Up Close with Principal Investment Officer Will Robbins
Though you joined Private Client Services earlier this year, you’ve been with Capital Group for some time. What drew you to this new role?
I’ve worked at Capital Group for nearly two decades. I was originally a summer intern and then came back after completing my second year of business school. I’ve been with Private Client Services for about nine months now. It’s really a great fit, especially since I have always had a major focus on downside protection. That’s perfectly in line with our mission of protecting and prudently growing client assets.
The market has risen along with the expectation of continued improvement in corporate earnings. How does the way forward look from your perspective?
I don’t see a lot that gets in the way of further earnings gains for most companies in the S&P 500. I would note that two-thirds of the market increase last year was due to price/earnings multiple expansion, while the remainder was based on earnings growth. The economy is expanding at a 6 percent nominal rate. It wouldn’t surprise me to see earnings growth in that realm. But that’s far less than what the stock market gained last year. In order to generate the kind of returns that we’ve seen in the recent past, you’d have to assume multiples will expand further than I expect they will.
What is your investment style?
I’m primarily focused on U.S. stocks, though many U.S. companies today derive a substantial portion of their earnings outside the U.S. Thus, I have to maintain a global view. I don’t really distinguish between large- and small-cap. I also don’t make much of a distinction between value and growth. I believe there is value in every stock I hold, though some companies in my portfolio are growing faster than others. I am driven by bottom-up, one-stock-at-a-time portfolio construction. It’s extremely important to know each company inside and out. Access to the perspectives of our analysts is invaluable because, while history doesn’t always repeat itself, it often rhymes.
Are any sectors currently more attractive to you than others?
Financial services, and especially regional banks, look particularly good. Coming out of the 2008 financial crisis, banks had a quantum step-down in terms of their ability to generate returns on equity. They’ve since stabilized, and there’s now an opportunity for higher returns despite elevated capital requirements. The regionals are back-to-basics banks, where deposit collection and lending are the core business. They have an ability to capture more market share even as they compete against better-capitalized, larger peers. There’s also the potential — particularly in a higher-interest-rate environment — for margin expansion, and I would note that bank stocks aren’t priced to perfection by any stretch.
What is your view of current stock market valuations?
In terms of the overall market, I don’t think valuations are extraordinarily high, though they aren’t low either. Importantly, we invest in individual companies one stock at a time, and I do believe all the holdings in my portion of the portfolio are still attractively priced.
As you survey the economic landscape, are there any signs of potential trouble that concern you?
I am worried that there are inflationary pressures building in the system, particularly here in the U.S., as a result of easy liquidity. We’ve started to see wage rates pick up. There’s been a public debate around how much slack there is in the employment market. I tend to side with the school of thought that there is less slack, at least in the short term, meaning there will be more wage response as there is greater demand for employment. That’s largely a good thing because there’s more money in consumers’ pockets and more pull-through of demand. As a result, there may be more economic activity. But I also worry that’s going to be associated with higher inflation than the market expects. Seventy percent of our input costs in this country remain labor and wages. I believe that if we ever see inflation, it’s got to show up there.
Tagging on to one of your points, the Federal Reserve is worried that there is too much slack in the labor market, or a surplus of capable workers that companies can hire. What makes you believe otherwise?
In the first three post-crisis years, there were a lot of exits from the labor market, though many were arguably temporary. Consider all the people going back to school. They were building a skill set so that they would someday be employable. In more-recent years, the exits from the labor force have been more structural, namely retirement and disability. Those workers are less likely to return to the labor force, particularly over a short-term period. As a result, that slack is less able to be absorbed by our existing workforce without higher wages.
Given the rising level of stock buy-backs, do you worry that companies are overpaying to repurchase their own shares?
One indicator of a market peak is when corporate buybacks intensify. Such activity is nearing 2007 levels, which gives me pause. Companies that are good at allocating capital should be buying back stock at the bottom, even though they don’t have as much available cash at that point or as much confidence. Now that we’ve seen stocks significantly increase from their crisis troughs, the fact that we are witnessing so much activity in the buyback landscape is a source of concern.
What do you think about the recent rise in corporate mergers, which has helped to push up stock prices?
I think we’re still very early in the merger and acquisition cycle. It gives me as much pause as it does excitement because, over a broad sweep of time, my sense is that M&A has destroyed value for buyers. With so much cash sitting on balance sheets, I’d much prefer that it be either invested in high-return, organic opportunities or returned to me so that I can selectively deploy it. While I can’t generate the same kind of synergies that a strategic buyer could through purchasing the whole company and running it differently, as an investor, I need to have confidence that the synergies justify the premiums being paid.
You are a big believer in dividends. Why are they so important?
Roughly half of total returns to equity holders in the post–World War II era have been generated through dividend income. That’s less so in the recent past because of lower payout ratios. Having said that, dividends still play a very important role in my portfolios, and not just in terms of how they contribute to total return. They also help to provide downside protection in bear markets. One reason I value dividends so dearly, as opposed to having the company use that money for acquisitions or buybacks, is I can more easily determine the value of that cash. That’s why I aim to create a portfolio of healthy payers that will increase their dividends over time.
What are you doing to limit risk in your portion of client portfolios in the event that equities pull back?
I’ve raised cash in the portion I manage to nearly double-digit percentages. Historically, I range from zero to 15 percent, but I’m being a bit cautious at the moment, especially given our mandate to protect client capital.
Will Robbins is the principal investment officer for Capital Group Private Client Services. He is also part of the firm’s U.S. and Global Equity portfolio management teams. In this interview, Will discusses his investment approach and why he is particularly focused on downside protection. He also talks about the importance of dividends and shares his views on current market valuations.