Jim Rothenberg on the Year Ahead | Capital Group


Market Commentary

January 2015

Jim Rothenberg on the Year Ahead

A portfolio manager discusses the U.S.’s return to world economic dominance, the positive implications of a rise in interest rates, how he sees today’s market volatility as a plus, the importance of maintaining equity exposure outside the U.S. and the potential benefits of opening a 529 college savings plan.



James F. Rothenberg
Kevin G. Clifford


U.S. Back to Driving World’s Economy

Kevin Clifford: Hello, I’m Kevin Clifford, President of American Funds, and as we approach the end of 2014, I’m pleased to have with me Jim Rothenberg. Jim is the Chairman of Capital Group as well as a portfolio manager with The Growth Fund of America®. Jim, thanks so much for being with us today.

Jim Rothenberg: My pleasure, Kevin.

Kevin Clifford: If we turn our attention to 2015, I think everyone viewing this appreciates the fact that you and the rest of the investment group are long-term investors. What are the major trends you’re focused on? What headwinds, what tailwinds, are you paying particular attention to?

Jim Rothenberg: The biggest issue in front of us seems to be energy prices, and it cuts in a lot of different ways. From the positive side, obviously, it’s a big tax cut for the consumer, and that is one of the trends we’re watching very closely.

It doesn’t feel like retail sales or consumer activity has exploded because of the drop in energy prices, and I think there have been some significant offsets. I think one of those offsets is health care costs that people actually experienced, and so there’s been a dampening down of the positive impact of energy price cuts.

Obviously, we watch all the hot spots in the world, think about them, try to understand what the probable outcomes are. There’s a real possibility that Europe might slip into a recession. There seems to be a possibility of the same thing in Japan.

So in a way, we’re back to the old world where the U.S. is the big engine of economic activity driving the world. For a period of time, probably in the last 10 years, we’ve been in a period where the U.S. was important but what was happening in Asia, China, some of the emerging markets, was much more important than it is right at this moment. So I think trying to watch those parts of the world to see if we get any pickup in activity is very important.

Kevin Clifford: As you focus on the U.S. market being the engine of growth for the world, how do you feel about valuations?

Jim Rothenberg: Valuations have, unfortunately, gotten a little rich. Part of that is there’s an enormous amount of liquidity around. And that liquidity has been augmented by substantial inflows of money from outside the United States. It’s not all going into the equity market. Some of it’s going into the fixed-income markets; some of it’s going into real estate in the United States. But I think, clearly, the United States has returned to its role as perhaps the safest place to be, and so there are flows from outside. There still are plenty of flows inside. And [if], as I expect — but is not universally agreed to — interest rates will rise somewhat in 2015, sometime, then I think there’s potentially a lot of money that can flow out of the bond market and into the equity market.

The Upside to Rising Rates

Kevin Clifford: Let’s turn our attention to the bond market, interest rates. The Fed has wound down QE. You’ve mentioned the fact that rates may begin to move in a different direction. How do you think about that when you’re building your portfolio?

Jim Rothenberg: Well, the first blush for me is that rates moving up — particularly short rates, somewhat — is a plus, not a minus. You think about all the people who hold cash in one form or another and on which they’re earning very, very low rates of return — sometimes zero. And you think about those monies earning a percent, 2% — some number in that range — and that’s going to be a plus. It’s going to be some income; it’s going to make the system work a little bit better, I think.

I think things have been too artificially low. And when you hear really smart people say, “Well, I can borrow at such a low price that I can do these things that I might otherwise not do,” meaning it’s not economic unless interest rates are very low, that’s not a good place to be, because ultimately, interest rates can’t stay this low.

So I think the first blush will be positive. I would think it will be a bit rocky for the bond market, but I’m not sure the long end of the market is going to move that much for quite some time, as long as inflation stays low, and I think it will.

Today’s Volatility a Buying Opportunity

Kevin Clifford: If you think about the volatility that we experienced just a few months ago, it’s fresh and at the forefront of everyone’s mind. How should we think about volatility going forward?

Jim Rothenberg: Well, I think we’re going to see volatility ebb and flow. I think trying to predict volatility is about as profitable an exercise as trying to predict short-term interest rate movements; it’s very difficult. People get excited about something and the market gets a bit volatile for a period of time, then it seems to settle down again.

Again, I’ve spent so much time thinking out in three- and four- and five-year time frames that if the market goes down, as I’ve said to you many times, I sort of look at that as a positive, because I get to buy things less expensively. Most of the time, that’s what I think about when I think about volatility: It’s an opportunity to buy things that I feel are attractive.

Nonetheless, I wouldn’t be surprised to see a few glitches here and there along the way. We still have a very dysfunctional government in the United States, with the Republicans feeling their oats and Obama doing what he’s doing, and we’ll see if there’s any ability to get some agreement on things. So I think we’ll see bits and pieces of volatility throughout the year.

Positioning Portfolios for 2015

Kevin Clifford: You get this question every time you’re with an advisor: If I’m investing money for someone 50 years old or above, and they have a realistic 10-, 20-year time horizon, what are some of the areas that they should make sure they’re invested in as you look out over the next 10 to 20 years?

Jim Rothenberg: Well, right now I think most people would say, “You just want to be in the U.S.” In a 10- or 20-year time frame, I don’t think that’s correct. I think there’s still every probability that the faster growth in the world is outside the U.S. So I think that needs to be an element in your diversified portfolio: exposure to non-U.S. There are a lot of yield opportunities outside the United States. So some of the funds that we manage that have global diversification are, I think, ones that should appeal to people.

We’re in that time of the cycle where everything turns from doing difficult things to trying to make the economy grow and trying to get everything ready for the next election. And it doesn’t matter if you’re a president running for reelection or you’re a president just trying to help your party stay in power. This is the time in the cycle when equity markets tend to surprise you on the upside. So I would pay a lot of attention to that and be willing to tolerate a little more of higher valuation than I would [otherwise].

I think the energy business is a very interesting challenge over the next few years. But there will be another time in our lives when oil prices are over $100 a barrel, and we may be creating an environment here today, or shortly, where you can actually position yourself in energy stocks at very attractive prices. You don’t have to do that individually, but you can certainly know that we are looking at it carefully.

529 College Savings: The More, the Earlier, the Better

Kevin Clifford: You have picked up a new title in the last couple of years: the title of grandfather. And many advisors work with parents and grandparents to think about funding higher education. Higher education is important to everyone in your family. What advice would you have for your fellow grandparents thinking about funding 529 plans for their grandchildren?

Jim Rothenberg: Well, I should first tell you that I have six grandchildren. The oldest is less than 3½. It has taken, in each case, less than two months from birth to getting a social security number to funding a 529 plan. In my case, I’m able to do it at the maximum that I can do it.

And I just simply view this as a gift I can give to my children and my grandchildren, which is that if you can put away at the maximum that you can do it — and it has probably 18 years to run — my guess is those kids will have the money to go to college. And I just view that as a great thing that I can provide, because all my life, my parents and my wife and I have worked very hard to be sure anything educational that my children wanted to do — and in my parents’ case, their children wanted to do — they were able to do. And I view the same thing about my grandchildren, and I’m in a position to help. So I would encourage people to look at it. Again, I’m a believer in the American Funds — that shouldn’t surprise anybody — but I would just encourage everybody who can to set up 529 plans for their grandchildren and set them up as quickly as you can.

Kevin Clifford: Great. Thank you, Jim.

Jim Rothenberg: My pleasure, Kevin.

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Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. This information is intended to highlight issues and not to be comprehensive or to provide advice.