The 1950s represented one of the most difficult times in Capital's history, but they also led to one of its greatest successes.
In 1953, Capital's founder, Jonathan Bell Lovelace (or JBL as he was called), suffered a heart attack at the age of 58. The incredible schedules and frequent travel had taken a toll on him, and his doctors advised him not to return to work.
At the time, JBL was a central figure in the organisation, not only leading the firm as a whole, but serving as the chair of the investment committee. While another analyst stepped in to replace him in the interim, the greater question of succession loomed.
Five years after Jonathan Bell Lovelace's heart attack, his full recovery was taking longer than expected. The funds were also growing so fast that the mechanics of portfolio decision-making were becoming problematic. Upon reflection, JBL's son, Jon, who had joined the firm, suggested an alternative to the committee system.
At the time, the question of who would manage the funds had emerged as a key concern. Unfortunately, there was no overall agreement on what to do. Jon suggested that on a transitional basis, two of the funds would be divided among four portfolio managers with each managing a portion.
The advantage of doing so was unmistakable – it would temper the bullishness of one manager with the conservatism of another, and lead to greater consistency of investment results over the long run. What the portfolios might lose in upside potential during bull markets would be offset by increased stability on the downside in bear markets. However, what became one of Capital's greatest competitive advantages wasn't immediately recognised as the innovation it was.
However, this system ultimately became the standard in which Capital managed portfolios. We call is The Capital System.
"Everybody thought that it was a cockeyed idea, including me," Jon remembers with a laugh. "But it was good for the transition, at least, and that's how it began. And it ended up working so well, we kept it!"
Throughout the years, the system has garnered praise for its common sense approach. Yet many other firms have not attempted a multiple manager approach, and those that have tried to mimic it have not been successful. Capital's emphasis on collaboration and respect for the individual are key reasons why The Capital System remains a success today.
"I think the problem is that most other companies just don't have the culture that allows it to happen," Jon says. "You have to be willing to put up with some of your fellow managers doing things that you don't agree with. You have to acknowledge that you're all good managers and are each going to have to trust one another."
"It's been a remarkable stroke of luck that this bizarre idea was given a try, and that it worked out far better than any of us thought it would," concludes Jon.