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Capital Faced With Foreign Cold Spell

The L.A. investment giant, hit by lagging returns on overseas stocks, vows to stick to its core principles.

September 19, 2004|Tom Petruno | Times Staff Writer

When pension funds and other large investors sought a hot hand in foreign stocks in the 1990s, many of them put their money with Los Angeles-based Capital Group Cos.

The company's stock-picking prowess in the U.S. market already was well known. And by the start of the last decade, Capital had become the world's biggest investor in emerging-market countries, as its far-flung managers scooped up shares in banks in Brazil, cellular phone companies in China and detergent makers in India.

As "globalization" became the watchword of the '90s, billions of dollars poured into Capital's foreign investment units. The company didn't disappoint investors: It racked up spectacular returns -- 71% in its flagship account in one year alone.

But in the last few years, Capital's hot hand with foreign stocks has cooled. Since 2000 the companies' foreign returns have mostly lagged behind their benchmark indexes.

Some unhappy institutional clients have bolted, and many who remain are asking what has gone wrong at the world's ninth-largest money manager, where overseas holdings made up more than 40% of the firm's $814 billion in assets at the start of the year.

It's a "delicate moment," for Capital, says Jon Bauman, executive director of the Teachers' Retirement System of Illinois pension fund, which has $600 million in foreign stocks with Capital. Bauman's fund has put Capital on its so-called watch list because of performance shortfalls.

Some clients are less diplomatic in their assessments.

"We used to talk about how great they were, and now all we talk about is how they're our worst performer in the foreign-asset class," said one frustrated pension fund director, who asked not to be named.

It isn't surprising for a money manager to hit a rough patch. Usually, however, the reason isn't a mystery: A firm may have gambled too heavily on a losing market sector, for example, or talented strategists may have abandoned ship.

In Capital's case, neither the company nor its clients have been able to isolate a root cause of the firm's relative slump with foreign stocks.

It's no small concern for David I. Fisher, the executive who has overseen Capital's foreign investment operation from its fledgling days in the early 1980s.

"Clients would feel better if we could say, 'We've looked at the numbers and it's that person's fault. And we fired that person and hired this person,' " Fisher said in an interview last week in his West Los Angeles office.

But "that person," he said, doesn't exist.

Adding to the enigma is why Capital's principal foreign stock mutual fund for individual investors, the EuroPacific Growth fund in the firm's American Funds family, has performed markedly better over the last three years than its average foreign blue-chip stock account for institutional clients.

The mutual funds and institutional accounts are managed by different teams. But they share the same basic stock- picking disciplines, notably a research-intensive "value" orientation and a long-term approach to investing.

Perhaps what has most distinguished Capital has been its refusal to settle for being an index-hugger -- a money manager that views success as performance that hews close to benchmark stock indexes. Capital's portfolio managers have been encouraged to follow their hunches and take educated risks in search of above-average returns. Their compensation always has depended on beating market indexes, Fisher says.

That approach has won the company devoted fans, and is one reason many of Capital's institutional clients are torn about pushing the partner-owned firm to make dramatic changes in its operations. They don't want to risk disturbing a business model that has produced tremendous returns over the last four decades.

"Historically, Capital has gone through periods of underperformance and then come back with a vengeance," said David Kushner, deputy director of investments at the San Francisco City and County Retirement System, which has the bulk of its $930-million foreign stock portfolio managed by Capital.

"They have a long-term track record that is almost without peer," said Michael Rosen, a principal at Angeles Investment Advisors, a pension consulting firm in Santa Monica. "This is an organization that has earned the benefit of the doubt."

Indeed, some U.S. institutions that want to be invested in foreign stocks say this might be a better time to be hiring Capital than firing it.

The Washington State Investment Board signed Capital in June to manage about $480 million in blue-chip foreign shares, said Joe Dear, the pension fund's executive director.

"They have a very impressive organization," Dear said of Capital. As for the firm's performance in recent years, "if you're only picking on performance, you're doing your [investment] selection looking in the rearview mirror," instead of looking ahead, he said.

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