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D. Murali

THE intro does not mince words: "No investment organisation in the world has ever done so well for so long for so many clients." Which one? "It is one of the world's largest investment management organisations, consistently earns the admiration of clients and competitors, and decade after decade achieves superior long-term investment results."

That, from Charles D. Ellis, acclaimed by Burton G. Malkiel in the foreword as "a seminal thinker, a keen observer of financial markets, a writer who combines intellectual rigour and common horse sense, and an influential consultant" is about The Capital Group Companies of the US.

His book, Capital, published by Wiley (www.wiley.com) is "the story of long-term investment excellence" that explains the organisational culture behind the organisation.

What are the secrets of Capital, the company? One, it gives no room for `egotistical stars' because emphasis is on groups. Also, "each portfolio is assigned not to an individual manager but instead to several individual managers each of whom is responsible for one part of the overall fund and each makes direct investment decisions."

Uncharacteristically, Capital eschews publicity, uninterested in promoting stories about its funds. "Capital does not even use the term `performance' to describe investment results," writes Malkiel. "In its view, performance should be used only to describe what actors do in Hollywood or New York."

The `multiple-counsellor system' of portfolio management, where the problem is divided into parts and rearranged, is an innovation from Capital, notes the author. The software used to operate the system has cost over $100 million. Useful exercise, one would agree, because it is tough to stay on top of too many stocks all the time. "This is particularly true of the `needle' stock — the stock clients will needle you about during the portfolio review meeting if performance has been disappointing." It could sound like home-truth when the author writes, "The secret to having a stable group of shareholders is to offer investors only those funds that will work well for them through many different market environments over many years." But that's the strategy of Capital. It builds its business by developing products and their channels of distribution "so the appropriate customer can and will find the appropriate product to buy and own with the satisfaction that leads to consumer loyalty and to repeat purchases." Here is a taste of Capital-think: "The right fund to buy at any particular time in the market is usually currently unpopular and appears unattractive to most people. And it will appear most unattractive exactly when it is the best value and set to deliver the best results over the long term." Capital's job description is straight: "To create wealth for shareholders." And the subtext is: "With the least risk and the most opportunity." The company knows that mutual fund investors are mostly 50 plus, "so 10 years matters a lot to them." They are not looking at a 30-40-year horizon.

The company works on its reports, to make them `readable, interesting, and useful.' So, one report opened thus: "In investing, as in auto racing, you don't have to win every lap to win the race, but you absolutely do have to finish the race. While a driver must be prepared to take some risks, if he takes too many risks, he'll wind up against the fence. There are sensible risks — and there are risks that make no sense at all."

Makes lot of sense.

BookValue@thehindu.co.in

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