What is your role at Capital Group?

An investment director role at Capital Group is like a portfolio manager but without a portfolio. My role is to represent our fixed income capability in an expert manner: to describe our process, how we manage assets in a fixed income space, what our services are, and the differentiators of how we manage fixed income and why it’s advantageous for our clients. I need to have an understanding of what we’re doing in portfolios, how our investors are actually managing the portfolio and why we are taking the risks that we take within portfolios. My role is to describe what our view is with respect to the global economy and the asset class, our thinking and our outlook for the markets. To be able to do all of that at a very in-depth level allows us to provide our clients with first class service and information in an effective, efficient and clear manner. This allows our investors, who manage our clients’ assets, to spend the vast majority of their time pursuing the right outcome for their clients.

What makes Capital Group different for fixed income?

Historically, Capital Group is known as an equity investor but USD 450 billion of the USD 2 trillion in assets we manage is in fixed income*. We are among the top five active only fixed income asset managers in the world as far as size and capability are concerned, with 180 people focused on managing fixed income assets for our clients *. What makes Capital Group different is our deep, fundamental, bottom-up research that we apply to understanding where the value lies in capital markets. Capital Group analysts who cover different parts of the equity market collaborate with our fixed income analysts who cover the same parts of the market from a fixed income perspective. This Capital-wide approach yields high quality research applied across all of our portfolios.

Another primary differentiator is that our analysts actually manage money within the portfolios. If portfolio managers are generalist investors, analysts are specialist investors, investing into their specific area of coverage, which ensures that all of the value from those analysts is captured. The quality of our investment ideas is therefore enhanced as our analysts are evaluated on the results of what they have generated over 1,3, 5 and 8 years, in the same way that portfolio managers are. They are equally important to the portfolio as analysts and both are equal partners in generating results. In addition, we believe our multi-manager approach provides diversification, which aids the pursuit of stronger risk-adjusted returns.  

Why are fixed income assets important in a portfolio?

Fixed income is a very broad asset class containing different categories and instruments. Fixed income is bonds – debt – which are sometimes issued by corporations and governments, including emerging market governments. There are many types of fixed income and therefore it can fulfill multiple roles within a portfolio, depending on allocation across that range.

Fixed income has four roles within a broader asset allocation for an investor. The first is to provide diversification to your equity exposure. Part of fixed income performs very differently in terms of its price at certain points in the cycle compared to equity markets. When equity markets go down, typically government bonds go up. The second is inflation protection. There are fixed income instruments that rise in value as inflation increases. Thirdly, capital preservation to provide you with a stable core from a capital perspective within your portfolio. Equity markets and corporate bond prices can move significantly but a core part of a portfolio made of high quality, low risk bonds (e.g. government bonds), will provide some stability and capital protection. The fourth role is generation - there are numerous ways you can generate income from fixed income.

Why invest in fixed income in 2021 and beyond?

The four roles of diversification to equity exposure, inflation protection, capital preservation and income generation always need to be fulfilled within your portfolio, but how do you make that allocation depending on where we are in the cycle of valuations? What’s going to happen to the macro economy in this new world? We imagine it like looking across a valley: we know we need to go down to go up; we are not sure how far down or for how long, but we will get to the other side. The trajectory of growth and recovery became clearer with the vaccine rollout. The markets reacted and on the fixed income side risk markets, corporate markets, investment grade and high yield markets reacted well. We are now back to historically tight markets in the investment world.

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* As at December 2020. Source: Capital Group