Capital E-Book

Charles D. Ellis

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 506

Veröffentlichungsjahr: 2011

Beschreibung

Go inside the elite investment firm with Capital.

The Capital Group is one of the world?s largest investment management organizations, but little is known about it because the company has shunned any type of publicity. This compelling book, for the first time, takes you inside one of the most elite and private investment firms out there?the Capital Group Companies?a value investment firm par excellence. It digs deeps to reveal the corporate culture and long-term investment strategies that have made Capital the one organization where most investment professionals would like to work and would most recommend as long-term investment managers for their family and friends.

Leseprobe

CONTENTS

Foreword

Introduction

Chapter 1: The Founding

Chapter 2: Staying Alive

Chapter 3: The Multiple-Counselor System

Chapter 4: Organizing the Core

Chapter 5: Mutual Fund Distribution

Chapter 6: Crossing the Rubicon: Capital Group

Chapter 7: Shareholder Services

Chapter 8: Acquisitions and Start-Ups

Chapter 9: Capital Guardian Trust Company

Chapter 10: Global Investing

Chapter 11: Emerging Markets

Chapter 12: Managing People

Chapter 13: Management

Chapter 14: Compensation

Chapter 15: Investing

Afterword

Appendix I: Summary Statement of Corporate Objectives and Goals

Appendix II: Outline of Basic Managerial Beliefs

Appendix III: Growth of The Capital Group Companies, Inc.

Index

More Praise for CAPITAL

“The exciting evolution of Capital Group, one of America’s great investment management firms, is an inspirational story of creating a special environment of discipline and freedom, accountability and support, and stimulation and study. Understanding how the extraordinary people in this organization have made this work will help managers everywhere do a better job.”

—Byron Wien

Morgan Stanley

“Capital Group is an extremely successful investment organization that we have all admired from afar. In this intriguing history, Charley Ellis recounts the birth and evolution of Capital Group and analyzes the origins of their success—a thoroughly engaging story and a must-read for all those seriously interested in investments.”

—Jay O. Light

Harvard Business School

“Capital is a wonderful book about one of the best firms in our business and provides fabulous insights into the two most important assets that any investment management firm has—its people and its culture.”

—Jack Brennan

Chairman and CEO

The Vanguard Group

Copyright © 2004 by Charles D. Ellis. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

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Library of Congress Cataloging-in-Publication Data:

Ellis, Charles D.

Capital: the story of long-term investment

excellence / Charles D. Ellis.

p. cm.

Includes bibliographical references and index.

ISBN 0-471-56704-3 (CLOTH)

1. Capital Group—History. 2. Investment advisors—History. I. Title.

HG4621.E45 2004

332.6—dc22

2003020207

With admiration and affection, this story of global professional excellence is dedicated to Richard C. Levin,

Yale University’s great and twenty-second President, exemplary servant-leader, pragmatist-scholar, native Californian, and baseball fan.

ACKNOWLEDGMENTS

Linda Koch Lorimer, my beloved wife and best friend, encouraged me with penetrating questions and helpful suggestions—some on trips to China, some on vacation in Europe, and some in New Haven. Heidi Fiske, my friend over 35 years, uncovered historical sources of information and gave generously her keen editorial skills and her journalist’s knowledge of Capital. Randy Whitestone combined good humor and discipline to help clarify and tighten the text—significantly. Jack MacDonald and David Rintels gave numerous useful suggestions. Kimberly Breed cheerfully converted the complexities of various pieces of text collected into complex paste-ups with extensive handwritten annotations, arrows, and codes into draft after draft in the ungainly process of struggling toward clarity. Dozens of Capital Associates gave me great help and a first-hand experience with the Capital process of making decisions—generosity in support and assistance and the clear understanding that all final decisions were entirely mine to make.

C. D. E.

FOREWORD

It is always a treat to welcome a new book by Charley Ellis, and I am honored to provide an introduction. The practice of investment management owes Charley an enormous intellectual debt. He is one of the titans of finance. A seminal thinker, a keen observer of financial markets, a writer who combines intellectual rigor and common horse sense, and an influential consultant, Charley Ellis has made a profound and lasting impression on the landscape of the investment business. The firm he founded, Greenwich Associates, and his many articles and books have improved investment decision making for literally thousands of institutional and individual investors. Charley’s writings have become investment classics. “The Loser’s Game” is mandatory reading for anyone entering the investment business. How to Win the Loser’s Game provides institutional and individual investors with an indispensable guide for effective asset allocation. Classics: An Investor’s Anthology (Volumes I and II) brings together the major pieces in the literature that have helped change the practice of investment management from an art to a science. Wall Street People (Volumes I and II) profiles Wall Street luminaries from Warren Buffett to George Soros. And now comes Capital, the story of one of the largest and most successful investment organizations in the world—The Capital Group Companies.

For many reasons, Charley Ellis is the perfect person to tell the story of this remarkable firm. The building of Capital and the values that sustain the firm are not dissimilar to the development of Charley’s own firm, Greenwich Associates. The factors that made Greenwich the premier global financial strategy consultancy firm bear a close relationship to those that made Capital a firm described by Charley as “among the best at everything it does.” Perhaps the most important factors are absolute integrity and “what’s good for the client” as the essential driving principles of both firms. In these days of tainted research, insider trading, obscene compensation arrangements, and mutual fund complexes that put the profits of the firm above the interests of the shareholders, it is reassuring to be reminded that successful firms do flourish by holding fast to fundamental values: sticking to the right path; taking the long-term view; and insisting always on quality and excellence. And finally, it is clear that both Capital and Greenwich have been led by men of vision, tenacity, and inspiration, who know what it takes to bring a start-up to grandeur.

Indeed, this book represents a perfect pairing of one of the most astute observers of the investment scene with one of the most outstanding investment firms ever created. Not only is Charley smart; he is a professional listener. In preparing this volume, he interviewed the people involved in the building of Capital, and he has an ability to make everyone he talks with believe that what they have to say is of the utmost significance. He recognizes the importance of molding a set of enormously capable colleagues into a community and of continually raising the bar to define excellence. There could not be a better person than Charley Ellis to tell the story of Capital with such finesse and critical understanding.

In another sense, however, Charley is a very unlikely person to write this book, and I am a very unlikely person to provide its Foreword. Charley and I are soul mates in believing that stock picking is a losing game and that the most useful function of professional investment advice is in selecting an appropriate asset allocation consistent with the needs, circumstances, and preferences of different investors—not in trading from one stock to another on the basis of perceived differences in valuation. Indeed, winning the loser’s game is accomplished by using investment funds that simply buy and hold the stocks (as well as bonds and real estate investment trusts) that comprise a very broad-based market index. On a foundation investment committee where Charley and I served, he once chastised me for my only lukewarm espousal of indexing. (I recommended that we start by indexing only half of the portfolio. Charley wanted to go much farther.) Why, then, would Charley Ellis—a man who believes that our stock markets are so dominated by talented and dedicated institutional investors that it is virtually impossible for anyone “to do significantly better than the others, particularly in the long run”—write a book praising a firm whose raison d’être is active portfolio management?

There are at least two justifications for a book about the virtues of Capital—even for such confirmed indexers as Charley and me.

The first reason to extol at least some active managers stems from a basic paradox in the theory of efficient markets. If markets were always perfectly efficient, there would be no incentive for any professionals to uncover the information that so quickly gets reflected in market prices. Markets need some professionals to ensure that information is quickly incorporated into market prices, and those professionals have to earn above-market returns to compensate them for the time and effort involved in doing fundamental research. I firmly believe that too much effort is put into finding mispriced securities and that few investors actually gain from the effort. But the market could not be efficient if everyone simply invested in index funds. Paradoxical as it may sound, markets need firms such as Capital to ensure that low-cost indexing is, in fact, a winning strategy.

The second justification is that Capital is one of those very rare investment managers to have achieved superior long-run investment returns. The records of the mutual funds managed by Capital are publicly available, and we can examine the long-run results of these funds compared with broad-based index funds. In the table below, I compare the results of the general domestic equity mutual funds managed by Capital with the returns from the S&P 500 and the Wilshire 5000 indexes. The S&P and Wilshire returns are shown for the same 30-year period over which the fund returns are measured. The table shows that investors would, in fact, have been better off by investing in those mutual funds managed by Capital. Capital has indeed produced above-average and even well-above-average market returns for investors.

What is Capital’s secret? Why has this organization excelled in the investment race while most others have played the loser’s game—at least where investment results are concerned? In these pages, Charley Ellis tells the Capital story and shows how the organization of the firm has been designed for sustained success.

Of the many factors explaining Capital’s success, three stand out. The first is Capital’s unusual way of organizing its “knowledge workers” in an industry that typically celebrates individual “stars” and where hubris is common. An unusual amount of effort and care is taken in recruiting, coaching, and developing Capital’s exceptionally talented investment analysts. There is no room for egotistical stars, and hierarchical symbols are removed that would interfere with individuals working effectively together in groups. The organization has been successful in creating a pervasive tone of trust, mutual respect, and interpersonal enjoyment.

Average Annual Returns, June 30, 1973–June 30, 2003

Sources: Lipper and CRSP.

Indexes (before expenses)S&P 50011.46%Wilshire 500011.58Domestic Equity Mutual Funds Managed by Capital (after expenses)AMCAP Fund14.71%Growth Fund of America15.33American Mutual13.36Investment Company of America13.25Washington Mutual14.02Income Fund of America12.28

A second—and related—unique feature of the Capital organization is its innovative “multiple counselor system” of portfolio management. Each portfolio is assigned not to an individual manager but instead to several individual managers (which might include some of the firm’s research analysts), each of whom is responsible for one part of the overall fund and each make direct investment decisions. The system ensures that there will be no star managers, and it effectively copes with a problem endemic to investment organizations: As the size of the assets to be managed increases, the flexibility of an individual portfolio manager is often severely constrained.

Finally, Capital has managed to maintain a long-term focus in the face of changing fads and the changing popularity of investment styles. In inevitable periods of underperformance, Capital’s answer to the question, “what are you going to change?” is “nothing.” When popular faddish products (such as new Internet or high-technology funds) have been brought to market by competitors, Capital has refrained from bringing out similar products. Capital eschews publicity. Capital’s leaders are not interested in promoting stories about their funds—especially those that are “hot”—because they know that investors invariably tend to put their money in such funds at just the worst time, when investment results are likely to revert to the mean. Capital does not even use the term “performance” to describe investment results—in its view, performance should be used only to describe what actors do in Hollywood or New York.

In these pages, you will find some wonderful stories about the people who made Capital the outstandingly successful investment organization that it is. Occasional failures are recounted as well as the more frequent successes. And Capital is written with grace, wit, and eloquence. Charley Ellis has an anti-Midas touch. If he touched gold, he would bring it to life. I can’t imagine another writer who could make a discussion of custodial services and the transfer agency function interesting. And all this from a writer whose comprehension of the investment business is unexcelled. You are about to embark on some delicious reading—bon appétit!

Burton G. Malkiel

Author, A Random Walk Down Wall Street

INTRODUCTION

NOTES FOR READERS

While dozens of Capital Associates have made themselves available for candid interviews and several have helped on factual accuracy, this is certainly not an authorized biography. Out of all the information provided to me, only four small, factual deletions were requested and made. All along, it’s been understood by everyone at Capital that I would tell it as I see it, and I have done just that.

No Investment Organization in the world has ever done so well for so long for so many clients as The Capital Group Companies. It is one of the world’s largest investment management organizations, consistently earns the admiration of clients and competitors, and decade after decade achieves superior long-term investment results. Yet most people, even its own customers and clients, know very little about Capital.

This is no accident. Capital is a very private organization—both financially and philosophically—and sees no benefit to its clients from organizational recognition or individual fame.

As an organization, Capital is designed for sustained success. No other investment organization is so well organized, staffed, and motivated to continue striving to be among the best at everything it does while achieving superior long-term results for clients around the world.

Capital does not advertise and avoids the media. Its largest division, one of the world’s largest mutual fund organizations, even uses a completely different name: “The American Funds.” That’s why most people do not realize that Capital is:

One of America’s three largest managers of mutual funds—serving over 20 million shareholder accounts and managing four of the nation’s 10 largest mutual funds. With the best long-term record of investment results, it is gaining market share.A leading institutional investment manager, serving 35 percent of America’s large institutions and 65 percent of those very large funds with assets over $10 billion.One of the largest independent investment research organizations in the world—repetitively identified as having the most capable research analysts.One of the most respected investment managers in each of the world’s large national markets: America, Japan, the United Kingdom, Australia, Canada, and continental Europe—and gaining market share.The world’s leading international investment manager.The largest investor—by far—in the emerging markets.

Much more important to the company and to its investors, Capital achieves superior long-term investment results. Over the past 5 years—and 10 years, 20 years, 50 years, and longer—Capital’s investment results rank in the Top Quartile. No other investment manager has done so well for so long. Not nearly. And no other organization is so well resourced and so well organized to succeed in the future.

Unsurprisingly, Capital is where most investment professionals would most like to work and is the firm they would most frequently recommend as long-term investment managers for their family and friends. Capital is also the one investment organization senior corporate executives would most like to have owning their company’s common stock.

Finally, Capital is both the one organization most likely to fulfill favorable expectations over many years into the future and the least likely to say or even acknowledge such prospects. As Jon Lovelace, who has been central to Capital’s development, says, “Nothing wilts faster than laurels rested upon.” Modesty is pervasive at Capital, where people are far more interested in what lies ahead than in past achievements.

Investors—both individuals and institutions—seeking to understand why Capital is such an admired organization will find in this book many important lessons in organization design, management of professional people, and strategic development. These lessons will not only inform other investment firms, they also have application for other types of professional organizations. Capital may well be the world’s best-designed organization of what Peter Drucker so wisely calls “knowledge workers.” The major factors that make Capital the world’s most admired investment organization include:

Long-term focus. Capital is creatively conservative and comfortable saying “No” to currently popular and apparently profitable ideas that, in the long run, might harm investors. Capital comfortably defers action on new mutual funds until the market is truly attractive for long-term investment commitments, even though this will often be the very same time the market for that particular type of investment seems least attractive. Capital is comfortable absorbing significant operating losses—for many years—to support strategic commitments that can prove rewarding over the long run.

While most investment organizations try—and many try too hard—to keep up with changing fashions in investing, Capital has shown that over the long term, faithfully serving investors’ true long-term interests will build a remarkably strong, growing, and profitable franchise.

Consistent objectivity. Rational thought and behavior are paramount at Capital. Investment results are reported quite frequently and compensation is carefully linked to long-term results to assure consistent objectivity.People-centered operations. With all its systems and consistently rigorous rationality, Capital’s operations—both daily and long term—are remarkably humane and sensitive to each individual. Capital is unusual in the time and care it invests in recruiting exceptionally talented people who will work well together and produce superior services and results for investors.

Capital is even more remarkable in the continuing investment it makes in helping each individual develop her or his capabilities and in designing the organization in ways that enable each person to contribute most. Jobs are designed, and continuously redesigned, around specific individuals to match and capitalize on their particular strengths.

Capital is not so much in the investment business as it is in the business of developing individuals and groups who can and will make superior investment decisions and deliver superior service to clients. At this, it excels.

Seminal organizational innovation. Capital’s seminal organizational innovation—which perhaps only Capital itself can fully utilize—is the multiple-counselor system of portfolio management. This system deals effectively with the formidable “asset-size barrier” that eventually confounds most growing investment organizations. The problem of size cannot be eliminated, but it can be made manageable by dividing large portfolios into several segments. The manager of each segment invests in her or his “highest conviction” ideas—with full accountability for rigorously measured results.Flexibility in the organization. Capital’s overall organization is flexible and fluid. (To outsiders, it often appears vague or amorphous.) The firm disperses decision-making power widely and keeps strategic options for future development open as long as possible. Since stable structure is all too often the dangerous enemy of dynamic strategy, Capital avoids such tangible indicators of organizational status as vested titles, different size offices, and hierarchical reporting. Corporate titles change frequently and have little real significance.Flexibility in compensation. Capital’s compensation policy is both very flexible and based directly on the objective measurement over several years of each individual’s long-term contributions to Capital’s long-term goal to serve three equally important and ultimately complementary groups: investors, Associates, and owners.Private ownership. The broad and equitable distribution of private ownership is considered essential.Recognition of the need for ego strength. Although egotistical manners and negative remarks are verboten, each individual needs quiet ego strength to flourish professionally and personally when surrounded by skilled and dedicated professional colleagues who work closely together and continuously compete to achieve superior long-term investment results.

As an organization, Capital has made serious mistakes, particularly back in the 1970s, but it has made fewer major mistakes and has corrected those mistakes sooner than its competitors. And individual people at Capital make mistakes: Feelings get hurt, tempers flare, and of course, mistakes are made in investments every day. If making mistakes is the inevitable cost of striving, correcting mistakes—and learning how to avoid repeating them—is the best measure of a learning organization that will continue to get better and better. The people inside Capital Group Companies would be first to say that Capital is not and never has been perfect—and hopefully never will be because the drive to do better and better creates the dynamic tension in the pursuit of excellence that keeps Associates focused on the future and on continuous improvement.

Hard as it is to become a champion, the hardest task is always to stay a champion. The longer an organization has been successful, the harder it is to sustain the creativity and competitive commitment required to continue improving—and Capital has been more successful for longer than any other investment organization in the world. Each year of success adds to the cumulative challenge to prevent the conventional and insidious diseases of “success”: complacency, insularity, and overconfidence. If the Lovelaces, father and son, represent two generations of leadership, then the third generation of leaders—Shanahan, Fisher, Rothenberg, and others—is already devolving major responsibility to the fourth. To succeed with success, as the many leaders within Capital Group Companies know and understand, is a forever challenge.

A view toward the future raises more generalized questions: Has Capital overinvested in talent for the incremental rate of return actually earned? Will success lead to inbreeding or cult culture? Should Capital have been much more successful in developing its business in bond management or in serving wealthy families? Will Capital’s complex and subtle corporate culture flourish in each of the many nations around the world? Can Capital maintain consistency across all those very different nations and business cultures? Will successive generations of leadership continue to develop a stronger and stronger organization that is able to do more and better for Capital’s three great constituencies? As institutional investors increasingly dominate the world’s capital markets, can even as strong a research-based investment organization as Capital achieve results that are consistently superior to passive investing? To what extent will Capital’s professionals use their understanding of investing to work with clients as investment counselors, helping each client develop the appropriate investment program to meet its long-term and interim objectives? Although Capital is likely to develop superior answers to these questions, the questions remain challenging—even for Capital.

CHAPTER 1

THE FOUNDING

NOTES FOR READERS

An investment management organization—like any professional organization—is profoundly dependent on the capabilities, character, motivations, and values of its people. And the attributes of the early joiners primarily determine the kind of professionals the firm will attract in future years. Once the die is cast, upgrading an organization is very hard. For an organization to upgrade itself at a later date is almost impossible. So, the founders and early joiners matter greatly.

Hundreds of investment management firms have been launched during the past 50 years. Collectively, their behavior in recruiting professionals confirms the grim validity of David Ogilvy’s caution: “Only giants will hire giants. Ordinary men will hire men who are less than they are—and then those will go on to hire men of even less stature until the whole organization is replete with pygmies!”1 Creating and building and then sustaining a superior professional firm is always deliberate, continuous, and “unnatural”—unnatural in the sense that something new and different is being brought to life and built to last.

Jonathan Bell Lovelace2 and his son Jon Lovelace repeatedly demonstrated leadership in reaching out to bring exceptional people to Capital. By their persistent searching for strong people—repetitively taking the initiative to exploit “lucky” opportunities—they assembled a collection of talented professionals who worked well together. Capital became increasingly recognizable as a firm of unusually capable and congenial professional people: a good group to join.

The core group of individuals illustrates one obvious lesson and one not so obvious. The obvious lesson is that attracting and keeping highly motivated and talented individuals is essential in building a superior professional firm. The familiar keys to success are (1) persistent and imaginative recruiting; (2) consistently high standards for acceptance into the group; (3) uncompromising search for meritocracy in the distribution of rewards and responsibilities according to real contribution; (4) devotion to professional excellence and superior service to clients; and (5) genuine collegiality. In sad contrast, when hiring people, many start-up firms make expedient compromises that they later learn to regret and recruit too few real leaders to ever become a truly superior firm.