In light of Warren Buffett’s recent letter to Berkshire Hathaway shareholders advocating low-fee index investing for most individual investors, Capital Group chairman and CEO Tim Armour and vice chairman Rob Lovelace add their views — and Capital Group’s voice — to the indexing discussion.
Tim Armour: Passive investing has grown a lot in recent years, and there are some good elements of that. It’s helping people be invested and stay invested in the market, and that’s important. But there are better ways to get at it. By investing in index funds, you’re going to get the average return, and there are ways to do better than average.
Rob Lovelace: Index investing is a great entry point. It’s a great way to get people in, and it’s got low fees. So there’s no challenge with that. Actually, it’s important that people be invested in the market. I just think that there are other ways — through active managers, through the type of approach that Capital has.
Tim Armour: We believe you really need to be out looking at companies — identifying those companies, the most attractive ones to invest in. So as an example, globally we have 350 investment professionals around the world calling on companies, trying to identify those that are most attractive.
Rob Lovelace: The bottom-up approach that we take helps us identify companies. The multiple-manager, The Capital SystemSM that we use is one that can dampen volatility, make the ride smoother over time. If you can get a low-fee way to have the best companies — not just the companies that were good but the companies that will be good, so you can get some additional returns through company identification and smooth the ride over time — that is the best outcome.
Tim Armour: All of our funds are really tailored to an investment objective to meet investors’ needs. That is very different than an index fund, which really is taking the approach of owning the broad swath of the market. So you are getting an average type of return and not a specific investment plan set up for the investor that they may need.
Rob Lovelace: The simplest filter, when you think of it, is simply to say, "Why don’t I actually go out and visit the companies, get to know them better and figure out which ones we think are going to do better going forward” — not own the entire group of [the] index but find those companies that do better.
Tim Armour: One of the arguments against non-passive investing — or what many call active investing — is that average active investing does not do better than passive, and that’s correct. But there are many active investment alternatives that have done better than the index — and significantly better than the index — over time. And we know there are a few screens one can use to identify what those opportunities are, and one is, look for those funds that have low fees.
Rob Lovelace: The academic studies that have focused on this topic really identify fees as the main drag on active managers as a group compared to index investing. There is a meaningful group of managers that have lower fees and that buck that trend. And what we need to help people understand is it’s not hard to identify that group of managers.
Look for managers that have demonstrated consistency of return over time, but particularly in down markets. Active managers in down markets can help preserve capital. That helps you both on the return side and on the volatility side. We’ve been focused on this for 85 years.
Tim Armour: And then also, add on top of that funds where the managers — the money managers of that fund — actually have large ownership interests themselves in the funds.
Rob Lovelace: How much do the managers invest in their own funds? If you look for managers that have a lot of their own money, and firms that have a lot of their money in their own funds, it’s a really good indicator. If you don’t have the confidence to put money in your own fund, or your own objective, what does that really say, right? In our case, we are often — the employees of Capital Group — the largest investors in most of our funds.
Tim Armour: Professional advice is a key part of helping investors achieve their real objectives and investing for the long run — hopefully planning for retirement, college education for their children or whatever objectives they have in mind. But also, we’ve learned over time that advisors are very helpful to investors in difficult market periods and turbulent economic times, and times when stock markets are weak.
Rob Lovelace: We’ve worked with advisors for many, many decades. And we think advice is extremely important, particularly because the basic instincts that all of us have — even those of us that have been in the business for a long time — is to panic at exactly the wrong times. And the opposite is true: We get a little overexcited when markets are rising. So having that person that you talk to before you take an action — having someone who’s thinking about the broader questions of when you’re going to need the money, what you’re going to need to use it for, and shifting your asset allocation or just helping you think through what your needs are — is so important.
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