:23)

And I think that flexibility something not a lot of us considered pre Covid. It may be one of the benefits. Post Covid, but one day.

A (31:32)

Yeah. When do you wake up in the morning?

B (31:34)

Four.

A (31:35)

Wow. What do you do? What do you do when you wake up?

B (31:39)

Well, it doesn't take me a long time to do my hair, so I quickly get ready and go into the office. I'm in the office by 5.

A (31:48)

For the people who are not on any visual hair or just on sound, he's got a pretty short haircut.

B (31:55)

Yeah, super short. It's been short since I've been 29. But. But I like, I like doing the early stuff. I'm not too bright at nighttime.

A (32:02)

Right. When do you go to bed?

B (32:03)

8:39.

A (32:05)

Right. How do you relax?

B (32:08)

I spend time with my wife. We've been empty nesters for six years. I walk a lot. I read, spend time with the kids who are no longer kids, they're adults, so more family things.

A (32:22)

What do you read?

B (32:24)

So a bunch of things I've. I'm A big fan of fiction as opposed to non fiction. My life is a non fiction story, so I read a lot of fiction. Anything that Jeffrey Archer writes, Steve Barry, Daniel Silva, I love those kind of books. I read the regular publications that all of us in the finance industry read. So I read the FT Wall Street Journal, Barron's, and then I read stuff inside a capital group. We have something called Capital Connect where all of our research is. I once spent a lot of time reading external research and I realized reading the internal research, I can still get that diverse perspective, but I don't have the world of volume coming at me. I can hunt and peck within our own capital system.

A (33:13)

If you were not in asset management, what do you think you'd be doing?

B (33:18)

Probably be a teacher. Right. When I left university, my first job was teaching in Australia and I loved it. It was a short period of time, but I'd probably be a teacher.

A (33:29)

What would you teach?

B (33:32)

I probably wouldn't teach the kind of thing we're doing today in our business, you and I, maybe English or history like I taught back then, but I don't think I would get into the world of teaching finance. First of all, I probably don't know enough. And second of all, I'd want to do something different.

A (33:49)

And what would be your advice to these young students generally when it came to their lives?

B (33:56)

Yeah, it's interesting. I think when you're young and just getting into the workforce, you think two things. You think you have to know your future then, which none of us do. I don't think you saw yourself sitting in the seat you're sitting in today.

A (34:16)

40 years ago, partly because the fund didn't exist.

B (34:19)

There you go. And I certainly didn't see myself sitting in this seat. So I tell people, try not to be too bright in terms of the long term future at inception. The second part is be excellent at what you do before you assume that you're capable to do the next thing. So be excellent on what you do. You'll stand out if you're excellent. Be curious and don't plan too far ahead.

A (34:43)

Yeah, well, Mike, you clearly are excellent in what you do. And so when you become a teacher, I'll sign up for your class as.

B (34:51)

Long as you're willing to learn history in English. Thank you, I appreciate it.