HIGHLIGHTS: Mike Gitlin - CEO of Capital Group

0:01Hi, everybody. Tune in to this short version of the podcast, which we do every Friday. For the long version, tune in on Wednesdays. Hi everybody, I'm Nikolaj Tangen, the CEO of the Norwegian Sovereign Wealth Fund. And today I'm joined by Mike Gitlin, President and CEO of Capital Group, which is one of the world's largest investment managers with more than$3 trillion in assets. Now, more importantly, Capital Group has a unique approach to investing, owned by its employees. And I kind of think that you are the gold standard in investing, Mike. So great to have you here. Well, thank you. We can end it there.

0:39No way. No way. Now, Capital Group, you've been around for nearly 100 years. But for those of the listeners who don't know, what do you do? So we manage money for people around the world. And those people may be served by a financial advisor. And they may be a part of a large-scale institution like a sovereign wealth fund, a defined benefit plan, a defined contribution plan. And so it's both a wealth management business and an institutional business. But at the end of the day, all of that is managing money for people at the end of the day. What is it that makes you guys unique? I'd say it's two things.

1:19Apart from a really great CEO, of course. Well, geez, we can end there. So I think two things make us unique. One is how we manage our business. And the other one is how we manage our money. So in terms of managing our business, we don't have to think about quarterly earnings in the public space. And we have shareholders internally who understand that we're investing in the business for the long term. So the S &P 500 can be down 20 percent and we can still invest in that technology project that at another company might just get stopped. So we're able to invest through the cycle in our own business, which helps our clients because we're stable.

2:01We're not super reactive to the market conditions in that regard. And then how we manage our money. In 1958, we launched something called the capital system. It's just a different way to manage money than everybody else in the world. And that's like your secret sauce, right? It is. And I can speak about it. I wasn't alive yet. It was a brilliant concept, but it came out of a moment of challenge. At that time, our founder had had a heart attack, survived. When he came back to the office, said, we can't manage money with key person risk. It's just not good for the clients. And so the capital system was formed where the analysts themselves are investors.

2:46They're not credit raters or stock raters. They invest real client assets. And then you'd have multiple portfolio managers collaborate in a portfolio as opposed to just one person managing all the money. Why is that good? It's good for a few reasons. One is an analyst who manages money has skin in the game. That's real client assets. It's not a buy rating or a sell rating. It's money. That's a very different responsibility when you're actually managing money. How does it help learning and knowledge transfer, the fact that you have these people working together? I think what you have is you have people sitting around the table in a certain investment unit and everything's open.

3:30There's no hierarchy. You're a portfolio manager. I'm an analyst. It's not hierarchical. And so we all share ideas. All the portfolios are open so everybody can see them. And what it does is it gets the ideas all on the table. And because you and I can express our convictions, it doesn't promote an environment of group thing. You might have serious conviction in these names, I in different names, and we can do that in the portfolio because we'll have some diversification benefits from the client on an overall perspective. So it just makes a really open conversation at the table. These portfolio managers, they hang in there for ages, right?

4:09I mean, is it right that the average tenure is more than 20 years? Yeah. Our folks stay. Why? They stay because of the culture. They stay because of the nature of the shareholding. And they stay because they love Capital Group. I mean, they come. We tell people when we're interviewing, if you don't think you're going to be here for your entire career, don't come. So our attrition rate for investment professionals is in low single digits. I mean, they do come for their careers. Long-termism. How does that come into play here? It's interesting. Incentive systems are a very interesting thing. I'm a believer in incentive systems.

4:51They drive behavior, period. The number one driver of an analyst or portfolio manager's quantitative compensation is their eight-year number. That's a long time. It's a long time. Well, in a world where short-termism can be favored and create additional volatility, when you're eight years first and then five and then three, and your one year is the lowest component, smallest component of your compensation, it says, don't be a hedge fund manager. Manage for the long term. But eight years is a long time. And just to put it into perspective, we until recently had three years as the rolling number.

5:30And we have, partly inspired by you guys, moved some of it to five-year. But to have people think about five-year results in this faster and faster-moving world, that's interesting. But I think about your people and I think about your goals. Going from three to five years, statistically, if you measure that over the next 10, 20, 30 years, I'll bet you have better investment results by having that slightly longer time horizon. It gives people confidence to have conviction and not be so knee-jerk reactive to one thing or another, but stick with it. Moving on to AI, how do you use AI in capital? Well, it depends.

6:16It depends on the group. The operating group taking commoditized functions, having them go away and having those individuals spend their time on higher value added activities. And the world is doing that. I don't think we're any different in that regard. In the client group, you're going in to see a financial advisor on the wealth management side. Hit the prep me button. And it tells you everything about that financial advisor that you've already put in the system. So you can make it a more productive interaction with the advisor. You're not going in there blind. You look at all, AI reads all of your notes in the prep me session, just makes it so much more valuable.

6:58Translation. We put together lots of value added content for our clients. Translation makes it available immediately for everybody around the world in their language. These are just really easy use cases. On the investment management side, think about 94 years of data. We've digitized our entire library over 94 years. Every single report on every single stock ever written at Capital Group. That's a proprietary advantage. How we utilize that data and structure that data and investors as well. I'm an investor. I've been at Capital Group 30 years. This environment has rates that are coming down. Valuations are relatively high.

7:45What mistakes have I made in the past in the similar environments? It goes through all of my data managing money, and it tells me things to be aware of as this cycle may be the same or different, but at least it gives me an indication of some of the things I've done in the past. So trying to use all of the data we have to make better decisions, there's a lot of opportunities in that space. Can we drill down a bit more on the culture side? So now I'm really lucky I get a job at Capital. It's a long interview process. Are you patient? Let's just start with that. So how long is it? Long. I mean, it can be anywhere from six to 12 months.

8:26And, you know, I was asked a question in one forum. Someone said, have you ever lost a candidate because the process was too long? And I said, yeah, of course we had. But it's worth it. Over the long run to take that time. And can everyone veto and say, listen, I don't like the look of that person? The good thing is nobody has veto power on anything. so it's not it's not like that everyone has a voice everyone can weigh in but nobody has veto power but it's important because you you want them to interview us also if they're going to be there for the rest of their career they should be interviewing us as much as we interview them i think that's super important what are the other cultural things you know i if you look at culture culture is an interesting thing because some people their eyes glaze over when you talk about culture, they feel like it's so intangible.

9:17Does it really matter? It's everything that matters. It's everything that matters. I agree with you. And so from us, it's all in the core values, integrity. If you look at financial advisors, we're rated number one in trust. You have to have integrity. It's what you do. It's our whole business is built on integrity. Diverse perspectives, the capital system's built on diverse perspectives. Long-term, we talked about eight-year number driving quantitative bonuses. Community. We want people to invest in the capital community, but also the community they live in so we can be responsible in that community.

9:52And the fifth one is client focus. Are you client focus or are you so focused on your own P &L that you're not? That's a huge thing.