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Capital Research & Management Chairman Speaks at HBS

In the 35 years that Jim Rothenberg (HBS ’70) has been with The Capital Group Companies, he has seen the firm grow from managing $2 billion in assets to over $1.2 trillion today. Rothenberg graduated from Harvard College cum laude in 1968 and from Harvard Business School with distinction in 1970. He was named to the Harvard Corporation in 2004, and has served since then as the Treasurer of Harvard University. Rothenberg manages money for the American Funds family of mutual funds, and serves as the Chairman and Principal Executive Officer of the company that manages these funds. Addressing 100 students last week, he shared his views on what has been instrumental to The Capital Group’s success and talked about the firm’s strategy and culture.

Rothenberg attributes The Capital Group’s success primarily to the firm’s results-orientation. While other investment managers have become devoted to simply growing assets, The Capital Group has continued to focus on performance and developing products “that have integrity and are transparent.”

This strategy has been very effective. The Group’s results pretty much speak for themselves. The American funds, Capital Group’s mutual fund division, has become one of the largest mutual funds in the U.S. with roughly $1 trillion in assets under management. Even in bear markets, assets have been sticky, thanks to the Group’s results relative to the industry. Although 401K assets are much more volatile than other asset classes, redemptions at The American Funds average a low 10% annually compared to 20% for the industry as a whole.

Rothenberg cites the firm’s global presence as another driver to the Group’s success. The Capital Group today has offices in Hong Kong, Singapore, Geneva, Tokyo, and London, plus five more in North America. These enable it to cover multiple industries worldwide more effectively.

Rothenberg recognizes that, “Our key assets are our people.” The firm’s high retention rate can be explained by Capital’s ability to “build jobs around people.” Associates are given a lot of responsibilities from the very beginning. The culture is highly collaborative and diverse, and the firm has continued to keep a flat organizational structure. Rothenberg says, “from our perspective, we are all partners…we stress diversity- diversity in terms of points of view, diversity in backgrounds and language skills.”

Incentives at the Capital Group are competitive. Compensation at the firm is focused on achieving investment results and outperforming benchmarks over the long-term. Investment bonuses are based on a rolling four-year average of absolute and relative results. In addition, the Capital Group is determined to remain a private company, providing extra incentive for current and future employees.

When asked to comment about The Capital Group’s interest in alternative investments, Rothenberg explained Capital’s approach to three types of investments. The Capital Group invests in private equity in emerging markets, but is careful to avoid conflicts of interest when successful investments go public. The Capital Group does not participate directly in early stage venture capital investing, but does have a long-running relationship with Sequoia Capital, an independent firm in whose funds Capital Group has invested in the past. The Capital Group so far has not done long/short investing in part due to potential conflicts of interests between those who would like to short and long the same security.

Speaking further about competition from hedge funds, Rothenberg emphasized that Capital’s long-term focus has been key to their success. In the current market where other players over analyze quarterly results, The Capital Group remains committed to outperforming in the four year horizon. He also warned against having too much confidence in hedge fund performance data, “When it comes to decomposing results, are the hedge funds producing what they say they are? Part of the problem in analyzing returns is that historical hedge fund performance suffers from survivorship bias. We’re only seeing the results of funds that have done well, and not those who have failed and no longer exist.” He added that there is also the issue of accounting for derivatives, as a mutual fund could deliver similar returns without using as much leverage. According to Rothenberg, key to evaluating hedge fund performance is to see how they’ve performed during the down years.

When asked about what has been the greatest challenge for the firm, Rothenberg cites that in the past there had been three or four different periods when they encountered downturns after a spike. “When we underperform, morale is down and confidence is low. It’s tougher to have conviction in your ideas when you’re not seeing results.” That said, the firm’s mutual fund results have done extremely well since the 2000 peak. 25 of Capital the Group’s 29 mutual funds have beaten their target benchmarks after all fees and expenses over the past 10 years.

The Capital Group will be hosting various events on campus over the next few weeks.

October 30, 2006
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