It’s been a trying decade for Rob Lovelace. Capital Group Cos., the money-management firm his father’s father founded in Los Angeles during the Great Depression, took a beating after the financial crisis. Over seven straight years, clients pulled out a staggering $425 billion. The company cut hundreds of jobs. Employees and customers wondered if Capital Group could turn things around.
At 56, Lovelace is slender, with bright blue eyes behind rimless glasses and a prominent forehead framed by wavy, light brown hair. In a rare interview at the company’s headquarters in a downtown L.A. skyscraper, he’s glad to say the arrows are pointing up again. New clients are coming with new money. Assets under management have rebounded to $1.9 trillion, double their low a decade ago. But the company’s future is far from secure.
For Lovelace—who, unlike his father and grandfather, is vice chairman instead of chairman—this challenge is bigger than Capital Group. It’s about his family’s faith that research and reason can help investors beat the overall market. That conviction has been at the root of the company, best known for its American Funds family, for almost 90 years. But now, more than ever, active management is being dismissed by the investing public. Vanguard Group Inc. and BlackRock Inc. have vacuumed up market share with funds that mimic broad market indexes for a fraction of the cost of Capital Group’s funds.
In some respects, Lovelace is resigned to the trend toward such low-cost, passive investing. “We don’t fight passive,” he says. “It’s OK. We just know what we do is even better.”
That contrarian streak can be traced back to Lovelace’s grandfather. Jonathan Bell Lovelace, known as JBL, was a math whiz who grew up in Alabama and moved to Detroit after World War I to join an army buddy’s brokerage. In September 1929, alarmed by the gap he saw between companies’ fundamental values and their stock prices, he cashed out most of his holdings in the market and the firm. He was on a California-bound train when the stock market crashed on Black Tuesday.
In Los Angeles he started Capital Research and Management Co., recommending stocks for funds run by his struggling former firm in Detroit. In 1932, JBL took over as chairman of those funds, building Capital’s assets throughout the Great Depression.
“His somewhat heretical view at the time was you should actually know something about the companies in which you’re investing,” Rob Lovelace says. “It was always based on research. This was our comparative advantage. This is in our DNA.”
As Capital Group grew, JBL persuaded his son, Jon, to join and eventually lead the company. In the 1950s, after JBL suffered a heart attack that put him out of commission for years, Jon created a system to distribute fund-management responsibilities, reducing the company’s reliance on any single person.
“Everybody thought that was a cockeyed idea, including me,” said Jon, who died in 2011 at age 84, in a book published for the company’s 75th anniversary. “But it was good for the transition, at least, and that’s how it began. And it ended up working so well, we kept it!”
The Capital System works like this: Every fund has from 3 to 13 managers, each of whom oversees a distinct portfolio known as a “sleeve.” Within general parameters, such as market capitalization or bond ratings, managers are free to choose the securities they want. They’re encouraged to follow their strongest convictions. Those are informed by research that goes beyond analyzing company financial statements and meeting executives—last year Capital Group’s 320 investment professionals logged 12,400 visits to factories, warehouses, laboratories, and other sites.
An example is the $88.7 billion New Perspective Fund. Facebook Inc. is the fund’s second-biggest holding. But Rob Lovelace, the longest-tenured co-manager, doesn’t own any Facebook among his sleeve’s 80 securities. He prefers Amazon.com Inc. Net of fees, the fund has beaten its benchmark consistently over two decades.
Lovelace recalls visiting Capital Group’s offices as a boy, when managers used slide rules and adding machines to analyze balance sheets. He became interested in investing as a teenager and still owns shares of toymaker Hasbro Inc., the first stock he ever bought. Today, Capital Group is Hasbro’s largest shareholder, with an almost 15 percent stake. The stock returned an average of about 20 percent annually from the end of 1980 to the end of 2018, almost double the 11 percent average annual return for the S&P 500.
Until the financial crisis, American Funds outperformed competitors, losing less in bear markets and starting from a higher base in ensuing recoveries. It reeled in hundreds of billions of dollars after the dot-com bubble, vaulting to the top ranks of mutual fund families. Its Growth Fund of America became the world’s largest mutual fund.
As Capital Group thrived, a radical idea was starting to take hold. A growing body of academic research cast doubt on stockpicking. Markets were so efficient that investors couldn’t beat them over the long term. Jack Bogle, a Princeton graduate like Jon and Rob Lovelace, thought investors were being ripped off. In 1974 he founded Vanguard Group in Valley Forge, Pa. Two years later, Vanguard started selling a fund that simply held all the stocks in the S&P 500 index. It was the first retail index mutual fund.
“People are too fixated on fees. They should be fixated on their total return after all fees”