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Capital Group Holds Fast to Fund Approach

The company that sticks to a risk-averse strategy also continues to sell its funds only via brokers, despite recent questions.

March 14, 2004|Tom Petruno and Josh Friedman | Times Staff Writers

Most mutual fund companies would be thrilled with the kind of attention that Los Angeles-based Capital Group Cos. has attracted of late.

Its stock and bond funds were the nation's most popular by far last year, taking in $66 billion in new cash, nearly twice as much as the next-best-seller, Vanguard Group. All of Capital's stock funds, marketed under the American Funds label, posted net gains in the five years through February, a period that included the worst bear market in a generation.

A just-published book on the company, written by investment management consultant Charles Ellis, begins with this declaration: "No investment organization in the world has ever done so well for so long, for so many clients, as Capital Group."

All of this comes at a time when much of the fund industry stands accused of participating in various kickback schemes to boost sales and profit at the expense of small shareholders. Capital, like dozens of other fund firms, is being examined by both state and federal regulators. But no wrongdoing has been alleged, and the company has defended its practices as proper.

So far, the scandal has even been good for Capital: It is winning new business as investors switch to its funds from tainted rivals.

Yet on the top floors of the BP Plaza building downtown, where the $840-billion Capital empire is headquartered, executives of the third-largest U.S. fund firm have no interest in the limelight. In fact, they tend to treat publicity like a virus: It's best to avoid it.

Capital's attitude toward self-promotion is best summed up in a line used by its 77-year-old leader, Jon Lovelace, the son of the founder and guiding hand of the business for four decades: "Nothing wilts faster than laurels rested upon."

Indeed, despite all the recent success, Capital executives say they are keenly aware of just how fickle the market can be.

"We know it's a cyclical business," said Paul Haaga, executive vice president of Capital Research & Management, the Capital Group unit that oversees the firm's mutual funds. As recently as the late 1990s, Capital's conservatively managed funds fell out of favor for a few years as many people turned to more speculative investments that promised stratospheric returns.

In an interview with The Times last week, Haaga, 55, and James Rothenberg, the 57-year-old president of the funds unit, said the company naturally worried that the record sums flowing into its funds could quickly reverse if new investors were to sour suddenly on the stock market overall or on Capital's "value"-oriented investment style.

"All of this money -- we don't know what its stability will be," Rothenberg said.

Meanwhile, the company faces questions stemming from its reliance on brokers to sell its funds. Specifically, regulators are looking into so-called pay-to-play deals -- agreements by which particular funds enjoy a higher profile with a brokerage's sales force if the fund company agrees to make certain compensating payments beyond the standard brokerage commission.

State Atty. Gen. Bill Lockyer in January subpoenaed Capital and two other big California-based fund companies, Pimco Funds and Franklin Resources Inc., in a probe of such arrangements. Capital says it's cooperating.

For the company, the long-term worry about its extensive use of brokers may not be Lockyer's inquiry but aging investors.

Unlike the No. 1 and No. 2 U.S. fund companies, Fidelity Investments and Vanguard, Capital doesn't sell directly to individuals except through company retirement plans. It conducts no mass-market advertising. Rather, it relies on middlemen to tout its funds -- and to keep those clients from bolting to other investments.

As longtime investors die off, that may become more difficult. Their money will be passed on to children or other beneficiaries who may never have heard of American Funds. This new generation could be more inclined to put its cash in a better-known brand.

For the moment, however, Capital's biggest challenge is the opposite: how to handle all the new money gushing in.

Capital has just 29 funds in all, compared with about 180 at Fidelity. This means that a lot of cash is being concentrated in a small number of portfolios. Historically for the industry, this is a recipe for trouble: Huge funds often have difficulty outperforming the market.

But not Capital.

"Despite the amount of money coming in, their performance continues to be extraordinary," said Avi Nachmany, research chief at fund consulting firm Strategic Insight in New York.

In part, that's because of the type of stocks Capital buys: mostly big, dividend-paying blue-chip shares. Rothenberg estimated that the firm's team of analysts around the globe, widely considered to be among the best research operations in the business, covers only about half of the world's largest companies. The upshot is that there are potentially a lot of good ideas for Capital yet to discover.


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