The Broad View
Greg Singer is an investment director with Capital Group Private Client Services. As part of his role, he helps clients understand what portfolio managers are thinking and doing. In this interview, he relays what he’s hearing — from both clients and managers — and how Capital Group is responding to today’s market conditions.
This year’s been so volatile — markets and individual stocks have been on a roller coaster. What are you hearing from clients?
Inflation is on most everyone’s mind. We’re going through a very rapid recovery, and most of the COVID-19 restrictions have been removed. And there is a tremendous amount of both fiscal and monetary stimulus in the system. Demand is rebounding faster than supply can restart. Many factories were closed or at limited capacity for the past year, so we’re seeing shortages. If you’ve tried to do a home renovation, then you know that lumber prices have gone up dramatically.
From the investment side, we are asking, “Is this the onset of a higher inflation regime, or will it be transitory as we restart the economy?” and “How would an inflation spike affect each company that we’re considering in the portfolio?” For example, does a given company have the pricing power to pass on cost increases to its customers?
At other firms, a computer may control risk management, and it will force people to sell or reduce their positions.
By contrast, part of how we seek to control risk is by creating the right incentives for portfolio managers to pursue steady returns. The largest part of a portfolio manager’s bonus is based on eight-year investment returns. If you have a single bad year, it affects you for eight. Managers have to constantly think about downside risk because it will affect their bonus for a very, very long time.
We also have multiple portfolio managers on each fund. We select managers who complement one another. We look for people with cognitive diversification, different backgrounds, different nationalities, different genders, different ethnicity, different industries they covered as analysts, different approaches to how they invest. They are assembled in such a way as to help limit the likelihood that the overall portfolio is too concentrated in companies with common investment risks at the same time.
What’s really neat about my position is I’m on five hours of global conference calls every week with our investment team. I used to say there were 100 people whom I knew by the sound of their voice. Now that we work on videoconference, I know them by their faces. It’s amazing to be directly part of the global collaboration of our investors and the things they are seeing, the questions they are asking vis-à-vis investment opportunities.
Our analysts and portfolio managers don’t look at stocks on a top-down basis. They don’t say, “The economy is going to accelerate, so we should own cyclical companies as a group.” That’s a very blunt approach, and it’s hard to get the timing right on those kinds of calls. Instead, we act on a company-by-company basis. We might identify a company that looks attractive on long-term fundamentals even if the economy doesn’t accelerate, while offering additional upside if it does.
Another thing that is very, very different about Capital Group is that we allow each of our portfolio managers autonomy to set their position size. Often, very good results stem from concentrated, high-conviction positions. Sometimes a single portfolio manager leads the way.
The potential infrastructure bill will likely be top of mind in the third quarter, if not longer. We’ve just had $1.9 trillion in COVID-19 stimulus, and that stimulus was entirely deficit-financed. The expectation on the infrastructure bill is that there will be “pay-fors” — i.e., tax increases — that could offset all or part of the spending. Infrastructure projects might take three to 10 years to be implemented. If the tax increases hit the economy before the infrastructure projects, then we might see fiscal drag in the upcoming years, which would offset some of that stimulus.
We’ve been looking at the effect of the taxes on the market. The surprising conclusion is that historically they haven’t had a material impact. We’ve done an exhaustive study where we looked at every federal tax increase since 1940, including the corporate rate, capital gains rate and ordinary tax rate. We found that there was very little discernible impact in the pattern. Markets have been up about three-quarters of the time in years with and without a tax rate increase. It’s a reminder that U.S. policy is only one factor among many for global economic growth.
Of course, tax increases do have a material impact on our clients’ personal planning issues. One of the things we’re looking at is whether tax increases have ever been retroactive. Far more often than not, tax changes are effective when announced.
I think some important implications for our clients, from a personal planning standpoint, is to consider taking discretionary capital gains on concentrated single-stock positions soon. There’s probably more risk of a rising capital gains tax than a falling capital gains tax. Consider a Roth conversion of your IRA. If it is something you would plan to do eventually, it may make sense to do it in the current environment, given the elevated risk of higher ordinary income taxes.
The estate tax is another area that could be addressed if you have the capacity to make an $11 million gift to your heirs before that level sunsets in 2025. We often analyze our clients’ ability to utilize their gift capacity. It can be a very valuable action to take. So this is a really important time to think about your capital gains and potential estate taxes, and to potentially take preemptive action when there is a risk of rising rates.
This material does not constitute legal or tax advice. Investors should consult with their legal or tax advisors.
Compensation paid to our investment professionals is heavily influenced by results over one-, three-, five- and eight-year periods, with increasing weight placed on each succeeding measurement period to encourage a long-term investment approach. Years of industry experience and years with Capital Group as of December 31, 2020.