A veteran portfolio manager and senior leader at Capital Group discusses why investors should keep the faith in non-U.S. names and where she's finding attractive opportunities today.
Our guest this week on The Long View is Jody Jonsson. Jody is a 33-year veteran of Capital Group, a Los Angeles-based investment manager, where she is vice chair. Since 2005, Jody has been a portfolio manager on American Funds New Perspective, a global equity strategy, for which she has been honored with various Morningstar awards over the years. She serves on the management committee and the target-date solutions committee for Capital and was an equity analyst for many years after getting degrees from Princeton and Stanford.
Background
American Funds New Perspective
Global Investing
“New Reality for Investors: 5 Big Trends Changing Markets,” by Jody Jonsson, capitalgroup.com, Nov. 2, 2022.
“Multinational Companies Can Thrive in Tough Times,” by Jody Jonsson, capitalgroup.com, March 2, 2023.
“Outlook: Long-Term Perspective on Markets and Economies,” Jody Jonsson, capitalgroup.com, 2023 edition.
“Emerging Markets: Positive Signs Even as China Slows,” by F. Chapman Taylor, Lisa Thompson, Brad Freer, and Kent Chan, capitalgroup.com, Oct. 18, 2023.
Markets, Artificial Intelligence, and ETFs
“The Changing Face of Trade: Idea-Driven Companies Come to the Fore,” Capital Ideas, Investment Insights from Capital Group, capitalgroup.com, Nov. 7, 2023.
“Magnificent Seven: What Do You Need to Believe?” by David Polak, capitalgroup.com, Jan. 9, 2024.
“AI: What It Means for Investors,” by Mark Casey, Richmond Wolf, and Drew Macklis, capitalgroup.com, April 13, 2023.
“AI and the New Megacycle for Tech,” by Julien Gaertner, Drew Macklis, and Mihir Mehta, capitalgroup.com, July 25, 2023.
“The World in 2030: Investing for the Next Decade,” by Martin Romo and Jody Jonsson, capitalgroup.com, Feb. 19, 2021.
“Meet the Suite: Exploring the Potential Benefits of Capital Group’s ETF Lineup,” capitalgroup.com, Oct. 2, 2023.
Dan Lefkovitz: Hi, and welcome to The Long View. I’m Dan Lefkovitz, strategist for Morningstar Indexes.
Christine Benz: And I’m Christine Benz, director of personal finance and retirement planning for Morningstar.
Lefkovitz: Our guest this week on The Long View is Jody Jonsson. Jody is a 33-year veteran of Capital Group, a Los Angeles-based investment manager, where she is vice chair. Since 2005, Jody has been a portfolio manager on American Funds New Perspective, a global equity strategy, for which she has been honored with various Morningstar awards over the years. She serves on the management committee and the target-date solutions committee for Capital and was an equity analyst for many years after getting degrees from Princeton and Stanford.
Jody, thanks so much for joining us on The Long View.
Jody Jonsson: It’s my pleasure to be here. Thanks for having me.
Lefkovitz: You are part of an organizational transition at Capital Group. Many of our listeners will be investors in the American Funds or Capital International Strategies or advisors who use them, and they’ll know that organizational turnover is not common in your organization. So how are things changing?
Jonsson: Well, this is really an evolution, not a revolution. This is a continuing evolution of ways in which our company has been evolving for a long time. The leadership transition specifically was underway for most of 2023 as Tim Armour and Rob Lovelace were retiring out of the roles on the management committee, and then Mike Gitlin taking over as CEO, Martin Romo, as chief investment officer, and myself as vice chair. The three of us have each been running in those roles for some time. So, it really was a pretty seamless transition, and Tim and Rob were extremely gracious in how they prepared the way and designed the roles that the three of us are in. And of course, we’re part of a 10-person management committee, and that’s also been very continuous through the whole thing. So, I’d say it’s been remarkably smooth as these sorts of transitions go. The first thing we’re doing as a new team: reviewing our long-term strategy and our strategic plan for the next several years. Capital will turn 100 years old in 2031, so we’re looking at that date and thinking about things we want to really excel at in that time between now and then.
Benz: Jody, so you are part of leadership there at Capital. You’re also a working portfolio manager, so you have a lot on your plate. We know you also talk to the Securities and Exchange Commission and the ICI, the Investment Company Institute, which is a fund industry trade association. What sorts of issues is Cap Group advocating for within the industry and with the regulators?
Jonsson: Well, what we’re trying to do is to be essentially a thought leader for policymakers. Not simply just arguing our own point of view, but trying to help them shape good regulation, good legislation, good policy around particularly retail investors. And we think that good regulation can have impacts for many decades to come. If you think about something like 529 plans, that’s certainly helped people save for their future over many, many years. That was a very well-thought-out piece of legislation. We want to be careful about the unintended consequences. And sometimes regulators try to go after problems that are really in the tails of the distribution. They are once-in-a-lifetime or once-in-a-generation problems that probably won’t recur. And often regulators can take a very heavy-handed approach to trying to prevent those things. And so, ICI is focused on this. We’re focused on this—really trying to think about the cost and complexity of regulation, as well as part of those unintended consequences, that in trying to solve one problem, we could inadvertently introduce others.
So, some of the issues that are front of mind right now are particularly with the SEC rules around money market funds, liquidity, possible discussions of swing pricing, that sort of thing. These are trying-to-solve problems that arose in 2020. But the industry, I think, generally has felt that some of these proposals were quite heavy-handed. And we’re just trying to be a thoughtful voice in these conversations.
Another example is around outbound investment in China. Many people on Capitol Hill are very focused around this about trying to reduce our dependency on China and supply chains and that sort of thing. We just want to be careful that that doesn’t inadvertently sweep in portfolio investment where it really wouldn’t be appropriate. So, I think we’re viewed as a thoughtful contributor on these issues. We try to have ongoing engagement, not just when there’s a particular issue at hand.
Lefkovitz: Jody, financial advisors have traditionally been the primary sales channel for the Capital Group strategies. Curious, what is it about that channel that works so well for Capital and how that relationship has evolved over the years?
Jonsson: Well, we have always believed and continue to believe very strongly in the value of advice. Having a financial advisor helps keep people on track for their long-term investment goals in our experience. And particularly in times of difficult markets where people might be tempted to give up and sell out, we find advisors just do an incredible job of keeping people on track to their goals.
In terms of how things are changing for them, we find that they are focused on three key areas. One is managing their clients and clients’ expectations. Two is managing their client portfolios. And three, managing their business—thinking about issues of succession and transition, practice management, tools to improve their productivity. And we can be helpful on all of these fronts. We do a lot in the areas of thought leadership and content. We are trying to expand our investment services through more vehicles, ETFs being the most recent example, but also SMAs, CITs, and others. And then on the practice management front, everything from helping advisors build portfolios to benchmarking, how they spend their time, what are other leading advisors in the field doing. We talk to hundreds of thousands of advisors, and so we have a great dataset of what industry best practice looks like. And so, we’re finding that just our relationship with the advisor is broadening over time in terms of what they are looking for from us beyond investment services and investment results.
Benz: Capital Group remains purely active. It’s the world’s largest active investor with roughly $2.6 trillion in assets. Unlike some of your competitors, you don’t offer any passive products whatsoever. Even your ETFs are active. I’m wondering if you can talk about whether the firm thinks passive is a valid approach. Is it just that the entrenched competitors offering passives are just so far ahead that there’s no catching up? Can you talk about how you’ve thought about that?
Jonsson: Well, passive investing is certainly preferable to no investing at all. It’s much, much better than cash in a mattress. And we would always prefer that people be invested to not being invested. We do think that it is possible to outperform passive. Our track record demonstrates that we’ve done so. And in particular, when you want to achieve a certain type of outcome, I think it’s better done with active than passive. So, an example might be an income-oriented strategy that will do better than the market on the downside. If you’re taking distributions on a regular basis, you might want an income-oriented strategy. So, there are ways in which I think active management really can provide better outcomes than passive.
We do feel that passive has made things more difficult. The market has gotten much more concentrated. I don’t know if that’s just because of passive, but that certainly has made it more challenging to beat indexes. I do think, however, that in the end, the fundamentals of individual companies win out. And we have never been shaken in our belief that fundamental research pays off in investing. And so, our approach will continue there. We have offered some combination active/passive models with certain partners. So, we’re not opposed to using passive. Particularly where financial advisors might have fee budgets, the combination of passive plus an active strategy can be a valuable thing. And so, we have entered into some partnerships to do those combined models.
Lefkovitz: Many of our listeners will be aware that Capital runs a multiple-portfolio counselor approach. So different managers are running their own sleeves of a portfolio. What are the pros and cons of that approach?
Jonsson: This has been our approach for several decades back to the 1950s, and we’ve refined it over many years. For us, the main pro of the multiple-manager approach is the opportunity to have multiple points of view represented. It’s very rare that a single investor can cover the whole investment waterfront and do well in all different kinds of markets. Having more points of view, more approaches to investment style, it just gives us more ways to win. And every manager doesn’t have to be an expert at everything. Each manager can play to his or her strengths. I think where the secret sauce of the multiple manager system is how we put those teams together, how we find complementary strengths of managers in a given strategy so that different people can be doing well at different times. And then when you put them together, it leads to a less volatile outcome, but still can be a superior outcome in that each person is doing what they do best.
Our approach also includes having analysts manage money. And that’s a very unique approach within the industry. So, our analysts are managing money almost from the very beginning. As soon as they launch coverage on their industry, they are starting to invest as well. So, they really have skin in the game. It’s not just the PMs who are controlling the investing, and this develops investors much better over time so that when they become portfolio managers, they’ve been exposed to multiple industries as an active investor.
The con to the approach is that it’s complex to manage. And because we’ve been doing it for a long time, we have built the systems to do it. It requires a lot of internal coordination, and not every company would have the culture that would accommodate that. But we do. We have a culture that’s very balanced and fair and collegial. And so, these internal systems help facilitate the running of this process.
Benz: We want to switch over to discuss global investing. You’re very much a global equity investor yet investing outside the U.S. is out of fashion among U.S. investors. The U.S. has outperformed by a large margin for the last 10 to 15 years. So why do you think investors should go global? What’s the case for it? And what’s an investor missing if they are just U.S. only?
Jonsson: Well, I think it’s a bit myopic to think that all the great companies are located in the U.S. Clearly the U.S. market has been very strong, and there are many dominant companies that are domiciled in the U.S. But increasingly, as you think about global champions, it doesn’t matter as much where they’re domiciled as where they do business. And in certain industries, there really aren’t even real U.S. competitors.
Let’s take the luxury goods industry. The dominant companies of this industry are based in Europe. And if you said I was only going to invest in the U.S., you’d really have no exposure to that industry at all. Other industries like semiconductors or aerospace have incredibly strong global leading companies that are not based in the U.S. And so, we just think it’s a more holistic view to look around the world and invest with the global champions regardless of where they happen to be domiciled. And that’s very much the foundation of our New Perspective Fund, which I’m involved in. New Perspective’s whole mission has been to invest in companies that benefit from change, particularly around changing global trade patterns and economic patterns.
Lefkovitz: I believe the strategy has celebrated its 50th birthday recently. The original mandate seems quite relevant in today’s context. So curious if you could talk about how you see trade patterns currently changing and how you’re taking advantage.
Jonsson: One of the things that’s so delightful about New Perspective is that that original mission around investing in companies who benefit from changing global trade patterns has essentially been unchanged for 50 years. The definition of what trade looks like has certainly changed. Back when the fund was started, we probably thought of trade as building goods in one country and shipping them to another. Increasingly, global trade is much more digital, information-related. It’s not really about sending stuff from one place to another. It’s about doing business around the world and being globally flexible. So, we think that approach is as relevant today as it was in 1973 when the fund was started—investing in companies that can be flexible when the world changes. It doesn’t mean that global trade has to be ever expanding. It can be, like a time we’re in now, where a lot of things are changing. In some ways, global trade is shrinking. Companies are not operating with … Supply chains are not as tight as they were before. Companies are putting more redundancy into where they produce, trying to produce closer to the source. Obviously, we saw a lot of this during COVID where we realized that supply chains were stretched a little bit too thin. And so, companies that are globally flexible are better positioned to handle that kind of change. They have more optionality to produce closer to their end customers, to source from different parts of the world, and so on, to just handle these geopolitical changes in a much more logical way because they’ve got more flexibility around the world.
Benz: Going back to the thesis for maintaining a global portfolio, I’d like you to talk about the diversification benefits of non-U.S. for U.S. investors. It does seem like correlations, at least among developed markets, have risen over the past several years. Can you address that as the diversification case for non-U.S. there?
Jonsson: I do think you’re correct. I have seen that data and I do think it is less about trying to diversify and more about, at least again for us in New Perspective Fund, trying to find companies that are not represented in the U.S., that are also global champions of their industries, but where there isn’t a strong U.S. equivalent. We’re not coming at the fund with a U.S. bias. We’re not saying we’re going to prefer U.S. companies unless we can’t find one. We truly look around the world. And again, our research is based all over the world. I think 36% of our research analysts globally are based outside the U.S. So, we’re trying to look for interesting companies wherever they may be based. And in a world that is increasingly global, I’ll come back to the point I made before—I just think it’s a little less relevant exactly where they’re based. It’s much more relevant where they’re doing business and how globally competitive they are. Again, back to something like the semiconductor industry—why we would invest in semiconductors in Taiwan? Not so much to diversify; simply because there are superior companies located there.
Lefkovitz: Turning to your current view on markets, I’ve seen you talk about the new reality for investors. You say that the investment landscape currently bears more resemblance to early parts of your career than in recent years. Can you talk a little bit about that concept?
Jonsson: Well, this is one of the areas where being old is helpful to be able to think back to, oh, this is how it was in the ‘90s. I try to remind some of our younger associates that we’ve been in a truly extraordinary period since the early 1980s. Basically until 2020, we had almost 40 years of uninterrupted declines in interest rates and declines in inflation. And I think if you started up in this business anytime since the GFC, all you’ve ever known is very low interest rates and very low inflation. And I think a lot of people came to believe that that was a permanent state of affairs. What we’ve seen in the last couple of years is really, in my opinion, just more of a normalization. It’s not abnormal at all. We’re just going back to something that is more typical of a period, even the early 2000s. You don’t even have to go back to the ‘90s because rates aren’t that high yet. But just going back to something more normal where rates are not at zero and inflation is not at zero.
That has a lot of implications for how companies will be valued, particularly high-growth companies. And for me, it’s just kind of a reset. It’s a reminder that things don’t go on forever and we’re going back to a different environment. It doesn’t have to be a bad market environment, but it’s going to be a little less easy. When rates are at zero, money is free, stocks go up, everything goes up. When there’s a cost to capital again, the market, I think, will be more selective. And that should help active managers. That will help us. And I think it will also mean a market that is broader than just very narrow leadership.
Benz: I wanted to ask about emerging markets. We often hear emerging markets cited as a reason to invest outside the U.S. because of the growth potential, but New Perspective actually has very minimal emerging-markets exposure. Can you talk about that?
Jonsson: The reason for that is, again, back to the definition of the companies that we invest in in New Perspective. So, to qualify for the fund, a company would have to have at least a quarter of its business outside of its home country and also be functioning like a multinational company.
I’ll give you an example. If it was a Scandinavian bank that had operations in Sweden and Norway, we probably wouldn’t think of that as a truly global company. So, it needs to both meet the letter of the law and the spirit of the law in terms of truly operating around the world. There are not a lot of companies headquartered in emerging markets that would meet that test. Many of those companies tend to operate in a single country or just over the border from that country, and they haven’t yet become truly global in scope. When they do, they are great candidates for the fund, and we have invested in a number of those over time. But it is just a smaller part of our investment universe than might be typical if we didn’t have that restriction around the companies that benefit from these changing global trade patterns.
Benz: Earlier, we were discussing some of the choices that advisors seem to be making with a lot of them gravitating toward very passive portfolios. Another thing that we’ve observed is that some advisors seem to want to have tight control over their clients’ asset allocations and specifically their U.S., non-U.S. exposure. So, can you discuss the case for delegating that to a fund manager as the express assumption if someone were to buy a fund like yours?
Jonsson: Well, global investing has been out of fashion. People seem to want to be very focused on U.S. allocations and non-U.S. allocations, where we think the world is just more integrated. In a global fund like New Perspective, we hardly even think about the U.S., non-U.S. divide. We just look for where is the global champion? It might be in Taiwan; it might be in Japan. There is some interesting stuff going on in Japan right now. There are some world-leading companies there that have been ignored for a long time. Why not go look over there if we feel the U.S. market is very expensive, let’s say? And so, I think there is a place for allowing the manager to roam where they see the best value—the money for value, so to speak, value for money—and not be so rigidly tied to a geographic allocation, particularly when a market gets overextended. If you think that the U.S. market is very toppy and highly valued, you want to have other places to go. You want to have other world-leading, world-beating companies that might be less expensive relative to the U.S. And we have found over time that that global flexibility is very helpful. And if you look at the long-term record of New Perspective, there have been times when we’ve really exercised it. So, for example, in the late ‘80s when the Japan market got very overvalued, we weren’t there. We avoided Japan almost completely. We had a few years of difficult results, and then when it turned, we had several years of wonderful results. There are times when you want to lean away and having other places to go is very helpful. So, I think it’s worked for us. And I think you can find good opportunities anywhere in the world if you’re willing to look, and that’s what we specialize in.
Lefkovitz: Following up on Japan, the Japanese equity market had a great year in 2023, and it does seem like there’s a new dynamism in the market. How are you thinking about Japan these days?
Jonsson: I would say that our analysts are more constructive on Japan than they’ve been in a long time. And I do think you have some tailwinds there, mostly on the corporate side. A lot of signs of better capital allocation and some pressure for better capital allocation. I believe the Tokyo Stock Exchange has been encouraging companies to improve their returns on invested capital. Some of them have been undoing their long-standing cross-holdings. I think also activists have been a bit more successful in the Japanese market. And again, in a world where arguably the U.S. is fairly highly valued, I think investors have started looking elsewhere. I think also with the China market having been so difficult and so disappointing, investors who are more focused on Asia have started to view Japan as a really compelling alternative because it was cheap, it didn’t have a lot of the geopolitical risk that China had, and it had been largely ignored for the last few years. So, I think that’s part of what’s driving the interest around Japan. And I think it could probably continue for a while.
Benz: We also wanted to ask about the U.K. You lived in London. The U.K. market has been really down and out due to Brexit and other factors. But you do own a number of British stocks. Can you talk about how you think about that market?
Jonsson: Well, again, when I come back to my New Perspective hat, I’m thinking about where in the world are the global champion companies and less about the particular view of that country. So, the companies we’re invested in in the U.K. are world leaders in their industries. A company like an AstraZeneca, for example, it happens to be based in the U.K., but its fortunes really do not depend on the U.K. or its politics very much. And so, when you look at our country representation in the fund, it’s much less a statement about the country and more about the companies within that country. You’ll see we have a lot invested in France, for example, but that’s really because of our aerospace and luxury goods holdings. And so, as regards to the U.K. specifically, I do think that Brexit certainly has had an effect on the growth rate of the country and the growth of GDP there. I do also think that a number of the companies that are represented in the indexes in the U.K. tend to be either more focused on the U.K. itself and less global companies and also more heavy on banks, resources, mining, just industries that have been more lowly valued. And that’s partly why the U.K. indexes have underperformed other global indexes.
Lefkovitz: A question on currency. Currency has been a big driver of equity market returns and has diminished the equity returns from the perspective of the U.S. investor. How do you factor in currency when you think about your portfolio holdings?
Jonsson: I think that currency has become a little less relevant with time to the investment thesis than it was earlier in my career. Again, back in the ‘90s, multinational companies were making goods in one country and shipping them to another. And now, companies that are manufacturers, for example, have located their production closer to their end clients. So, I think they’re less exposed to currency fluctuations because they’re more naturally hedged. And so, for us, the currency exposure is more in the currency that the stock is based in and a bit less about the business. I have found over time that getting the decision on the stock right is much more important than the currency. Of course, if you’re in say, an emerging-markets currency that collapses, that could certainly overwhelm it. But in developed-market investing, invariably, the stock selection overwhelms the currency effect. So, it is something I think about. But I’ve only hedged currencies a couple of times in my career, once around Brexit, and once I think around the Japanese yen many years back, because I found that the returns from that activity just were dwarfed by the stock-picking. So, getting the stocks right tends to win over the currency.
Benz: We wanted to ask about geopolitical risk. There’s been a lot recently—China, Russia, Israel. How does it impact your investment decisions?
Jonsson: I think it’s something investors have to think a lot more about now than they did five or 10 years ago. And I think it increasingly is factoring into the multiples that investors are willing to pay. And China is probably the best example going from a market that was seen as high growth, highly rated to a market that has been massively derated, as investors have been disappointed by a lot of the actions that the government has taken toward Chinese companies—in the internet sector, the education sector, the healthcare sector, you can go on and on, the property sector. So, I do think investors have had a bucket of cold water over the head in terms of the realities of geopolitics and political risk and what they can mean in portfolios. So, it’s something I think about a lot. And I think about it particularly in the technology sector, where if companies are doing a lot of their manufacturing in China, certainly the semiconductor industry, risk around the China-Taiwan relationship, the U.S.-China relationship, where there might be restrictions put in on exports and imports—definitely something that is a key part of the investment decision now.
And I think we have to be very sensitive about industries that don’t look political, but where all of a sudden there could be a geopolitical aspect to them. Reputation, or you’ve seen this already with certain consumer companies, like if they get themselves caught up in forced labor issues, that sort of thing. All of a sudden, a business that doesn’t seem very geopolitical can become so. So, I think we have to be very diligent about considering supply chains and just the state of relations between the key countries that a company operates in.
Lefkovitz: Have there been instances where you’ve avoided a company because of geopolitical risk?
Jonsson: Yes, definitely. When a company has a supply chain that is overly dependent on a single country, where I think there could be risk between that country and the U.S., that’s something I weigh very, very heavily. And I want to know that that company has some alternatives or want to see other sources of supply, for example.
Benz: Jody, I’m wondering if you can talk about revenues and how you factor them in? Capital Group has done some work on country of domicile, which is the traditional way of thinking about a company’s nationality versus where it sources its revenues. The report was called “The New Geography of Investing.” Can you talk about how that impacts your calculus and what the general thesis is there?
Jonsson: Again, I think for so long, investors have just thought about a company in terms of where it’s domiciled—a U.S. company, a French company, whatever. And our research shows that increasingly in a more global world with more global multinationals, their results are less dependent on their country of domicile and much more dependent on the countries where they’re generating revenues and profits. And so, when we think about the exposures within New Perspective Fund, yes, I think we’re 55% or 60% in the U.S., but it’s much less than that in terms of where the revenues are coming from. And so, there’s much emerging-markets exposure there. You asked previously about why don’t we have more in emerging markets? Well, we actually have, I think, around a third of the fund in emerging markets by revenue share. And so, we just think that the looking at domicile alone is myopic because it doesn’t tell the whole story about where the company actually does business.
Lefkovitz: You mentioned how narrow market leadership has been. New Perspective owns some of the Magnificent Seven—Microsoft, and Meta, and Tesla, I believe. But I’ve seen Capital Group call the U.S. equity market saying the U.S. equity market suffers from bad breadth with a D. Why is concentration a problem?
Jonsson: Concentration is a problem because—well, for a number of reasons, but one of which is just the basic SEC rules around mutual funds make it very difficult to overweight those companies if you really like them. Because you can’t own essentially more than 10% in a single holding in a diversified mutual fund. And when they’re so dominant in the indexes, you can’t own enough of them to really make a statement about it. So, you sort of lose the benefits of diversification. I know some funds have dealt with that by becoming nondiversified. We have not done that, but I already made changes to some of the indexes as a result of this. And I think it just results in crowding. I think a lot of people feel forced to own companies that may not be high convictions, but they don’t really want to bet against them, so to speak. I just think that these highly concentrated indexes result in behavior that’s not always in the interests of the end shareholder.
Benz: We wanted to ask about AI, because in keeping with the Magnificent Seven, it seems to be a big driver of equity markets. How do you and the team at Capital separate hype from reality in the AI space?
Jonsson: This is something we’re discussing in virtually every industry that we cover. It probably creeps into just about every investment conversation we have. And it’s probably still early to be very certain about who the winners and losers are. I think up to now, the market has focused mostly on the companies that enable it, whether that’s the chip manufacturers like an Nvidia or the cloud-computing companies who are obvious beneficiaries. But we think that many, many companies are going to benefit from this. And one of the sectors I’m really intrigued about is healthcare as a potential benefactor, whether that’s coming up with more molecules for drug discovery or speeding up that process or being able to test more of them. There are lots of different ways in which AI will improve productivity of various industries.
I think it’s still quite early. So, we haven’t made a lot of firm conclusions about who wins and who loses. And it’s changing so fast. When I think about this relative to other trends in my investment career, I think this one has come out of the woodwork so quickly and is changing industries so quickly, probably faster than any technology adoption I’ve ever seen. We’re excited about it. We’re really enjoying these conversations and talking to companies about how they’re implementing it. But I think it’s still very, very early to be certain about who wins or loses.
Lefkovitz: You mentioned healthcare as a beneficiary of AI. Healthcare has been a bifurcated space lately. You’ve got the weight-loss drug manufacturers who have been big winners and then a lot of underperformance in the healthcare space. Can you talk about how you’ve tackled healthcare lately?
Jonsson: I’m very, very proud of our healthcare team. We actually just spent a week in San Francisco last week meeting with healthcare companies for several days. And we go very, very deep on the science around innovation in the healthcare space. Obviously, the progress on obesity drugs has been nothing short of stunning. It also has huge implications for diabetes. And in my opinion, if we can get at the roots of obesity, we solve so many other healthcare problems. So, I personally think that these drugs are quite groundbreaking in terms of what they would mean for public health around the world. We could solve a lot of other comorbidities like cardiovascular problems, diabetes, all the sorts of things that go along with obesity. I just think this could be absolutely game-changing for public health.
Other drug companies have done less well in part because of innovation. It is absolutely critical that companies continue to innovate, continue to have cultures of innovation that thrive and that they are able to replace things going off patent. And I think a number of the companies that have struggled have hit a bit of a wall in terms of that. I think the other thing that was clear from the meetings we had last week is there’s still this COVID effect running through a lot of companies right now. And I think 2024 will probably be the first year where the COVID effect is finally behind us. So, a number of the companies that facilitate drug discovery, like some of the suppliers, they were also hit quite hard as you saw the other side of COVID. But I think, again, given the long-term growth opportunities around some of these drugs, those companies that serve the drug discoverers will also benefit a lot as well. I’m enormously bullish about healthcare over the long term. I think we’re in a truly golden age of discovery right now.
Benz: Jody, you mentioned the promise of some of these weight-loss drugs in other areas, in diabetes and cardiovascular disease and so forth. Do you have a losers column associated with the weight-loss drugs, like companies that have had some of those diseases as their bread and butter and that actually stand to lose if people lose weight and are able to address some of those other diseases and maybe head them off?
Jonsson: I’m sure there will be some drugs that do less well as a result of this. But I think if you look at the benefit broadly to society, to humanity, I think it is potentially just enormous. And that’s a very good thing for society. Obviously, I’m focused on trying to avoid losers, but it hasn’t been a huge part of my investment thesis. I think the implications might be bigger for companies in food and beverage, for example, probably more immediate in terms of how the weight-loss drugs change people’s consumption patterns. I think it will probably be more apparent there than it will be with some of the drug companies right away. It’s going to take quite a while still because we haven’t solved the problem of reimbursement. It’s going to take a while for weight-loss drugs to become very broadly adopted.
Lefkovitz: Obviously, the healthcare space is one that faces significant policy risk, regulatory risk. How do you think about policy when it comes to healthcare?
Jonsson: It is always a factor. I think often it is reflected in the multiples of many of the stocks. I don’t know that I think about policy as regards to healthcare any differently than I do other industries that are subject to the whims of government policy. I do think reimbursement is a big question. So, some of these innovations are absolutely wonderful, but if they can’t get paid for, they’re not going to go anywhere. I do think that the big challenge in the U.S. healthcare system specifically is to take the long view, because our healthcare is usually paid through employment and employees turnover, often healthcare providers and the companies themselves providing healthcare plans don’t take a full lifecycle view of the patient. And while it might make sense to reimburse for the weight-loss drugs because of what it will do for someone’s health over 10 or 20 years, often the payer doesn’t have the same kind of perspective. If we could get the whole system to look at it over the lifetime of a patient, I think we’d make better decisions about what we reimburse.
Benz: I don’t think anyone would be surprised to hear you talking about healthcare as an area for great innovation, but you see the industrials sector as another area of innovation benefiting from decarbonization, clean energy. So, can you talk about that thought where you’re excited about innovation in the industrial space and whether you think of industrials as another growth sector today?
Jonsson: I do think that industrials are a very interesting area right now, and I have a pretty high representation of them in my own portfolio. I think the perception of them is changing from companies that are making goods to companies that increasingly have an information component to their business, almost a software component, some recurring revenues, monitoring. So, yes, they’re selling equipment, particularly companies in the energy management sector, let’s say—a company like a Schneider, for example, which is in our New Perspective portfolio. They are very involved in smart buildings, energy management, energy storage, and so on. The monitoring, the software, the learnings from all of that, feeding back, and making adjustments—I just think there’s a technology component to it and a recurring revenue bit beyond just the hardware that I think makes it a very interesting position that probably deserves a higher multiple and is probably less cyclical going forward than it has been historically. And I think there are a number of companies like that in the industrial sector that are interesting.
Lefkovitz: Well, you talked about semiconductors as big beneficiaries of the AI theme—as suppliers. They’ve been likened to suppliers of picks and shovels to the AI gold rush. And I know that this concept of picks and shovels is one that you’ve talked about in the past, not just in relation to semis, but in in other contexts. Where else are you finding examples of picks and shovels suppliers?
Jonsson: Well, picks and shovels are a theme of mine in healthcare as well. Anytime there’s an industry where there’s a lot of innovation going on and you feel like there will be many beneficiaries, that’s where I like to apply my pick-and-shovel approach because I’m probably not smart enough to know exactly which company will develop the best drug. But I know that there are a lot of companies pursuing drug discovery and they’re all going to need common inputs into that process. And so, the suppliers of those inputs can really benefit when there’s a strong tailwind to an industry. Semiconductors is an obvious one that almost no matter what happens in AI, high-powered semiconductors at the leading edge are going to be absolutely critical to making that happen. And that’s going to benefit a lot of different companies that produce them, as well as companies like TSMC and ASML who are further back in the chain. Just that whole sector is going to be absolutely critical to making it happen. You almost don’t need to know exactly which one; you just know that all of them are going to benefit to some extent. So, it’s an approach I like to use when I feel like a whole sector has a tailwind and many different companies will benefit.
Benz: I wanted to follow up on that because you had mentioned thinking back to the late ‘90s period, it seems that people who were investing in semis during that period thought of them as a cyclical area, but they’ve had a makeover where people are thinking of semiconductors more of a secular growth story. So how do you think about that and how do you think about valuation when it comes to semiconductors? And also, how do you separate the hype from AI from reality?
Jonsson: I think one of the huge changes now versus the ‘80s or ‘90s is the massive consolidation of the sector. I saw a chart recently that showed all the semiconductor companies that were around in the 1980s when it was in its infancy, and they were all coming public. And it’s basically consolidated down to a handful of leading companies now over a few decades. So, I think that consolidation helps with the cyclicality. I think it makes forecasting easier. You have fewer companies that are just trying to fill spare capacity and that sort of thing. I do think there is a risk longer term that there is a lot of overordering in this excitement around AI that everybody wants to make sure they get enough to do whatever they need to do with AI. So, there may be some double-ordering and that’s something we’re trying to watch for very, very carefully. Looking at the order books, the backlogs, the book/bill ratios. That is something I think if there’s a lot of hype, we could find out later that there was a lot of overordering.
But when you look at the number of ways that semiconductors are embedded into basically every device you buy, every building, every piece of electronics—they’re everywhere. So that is also a change from a couple of decades ago. They’re just so much more integral to every single product out there. Again, think about what happened during COVID when there was a semi shortage and cars couldn’t be completed for lack of one small semiconductor. You had cars building up in inventory unfinished. So, I do think that there is a secular growth tailwind and less cyclicality than used to be.
In terms of valuations, there are very wide disparities among the companies in the industry. Obviously, Nvidia is one of the more expensive stocks, but you have others like Broadcom that are large holdings for us that are quite reasonably valued given their growth. So, I think there’s something for everyone in terms of whether you prefer more highly valued, higher-growth companies or more reasonably valued companies. There’s something for everyone in semiconductors.
Lefkovitz: Well, Jody, we’ve talked about some of the areas that you’re excited about. I’d also like to touch on some areas that you’ve been avoiding or de-emphasizing in the portfolios. It seems like consumer-oriented companies, both consumer discretionary and consumer staples has been an area that you’ve been moving away from. What’s going on there?
Jonsson: Consumer staples used to be—and I covered some of them as an analyst back in the ‘90s—it used to be an area of very consistent growth. And I think over time that really has changed a bit. I think back—I used to cover companies like Procter & Gamble and Colgate, for example, and emerging markets was an area of huge growth and huge potential for them, for example, that really was a tailwind to their unit growth. That’s changed. That has been less the case in the last several years. I think also many of the consumer-staples companies have struggled with inflation and pricing. And particularly in food and beverage areas, there have been a number of concerns around things like health. And many of those stocks have derated over time. So, there have been relatively few consistent winners in that area, and they’ve been less defensive in down markets as well. So, I think that just the character of some of those staples has changed.
In the consumer discretionary, again, we’re there, but in very selective ways. Obviously, retailing has been totally changed over the last decade or two by e-commerce. And we have had at times very large representation in Amazon in the fund and other beneficiaries of e-commerce, but probably less in traditional brick-and-mortar retailing. So, we’ve tried to be very thoughtful and long-term about the secular changes going on in those industries. We still have investments in some of the leaders there, like a Home Depot has been a very long-term holding for us over many years. But I think those sectors have changed to the point where we need to be much more discriminating in our selection there. And when we’ve wanted something more defensive, we’ve probably looked a little bit more toward areas like healthcare or even certain parts of technology has been the new defense where food and beverage might have been that in prior cycles.
Lefkovitz: Switching gears and focusing on capital allocation—wanted to ask about dividends versus buybacks versus reinvestment in the business. You’re a growth investor, but you still like dividends. Is that not a contradiction?
Jonsson: Not a contradiction at all. I spent the early part of my portfolio manager life as an income investor. In fact, my first PM assignment was in our Income Fund. And I was in that fund as a PM for over 15 years. So, I have a deep background in income investing. And I think dividends are a very important signal of financial health and of management discipline. How management thinks about the dividend and how they think about the need to generate consistent cash flow in order to pay it is very important. And there’s a huge difference between dividends and buybacks. Often companies will do buybacks when times have been very good, the companies are flush with cash, they’re feeling very optimistic about their business, and they’ll announce a great big buyback. And often that tends to coincide with a peak in their business of some sort. So, companies are not always the best at timing their own buybacks. Some are, some are excellent at it, but I think in general companies are not fabulous at that.
We prefer dividends because we think it’s more of an ongoing commitment. And buybacks can be intermittent, but a dividend is a commitment. And it’s a very, very strong signal if a company decides to cut a dividend—a much stronger signal than just pausing a buyback. So, we think about that a lot as a signal of the strength of the company and of management’s view about how they’re using the resources at their disposal.
Benz: We’re hoping you can talk a little bit about Capital’s initiative in the ETF space, offering active ETFs. Maybe you could talk about how you’ve thought about capacity in that space, how it potentially adds to capacity issues at some of the active mutual funds.
Jonsson: Capacity hasn’t been a great concern for us thus far. We manage them in the same process that we manage our American Funds’ mutual funds. We allocate investment capacity to them in the same way in terms of thinking about room to buy in any given security. And the ones that we have launched so far all have fairly broad investment universes. So, it gives us a lot of opportunity to find good investments there. So, thus far, we have not found capacity to be of concern. But we’re delighted with the take up. The adoption of our ETFs has really been tremendous and we’re coming up on our two-year anniversary and already over $19 billion in assets.
Lefkovitz: Curious if you’ve noticed anything different in the use case between the ETFs and the mutual funds?
Jonsson: Well probably the most striking observation is that it is attracting new advisors who have not sold our funds before. It’s appealing to a completely different class of advisor who primarily uses ETFs in their practice and up to that point we didn’t really have anything to offer them. So, we are delighted to be doing business with 18,000 advisors we weren’t doing business with before. And I think by extension that means we’re doing business with new investors who haven’t invested with us before. So, we’re very, very excited about how well received they’ve been.
Benz: Do you think that there should be a tax efficiency advantage to the ETFs versus the traditional mutual funds that might employ a similar strategy?
Jonsson: I would love it if the tax treatment were the same between mutual funds and ETFs. I don’t think that’s high on the agenda of people in Washington, D.C., right now. But I think it would be great if investors could use whichever vehicle made the most sense for them and you weren’t tax-favored to do one or the other. I don’t think it’s likely that they will have the same tax treatment. But they could be used in different situations. You could use ETFs in taxable accounts and mutual funds in nontaxable accounts, for example. I think there’s room for both.
Lefkovitz: Well, Jody, we’ve really enjoyed chatting with you. Thanks so much for joining us on The Long View.
Jonsson: Well, thank you so much for having me. It’s really been a pleasure to be with you. I love your questions and it’s a treat to be with you today.
Benz: Thanks so much, Jody.
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Ptak: And @Syouth1, which is S-Y-O-U-T-H and the number 1.
Benz: George Castady is our engineer for the podcast and Kari Greczek produces the show notes each week.
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