What now?

Protected Income and Fund Spotlight Series

Johnathan Young:

I'm your host, Johnathan Young, and I serve as the, uh, Senior National Account Manager, um, for Capital Group American Funds and I want to thank you for joining us today. We realize that you're being invited to many, probably too many webinars nowadays and we are grateful that you've carved out 45 minutes to join us today.

Before we get going, I hope that each of you and all those you care about remain safe, sane, and healthy during these challenging times, clearly challenging times for all of us. Before, uh, we get too much further, uh, we want to thank you again for continuing to partner with us. We are definitely still open for business and as most of you know, we are the third largest retail fund family in the industry with over $2 trillion dollars in assets. We're also the largest third-party manager in the variability annuity space with over $154 billion in assets.

Today's webinar will focus on Asset Allocation Fund, one of the oldest and largest funds in American Funds Insurance series, which dates back to 1984. This will not only be an investment discussion, but also a thought leadership discussion around protected income.

Today I'm very excited to be joined by three of my distinguished colleagues, Kate Beattie is a Senior Retirement Income Strategist for us, with over 13 years of industry experience. She and her team are responsible for the thought leadership around the topic of retirement income, helping us actually pull together our thoughts on the topic and share them, not only externally, but also internally.

Now I did ask Kate for a, a fund fact. Uh, she shared with me that she married a fireman and apparently, he's a pretty good cook. Like many others during quarantine, Kate decided to up her cooking game and has really enjoyed it. I asked her what her favorite dish was, she said it was crispy Carnitas with smoked Mexican street corn and Kate, I’ve got to tell you, that sounds delicious.

Also joined, uh, by my friend Mark Seaman. Uh, Mark serves as an Equity Investment Director at Capital Group American Funds and he helps represent what we're actually seeing broadly across our portfolios and in individual funds to our external audiences, such as our friends on the call today. Uh, Mark has 26 years of investment industry experience and has been with Capital for more than 14 years. I asked Mark for a fun fact. His? He and he's son built a 15-foot sailboat. Good news, uh, it didn't sink.

Uh, last by certainly not least is Alan Berro. Alan is an Equity Portfolio Manager with Capital Group and serves on the Portfolio Solutions Committee. He comes to us with more than 34 years of investment experience and has been with Capital for the last 29 years. We asked him specifically to join us today because he's serves as the Principal Investment Officer on the variable Insurance Asset Allocation Fund, which we'll be spending some time on today. Uh, like Kate, Alan has also taken up some cooking specifically baking sourdough bread. He's also taken up golf and he described it as the perfectly social, uh, distance sport, which I thought was great.

Now for our agenda today, we will cover three things. First, we need to acknowledge the current environment and its ripple effects on your clients, the investors out there. Then Kate will share a new tool to help build, uh, balance with protected income. Then Mark and Alan will bring us home with some asset allocation investment insights. Now let me clear three quick housekeeping items first. Questions. Many of you were kind enough to submit questions in advance when you registered. Thank you for that, uh, but for those of you who wish to submit questions throughout our webinar, please do so in the questions window on the left-hand side of your screen.

After Mark and Alan finish their remarks, we will go through as many of your questions as we can and follow-up with those of you who we can't quite get to. Now if you experience any technical difficulties along the way, you can use that same window, that question window on the left-hand side of your screen and someone will reply back to you. Now finally, there are a couple of preloaded links, uh, below the question window for additional resources relevant, uh, to today's topic.

Now let's talk about what's making today's environment so challenging, and not to overstate the obvious, but Americans nearing or in retirement are grappling with an economic fallout and market volatility associated with this COVID-19 pandemic. Uh, who could have imagined how quickly, how profoundly the world can change in just a few short months? This crisis, unlike most, has not only affected our wealth, but it's also affected our health and it doesn't stop there. It's also taken a widespread emotional toll in eroding investor confidence. At the start of July, U.S. investor sentiment hit its lowest level of the year. This is why I believe there is trillions of dollars sitting on the sidelines in cash today.

Now, um, as bad as that is, uh, there may be a little bit more bad news out there, and that is the election is just around the corner and we may still have some more volatility some more uncertainty ahead of us. So, the question many investors are asking and I'm sure you're hearing it, "What do we do now? How should I invest now in this current environment?" To be clear, we believe in the role of protected income and are proud to be one of the first participating members of the Alliance for Lifetime income.

Now I'm going to pass it off to Kate to talk about the important role of variable annuities and protected income as part of a broader retirement portfolio. With that, take it away, Kate.

Kate Beattie:

Awesome, thank you Johnathan, and thank you so much to everyone for joining us today. I am a Senior Retirement Income Strategist with Capital Group and as that retirement income strategist, I really view the Asset Allocation Fund as that flexible way that we can invest in a diversified mix of quality stocks and bonds that are going to be structured to adapt to the market conditions.

So, think of it as that all weather portfolio, and it's got three common objectives when looking at the fund. So, it's going to look for, um, long term capital appreciation, current income, as well as capital preservation. You know that aligned with meeting some of those retirement objectives, and the only place that you can find Asset Allocation is within a variable annuity.

So, before I turn it over to Mark and Alan, I would like to briefly share with you why we at Capital Group believe that the value of variable annuities as part of a broader portfolio can play pivotal role in improving an investor's retirement income confidence, supporting their lifetime income needs, as well as mitigating some of those key risks in retirement.

So, annuities come with a variety of benefits and tradeoffs that an investor should consider when developing that comprehensive retirement income plan. So, if we look at this next slide here, you can see when might it be appropriate for you to add an annuity to your client's portfolio? First, let's consider, how reliant are they on their current investment portfolio to meet some of those expenses in retirement? You know relying too heavily on that investment portfolio for income might increase an investor sensitivity to market volatility and the impact that sequence of returns may have.

Second, how much income will they need to draw from their portfolio each and every year? It's important to analyze how much income is needed in retirement, the current outside sources that they may have and what is the role that that investment portfolio is going to play to compliment some of these outside sources? And next, what is their planning horizon? Living longer and the uncertainty of how long someone will live continues to be the top concern for many retirees. So how as a financial professional do, we help our investors plan for that uncertainty.

By looking at an investor's reliance on their portfolio and overall confidence in achieving that sustainable withdrawal rate, you can help determine if additional sources of protected income are going to be needed.

So, let's look at an example that the difference in annuity can make within a broader portfolio. As you can see here, we have a 65-year-old individual who has a million-dollar investment portfolio, and they're currently looking to receive $60,000 in income per year. Currently, they receive $20,000 from Social Security, meaning they would need to take out 4% or an additional $40,000 from their investment portfolio in order to meet their annual income objective. Now that $40,000 is going to be subject to some of those risks that I mentioned, market volatility, sequence of returns, and longevity.

Now, if instead that same individual decided to allocate a portion of their portfolio into the variable annuity, let's look at a couple things that can happen to their overall portfolio. First, you can see that the amount of income that they need to take from their investment portfolio decreases from $40,000 down to $25,000 or from a 4% withdrawal down to a 3.57% withdrawal, reducing some of that withdrawal stress on their investment portfolio. It also increases the amount of protected income that they receive. That variable annuity is going to generate a 5% for life income, increasing their protected income from 33% to 58%, allowing them to guarantee and ensure that they can meet some of those essential expenses throughout retirement.

So, it comes down to the conversation of location. Where are my assets going to be located and can I reduce some of the withdrawal stress on my client's portfolio? So ultimately, it's important to understand that annuity is just one of many investment options that can provide for lifetime income in retirement, but it should be examined as one of those solutions that we should look for in order to generate retirement income.

So, I'm excited to share with you our new portfolio reliance calculator, and this can take that example that I just shared with you and allow you to customize it to meet your client's needs. It can determine how sensitive a portfolio is to some of those various market risks, and if that additional protected income might benefit your client to reduce some of the withdrawal stress on their investment portfolio.

So, if you look at the next slide, this calculator can be found at CapitalGroup.com. You want to make sure that you're on the financial advisor’s page. It's going to be listed in front of the login, so no need to log in or have a unique ID in order to access this. We did file it with FINRA in case a client were ever to make their way over here, and you can hover over the tools and practice management section and scroll down and on the mega menu, you'll see at the bottom of our tools list, the portfolio reliance calculator, a set of simple inputs and you can recreate the example I just shared to customize to your client, and then you can even further generate it into a PDF output that you can share with your clients, file away in their folder, or even share with your compliance department if you want to further have the conversation of why you choose to allocate a portion of your funds into the annuity.

While it helps to illustrate how an annuity may or may not improve an investor's retirement income portfolio, you always want to look at the investor's risk tolerance, as well as their personal goals and objectives that are going to be ultimately what determines if increasing or acquiring additional sources of protected income are going to be needed.

So, while the planning component is critically important, we can't forget about the engine that drives the fund. So, to share more about our Asset Allocation Fund, our investment insights, and the markets as we look ahead, I want to go ahead and take it and turn it over to my colleague, Mr. Mark Seaman.

Mark Seaman:

Thank you, Kate, and I will echo the thanks that you shared to everyone as well, appreciate your time and dedication to this today. Uh, I'm going to focus my comments on three areas. I'd like to talk about the objectives of the portfolio and how we're pursuing those. I'll talk about some characteristics of the portfolio and the flexibility we have in terms of pursuing those objectives and I'll finish with talking about some long-term results.

So, Kate, you, uh, you made some comments about the objective at the beginning, and I'll echo that. I think it's a fairly straightforward objective for the portfolio, and that's for high total return but consistent with preservation of capital and it may be said another way is we're trying to help investors generate or develop wealth, but when markets are challenged, we want to make sure that we're doing everything we can to preserve that capital at the same time. We're going to pursue that combination of objectives by investing in a combination of stocks and bonds, and our expectations around the equity portion of the portfolio is that they will contribute to those objectives first in both capital appreciation and the production of dividend income.

With respect to the fixed income portion of the portfolio, of course we expect them to generate some income to the Q Ponds, uh, certainly we'd expect to have some appreciation, but just as importantly, we want to choose bonds in the portfolio that have low correlations to equities and help moderate volatility, uh, by providing some balance to the equities when markets are most challenged.

With respect to the characteristics of the portfolio, if you look over the long-term period that this fund has been around, you'll generally see a trending type approach with respect to its combination of equities and fixed income. This is predominately a U.S. domicile portfolio, meaning the company is both equities and fixed income tend to be more, um, U.S. domiciled companies, but we do have some flexibility to invest outside of the United States as well.

I think if you use the top 10 holdings as an example or an illustration of the kind of positions that we tend to have in this portfolio, I think that you'll find that we have a good collection of companies where they've been growing their earnings, um, at a higher rate and your expectation would be that they would contribute to the portfolio through appreciation, but you'd also find companies in the portfolio that maybe their earnings have been a little bit more stable but have been more consistent in producing dividend income over time.

With respect to the bond portion of the portfolio, remember I mentioned that having fixed income that has low correlation to equities is a part of the, the process. You'll find that our portfolio here is a combination of mostly government in investment great corporates, but we also have the flexibility to invest in some high yield bonds as well. History would tell you that we have a consistent but fairly small percentage of the portfolio in those high yield dead instruments.

Last, but not least, let me finish with some comments about long term results. Uh, this fund does go back to 1989, so we have over a 30-year history of what I would describe as successfully achieving, uh, the objectives that this fund has set out. I'd like to focus though, more specifically on the last 20 years, and I think it's a unique environment, first in that it's certainly rewarded equity investors, but it's not been without its bumps along the way.

So, using that last 20 years as an example, the S&P 500, uh, had you made an investment of that 20 years ago, would be worth roughly three times more than your originally investment today. However, the journey a- along that path, to reach that wealth, um, w- was experiencing 10 market corrections of at least 10%. Uh, that's a fair amount of volatility to experience. Focusing specifically on the Asset Allocation Fund, you'd find that investor investing, uh, at the same time would have accumulated more wealth, but I think just as importantly, would have experienced a much less volatile path along the way, about 70% of the volatility.

I think the importance of that is that, um, keeping investors invested in, in the market through those volatile time periods is a very important component in terms of reaching the entire cumulative return that you can get through the 20-year time period. Last, but not least, let me focus on just the last 10 years and again, you'll find another very volatile time period. We've had seven 10% corrections during the last 10 years, each driven by different factors, whether it be the more recent health related impacts of COVID or going back a little bit further from an energy dislocation. Nonetheless, each volatile period is different, I think the important thing that you can see, uh, from the history of the Asset Allocation portfolio, is that we've successfully navigated those volatile time period. So hopefully this gives you an idea on what we're trying to accomplish in the fund and the means that we're doing that, historically through different market environments.

Maybe what we can do at this point is talk about the current environment and how our portfolio managers are navigating that environment for investors. With that, Alan, I'll turn it to you.

Alan Berro:

Thank you, Mark. Um, you can see the results page here. Mark already, uh, discussed it, but, uh, I think the description that we, um, try to preserve capital really, um, our primary goal, uh, and you can tell that this is a fairly well diversified portfolio, pretty blue-chip nature to the stocks.

I'm going to spend the bulk of my time talking about, um, slide 16, and just, um, try to give a little bit of context to what's happened in the recent environment and where we might go from here. Um, it's certainly probably one of the most difficult periods ever to give a market outlook because we are in such an unprecedented environment. Um, as you all know we went from a fairly robust growing global economy in February to a screeching halt in March due to the virus. So, this is certainly not a normal cycle where there was an, um, a business slowdown or some other type of issue. Um, so we can't really apply, uh, our traditional models, which is hard for someone like me who's been do this for a long time and has, um, used those models in the past.

Uh, so we went from a very healthy economy to a very sick economy in a matter of minutes. Basically, we had to put the patient on life support. Uh, the fed and Treasury, uh, did come through with massive liquidity, um, you know, very large, um, transfer and support payments. In the market as we have seen, has digested this fairly quickly, um, and we saw a group of companies that really became, um, what I would call the beneficiaries of, of the pandemic and so you've seen the Amazons and Netflix.

You know, Amazon up 79%, Netflix up 50%, Apple up 68%, um, anything cloud related, uh, work-from-home related, shop-from-home related have all been, um, you know, beneficiaries of this environment. Um, these companies all have strong fundamentals. Most have good cash flow; no debt and we’re already taking advantage of ongoing trends. This just pulled everything forward by a few years.

So unlike, uh, the dot-com bubble in other periods, these companies had real fundamentals. So, you know there is some justification for what happened. When we take stock of where we are today, the Nasdaq is up 28%, the S&P is up 6, the Dow is basically flat and, um, from the market lows to reaching back to taking out those lows, took only 11 or 12 weeks. So, sort of a very rapid fall, a very rapid recovery and now we've seen some bumps in the road, but some pretty good follow through.

Um, a lot of that is based, as I said earlier, on record low rates. Um, the 10-year at 0.7%, the 30-year at 1.4%, uh, still a lot of liquidity being pumped into the system. Uh, luckily, and I think this has been the most recent move. Cases are declining, um, you know, and there's a strong feeling, I think in the market, that science will prevail, and we will get a vaccine.

Um, what's unusual today is that the consumer is in pretty good shape given that we're at 10% unemployment, so it's a little hard to sort of reconcile what's going on. We've seen over the last several months that credit card balances have come down, revolving credit outstanding has declined. It turns out that many saved and did not spend some of the payments that they received, whether it was the $1200 payment or the extra unemployment benefits. And for a large group of the population, certainly not the bottom tiers, but for a large part, um, of the middle, uh, their housing value has gone up and I'll touch on that a little bit more in a minute. Uh, the value of their 401(k) or their retirement plan has gone up.

Um, so their balance sheet is much different from maybe what we had in the '07, '08 period where we had a large sloth of the population over levered to their house and to real estate uh, and you know it's very interesting to note that consumer net worth is actually up in an environment where we have 10% unemployment. So, a very, um, different environment from what we've experienced in the past.

Um, looking to business, you know, I just mentioned housing. Housing is booming. Housing in, in our opinion is probably in the best shape it's been in 15 years. You're seeing this in lots of different ways. Uh, lumber prices have more than doubled, they're two times their 10-year average. Um, home builder traffic index is up. Repair and remodel is up, which is benefiting the Home Depot and Lowe's of the world. We're seeing a big shift from renting to owner occupied, uh, housing.

Um, so we're seeing a demographic change and we don't know if it's going to carry through, but it certainly feels like it's got some legs where, um, the sort of trend of people wanting to live in the city, you know, walk to work, uh, take an Uber to go out and not own a car has just made a 180 degree, uh, u-turn, and now we have people running for the suburbs. Um, I know that you know Manhattan they're giving very aggressive lease incentives for somebody to rent an apartment and you can't find a house in a lot of the suburbs in Connecticut and other parts of New York. These are the types of things that we're trying to take stock of and that we discuss on a daily basis.

Um, when you look at companies overall, inventories are in good shape, and they all cut costs very quickly and sort of reset to the current environment in a very rapid manner. Um, outside the U.S., a lot of similar things. China is pretty much... I wouldn't say 100%, but a long way back toward normal. Japan is doing fine. Um, in companies surveys, whether here in the U.S. or overseas, all look pretty, robust.

Um, second quarter earnings as, as we've seen, you know, a high number of beats versus reduced expectations, um, and we're now seeing many market pundits, uh, raise their market estimates, raise their earnings estimate. I think a couple of months ago most of us didn't think we would get back to 2019 earnings until 2022 or 2023. I think that's come in a year or two. Given the environment, things are in decent shape, and I think that's what the market has been reflecting.

Um, but as stated earlier, it's a fairly narrow group that's been carrying the market. Um, it's the pandemic and theme-oriented baskets, um, so there's been this massive divergence that we see here between value and growth. Um, you know the big growers have PEs that are quite high. Um, you know, whether you're looking at things like SalesForce.com, which is now $187 billion dollar market cap, trading at 70- or 80-times earnings. ServiceNow, an $86 billion dollar market cap, trading at 100 times earnings. Zoom video, which, uh, you know, didn't exist a few years back is now an $80 billion dollar market cap, trading at 200 plus times earnings. I could go on.

Um, yesterday was yet another example of this with the changes in the Dow. So, you had Exxon, Pfizer and, Raytheon come out. Amgen, SalesForce, and Honeywell go in. The forward PE on the three that came out was probably 12 or 13 times, versus the three that came in, which is probably 30 times. Uh, the three that came out were down, uh, you know on average over 20% year-to-date, uh, the three that went in are up about 8% year-to-date. So just these massive divergences, um, that we see out there.

Uh, if you look at the S&P value index- ETF versus the growth, again you see, um, you know this slide was as of June. I think that's up to over 30% spread today. Um, we've also seen some other excesses, which, you know, you have to keep an eye on. Uh, Tesla sports at $375 billion dollar market cap, um, that's for producing 376,000 cars last year. Uh, GM, Ford, and Fiat, Chrysler produced seven or eight million cars last year and I think their aggregate market cap is about, uh, less than a quarter of Tesla's today, just to give you some flavor for the types of divergences that are out there.

So, you know I worry about market breadth, I worry about valuations, I worry about, uh, the level of retail participation, what you might call the Robin Hood effect. Um, you know we some risk assets or expense of... where do we go from here is, is really the question and will we see some shift back, um, to some of the old economy, uh, some of the groups that, that maybe haven't participated. Uh, and so you can see in our portfolios, uh, we have the drug stocks. They look cheap. Uh, we have selected industrials and chemicals that look interesting to us.

Um, energy is certainly, um, quite depressed and could be a beneficiary when things get back to normal. And then the other group that's really, um, not participated, despite actually coming through this thus far pretty well are the financials, which could be very interesting also.

Um, I think all four of these groups could bounce quite a bit with a vaccine and we might see some of that rotation, um, from growth back to value. Um, you know our belief is that people will go back to the mall, they will go back to restaurants, uh, they will go back to the movies, uh, they will travel again. It might take a year or two, but, um, that's just human nature to want to do these things. Um, we're already seeing, as I said, a shift in housing. There's always lots of puts and takes, but when we look out three to five years, um, we're still finding companies and opportunities out there that we like, that benefit from the trends that we think will endure.

Um, you know, maybe I should just take a minute and just talk about our organization. I mean we went to work from home, uh, and it's been pretty seamless. We're still talking to companies on a very regular basis, still having our management meetings, our analysts are still fully engaged. Uh, we have interns in-shop, um, doing their presentations as we would any normal summer. Uh, we've had two new analysts start this week, uh, we're continuing to recruit. Um, and, you know, as a global organization we have folks on the ground, um, all over the world and we're really trying to learn, um, sort of the shape and how the recovery looks, um, from our associates in Asia and Hong Kong and in China and other places, Europe, um, in terms of how the reopening is going, the recoveries look.

Uh, why don't I stop there and turn it back to Johnathan for questions.

Johnathan Young:

Uh, thank you, Alan, uh, thank you Mark, thank you, Kate. That was wonderful. We certainly got a lot out of it, but there a ton of questions that have come in and as I'm looking through them, I'm going to try to get to as many as I can. Alan, this first one is for you. "As large cap value has taken quite a hit and given the suspension of dividends on many companies due to COVID, what type of equities would you favor to provide consistent dividends for retirement income?"

Alan Berro:

Uh, everything in my portfolio. Um, you know I think, um, there are certain groups that will be fine. The drug stocks still carry, um, very healthy dividend yields, um, most of these companies are dividend aristocrats, um, have consistently paid overtime. Uh, the other area that, um, I think is going to be very stable, um, in terms of dividends and return of capital shareholders are the aerospace, defense stocks. Um, those have been reliable over time. Um, those would probably be my first, um, two go-to groups. There's lots of places to go, but those would be first choices.

Johnathan Young:

Thank you, Alan. This next one, uh, I'm going to send your way, Mark. Uh, it's about Asset Allocation Fund itself. "What is the philosophy of Asset Allocation, uh, the process for the fund? Are, are we trying to make short term tactical moves for the portfolio?"

Mark Seaman:

All right, so, uh, thanks for bumping this one up to the top. I think it's an important question for this fund. And, you know, the name Asset Allocation probably suggests that we are actively changing the, the dynamic between equities and fixed income in the portfolio on a fairly regular and, and perhaps a drastic basis. Um, your use of the word tactical is important because that's not the approach that we're taking.

Uh, I alluded to it earlier and made some comments about the Asset Allocation has tended to trend in this portfolio over longer periods of time. I think we're more strategic about our approach and looking out over longer periods of time and trying to identify where the trends are headed in terms of that mix of equities and fixed income we want.

Now all that being said, we're not going to be afraid to make adjustments in the portfolio. Uh, as the circumstances, um, necessitate and I think during the COVID environment, as an example, it is a good illustration of that because near the market bottom, as the percentage of equity and the portfolio had gotten lower than we felt was justified. We did make a, I guess what I'd call a rebalancing move from fixed income back to equities to try and take advantage of that opportunity of, of low valued equities and increased in percentage in the portfolio.

So not tactical, definitely strategic, long term, not trying to make quick adjustments in the portfolio, quarter to quarter that you would be able to see visibly.

Johnathan Young:

Thank you, Mark. Uh, Kate, there are a bunch of questions here for you (laughs). Uh, here's one that kind of pops up to the top. "What thoughts do you have regarding asset location versus asset allocation as it relates to planning for retirement income," and this is obviously a, a portfolio construction question.

Kate Beattie:

Yeah, great question, and you know, funny that we're talking about asset allocation, but I do think that location is critically important and where those assets are located, you know, what vehicles you choose to invest in and really, you know, it's possible to allocate across different types of vehicles, but maintain the allocation that's right for the client. And, you know, furthermore, by diversifying across different types of vehicles, whether it be mutual funds, annuities, um, whatever else you may be looking to do, you're able to... it's kind of that natural risk diversifier, um, within that broad portfolio.

So, you can meet the investor's objectives. You know, whether it be that income or legacy, you have that diversification going across the products. You can hedge with the insurance to protect and mitigate against some of those risks that we discussed whether it be longevity, um, market volatility, sequence of returned risk, and then you can really help to improve the investor's confidence I would say.

Johnathan Young:

Thanks, Kate. Uh, Alan, another one for you. Uh, this is an interesting one. We didn't really get a lot into this, but "What incremental return advantage can be reasonably expected by investing outside the United States?" and they have emerging markets here, so I would- and to include emerging markets.

Alan Berro:

Uh, that is a tough question. Um, you know we have the advantage of being a global organization, having analysts and portfolio managers around the world, so, and we do operate as a global entity. On our call this morning at 6:00 AM we had people from, uh, both Europe and, uh, and Asia on the call discussing companies, discussing, uh, various topics.

Um, it's hard to just say, you know, there's a, there's an advantage. I think at certain times, um, you know we have the flexibility to move assets, um, within this fund, um, between the U.S. and non-U.S. markets, um, when we see the opportunities. There's a lot more factors that come into play. Uh, you have to take in- into account currency and other things. Um, so you, you have to decide whether we're in a weak dollar or strong dollar environment. Um, but the good thing is that we do have the boots on the ground, so I’ve got a FYE situation.

So, you can see in the portfolio in food group, um, we feel Nestles is, is an attractive company to own, and, uh, you know, it's based in Switzerland, has global operations. Um, Philip Morris, similarly, um, you may not like the base business, um, also based in Switzerland, um, but, you know, again, global and we feel like it's an attractive opportunity, um, in terms of generating a significant income, uh, and, um, you know particularly, um, very, you know, transitioning to new products, which we think gives the story longevity, um, instead of, uh, you know, a story where it's sort of a declining, uh, user base and a declining, you know, product.

Johnathan Young:

That's great. Uh, thank you, Alan. So, Kate, I'm going to give another one to you. This is a, a very specific question. "Do you think annuities may be a good substitution for a portion of a bond portfolio where income is the primary concern?"

Kate Beattie:

Good question. Um, so I think it's gets back to kind of that holistic planning and really looking at the overall portfolio for the client. So, for example, you know it's going to depend on the type of annuity that you choose. If you choose to go into a fixed annuity or an indexed annuity, that's simply an allocation to fixed income. Um, so you're not really getting the benefit of diversifying away or getting that benefit elsewhere.

Um, so I really think that it could matter and it's also looking at, you want to make sure that you're upgrading your fixed income allocation. Um, you know, interest rates are probably going to remain lower for longer, and that's why, you know at the variable annuity can, uh, still allow you to get that upside potential within the client's account should the markets recover, which we, you know, we've seen them do quickly and just, um, you know, weighing the benefits and trade-offs to align to what the objectives are for that investor.

Johnathan Young:

I love the way you worded the question for a portion of the bond portfolio. Uh, I remember decades ago it used to be should you do this, or should you do that? It was an either-or proposition. In today's world of portfolio construction, we believe it's more about prudent combinations, a little bit of this, and a little bit of this, as opposed to maybe this or that.

Um, thank you for that. Mark, I'm going to try and squeeze one more in quickly in a speed round here. "Uh, does each portfolio manager get to invest in both stocks and bonds or do they have specialties that they focus on?"

Mark Seaman:

Okay, well, we haven't talked about this too much or at all on the call today, but this portfolio uses the Capital system like the others do within the American Fund. So, we divide the portfolio up into, into various pieces, with dedicated portfolio managers making independent decisions for their PORT in the portfolio. This fund has seven portfolio managers. We have three dedicated to fixed income, we have three dedicated to equity and we have Alan, who has the ability to invest, uh, across both equities and fixed income.

So, we've asked portfolio managers to do in, in six out of the seven cases, something very specific and Alan as the PI on that fund does have that slightly greater flexibility than the other PIs.

Johnathan Young:

Thank you, Mark, and thank you for doing that in a speedy fashion. As always, the case in calls like this and meetings like this, and events like this, uh, we have more questions than we could possibly get to, but as promised, we will get back to you, uh, with responses to your questions. Thank you so much for participating.

Uh, for more information on what you can use in your virtual meetings, we invite you to take a deeper dive into some of the resources and timely content we make available at Capital Group American Funds. ‘The What Now’ piece, uh, that Kate referenced does go into more details on the American Funds insurance series, Asset Allocation Fund, and it's available in the link, uh, below the question bar, as we mentioned. You'll also find a link there to the portfolio reliance calculator that Kate discussed today.

Uh, we also invite you to visit our insight section of the, uh, our website to access Capital ideas, which includes the latest, uh, thought leadership, uh, commentary on markets and our perspective, even on the election. So, uh, please take a look at that, and watch out for future, uh, webinars from us on the topic of retirement income. As always, feel free to reach out to your American Funds team. We stand ready, willing, and able to help you with whatever resources you might need.

Now, um, as you know, uh, we're pretty good here at American Funds, but as good as we are, that only comes, uh, in our partnerships with the insurance platform providers, uh, listed on this page. So, we ask you to reach out to them for help, uh, on their products, on specific illustrations you might need.

Now in the interest of time, let me land this plane, and, and bring us home. We appreciate you joining us today and we want you to know that while we are physically separated, uh, you're not alone. We are all in this together, and I believe, as I mentioned earlier, we believe we will get through this better together.

Uh, ladies and gentlemen, we hope that in some small way, uh, what we have shared will help you engage in better client conversations around the topic of retirement income, around the topic of portfolio construction, certainly around the markets and what we're seeing, but also specifically around Asset Allocation Fund. I want to, to once again, for joining us and I'll just ask you please stay safe, stay sane and remember to wash your hands.