Thoughts from three of our investment professionals
April 21, 2009
For most of us, this recession and bear market are the worst we’ve experienced in our lifetimes. While most of our funds surpassed their market indexes and competitive fund groupings in 2008, we were not happy with our funds’ absolute results. For our investment professionals, this has been a time of assessment and reflection as we absorb the lessons of this downturn and look to the future.
We believe it is critical to learn the right lessons from the past year. In addition, the market’s decline has strengthened our commitment to the cornerstones of our investment process — fundamental global research and investing for the long term.
At American Funds we have a seasoned group of investment professionals. Some have been managing money for more than 40 years. But even for them, this represents uncharted territory. We asked three of them — Hilda Applbaum, Tim Armour and Gordon Crawford, who have more than 80 years of combined investing experience — to share their thoughts about how the investment landscape has changed in the past year; what hasn’t changed; what they’re doing today; and how they view the future.
Hilda Applbaum, a portfolio counselor for American Balanced Fund® and The Income Fund of America®, has been an investment professional for 22 years, including 14 years with American Funds.
“We’ve watched for many years the globalization of markets and just how interconnected the world has become. But I didn’t realize the extent to which this had occurred — for example, that U.S. mortgage problems would show up in the balance sheets of small regional banks in Europe. What this downturn has shown me is how the problems in one troubled sector can muddy the waters for so many others who on the surface seem far removed.
“One of the ways we try to answer that is to look at the whole company, not just the cash flow and income statements, but also the balance sheet and the quality of management and the competitive landscape. We’re asking ourselves, ‘What can go wrong here? What can go right?’”
“Looking forward, we don’t question the resiliency of the U.S. economy, but we realize that the path to recovery isn’t going to be the same for all companies. The world has changed and the question is, ‘Who’s going to be hurt and who’s going to benefit?’ One of the ways we try to answer that is to look at the whole company, not just the cash flow and income statements, but also the balance sheet and the quality of management and the competitive landscape. We’re asking ourselves, ‘What can go wrong here? What can go right?’
“We’ve always looked at how much debt a company has, but today our fixed-income and equity analysts are working even more closely together than they have in the past. As a bond analyst I might be focused on things that an equity analyst is not, and similarly as an equity analyst I may have questions or concerns that might not have come to the attention of a bond analyst. For example, as we see companies downsize, we’re asking, ‘Are they just cutting costs and possibly impairing their long-term competitiveness or are they laying the foundation for a healthy recovery?’
“For me, this market has reaffirmed the need to really know individual companies in a broader context. We have always tried to connect the dots, as they say. But today we’re not just looking at the first few dots, but rather we are trying to connect farther-flung dots to gain a better understanding of what picture is being created. We are even asking, ‘Could there be an alternative picture should the disparate dots come together differently?’”
Tim Armour is a portfolio counselor for AMCAP Fund®, Capital Income Builder® and The New Economy Fund®. He has been an investment professional for 26 years, all of them with American Funds.
“I knew that downturns were part the market cycles, but this turned out to be much worse than any of us expected. This time the downturn fed on itself and when the authorities tried to correct the credit crisis, it resulted in a crisis of confidence. People got very, very nervous very quickly. As a result, the savings rate shot through the roof as people stopped spending. We’ve never seen anything like this before.
“We’re living through the toughest bear market in the past 70 years, and at American Funds that means we’re relying on our greatest strengths more than ever. We’re conducting fundamental research with a long-term view.”
“We’re living through the toughest bear market in the past 70 years, and at American Funds that means we’re relying on our greatest strengths more than ever. We’re conducting fundamental research with a long-term view.
“Looking forward, I see that a lot of the right steps have been taken for an economic recovery. For example, conditions in the credit markets have vastly improved. Still, recovery isn’t going to be easy, or rapid.
“As an investor, I’m paying close attention to balance sheets and cash flow and the fundamental soundness of companies. I’m asking, ‘Do these companies have debt? When is it due? Are they going to be able to roll it over?’ This is a time when one needs to be careful owning companies that need uncertain outside financing to operate in the near term.
“There are a lot of great companies with strong cash flows, good balance sheets, and strong future business prospects, but their stock prices have been really beaten up. What’s interesting to me in this market is that I don’t necessarily have to pay a premium for good companies. I’m trying to understand the valuation differences between the strong and the weak companies. It all comes down to doing fundamental analysis on a company, figuring out what a reasonable value for that business is and comparing that to how it is priced in the market.
“Another lesson investors learned — or re-learned in some cases — is that dividends matter a lot. They’re the most predictable part of the total return, the part that depends on the companies’ earnings and is not dependent on market psychology. Over the past couple of decades, dividends almost became passé. But this environment is going to heighten the importance of dividends.”
Gordon Crawford is a portfolio counselor for The Growth Fund of America®, The New Economy Fund® and SMALLCAP World Fund®. He has 37 years of investment management experience, all with American Funds.
“What I know now is the extent of the excess in the U.S. and certain parts of the global financial services industry. No one fully appreciated the amount of risk the banks were taking or really had an idea how sick the U.S. financial system had become.
“Back in 2000, I attended a conference where Warren Buffett pointed out that stock market values were at record highs, corporate profits were at record highs, and interest rates were at record lows. He asked how you could make money in stocks with those conditions.
“He was right. Now that people haven’t made money in stocks in 10 years, you’re seeing very low share prices, profits have collapsed, and interest rates — other than rates on government bonds — are very high. I think we’re setting the stage for investors to make money in stocks over the next 10 years.
“So, today I’m investing in companies with fortress balance sheets, companies that have lots of cash and no debt, companies that have global markets and global brands.”
“So, today I’m investing in companies with fortress balance sheets, companies that have lots of cash and no debt, companies that have global markets and global brands. I believe they’ll survive this and take market share from their competitors. The survivors are going to do pretty well when we come out of this.
“We may be bumping along the bottom now. Everything seemed to shut down in October, November and December. But in the last couple of months, we’re seeing new issues in the bond market and new equity offers. Interest rates on corporate bonds have come down relative to rates on U.S. Treasury bonds, and banks are getting recapitalized. A bunch of things are setting the stage for a recovery.”
Return to topInvestors should carefully consider the investment objectives, risks, charges and expenses of the American Funds. This and other important information is contained in each fund’s prospectus and/or summary prospectus, which can be obtained from your plan’s financial professional or downloaded and should be read carefully before investing.