Perspectives on the next recession
March 13, 2019
American Funds video transcript: “SMALLCAP World Fund® can play big role for the right investor”
Michael Utley: Tell us about SMALLCAP World Fund, of which you are the principal investment officer. What makes it stand out among the American Funds family?
Greg Wendt: The way I view the fund is, we have to produce a 100-, 200-basis-point premium return annually.
Michael Utley: Above the benchmark?
Greg Wendt: Above big-cap stocks.
Michael Utley: Ah.
Greg Wendt: For you to endure the extra volatility that comes with investing in our asset class, we've got to pay you that. We got to pay you that over 10 years. I've always said, nobody should put money in SMALLCAP World Fund that's not 10-year money.
Michael Utley: Sure.
Greg Wendt: But I feel very good talking about the fund. I think the secret sauce is SMALLCAP World Fund probably has more decision makers in it — actual, empowered decision makers — than any other mutual fund I know of. We have —
Michael Utley: Roughly how many?
Greg Wendt: Well over 100 analysts and a lot of portfolio managers, and they're all picking stocks. Making it work is very, very hard. Only The Capital SystemSM would permit us to do this.
Michael Utley: For our listeners who aren't as familiar, tell us a bit about The Capital System.
Greg Wendt: Well, The Capital System, at the core, is our multiple portfolio manager system. But the way it's been tweaked for SMALLCAP is [that] the largest of the managers is the research portfolio, which is the part of the fund the analysts manage. In SMALLCAP World Fund, that’s 100 analysts. We have more analysts in the research portfolio, and the research portfolio is a bigger percent total, than any [other] fund at Capital.
Michael Utley: Right.
Greg Wendt: But you know, we've had periods in the fund's history where we haven't always gotten it right. I call those periods where our shareholders pay tuition. Particularly ’00 and ‘01 were tough years for us. We, I think, have done a much better job since then of building infrastructure and capacity ahead of growth. And so, I think SMALLCAP World Fund is sort of uniquely positioned to take advantage of our research efforts and is a one-of-a-kind fund in the world.
Michael Utley: Right. So, how volatile are small-cap stocks compared to, say, their mid- or large-cap brethren?
Greg Wendt: To put it bluntly, significantly.
Michael Utley: A lot more.
Greg Wendt: And you can see it in our results. Our downs are further downs and our ups are further ups.
Michael Utley: So, then that makes the long-term approach the important aspect.
Greg Wendt: Yeah. That’s why SMALLCAP World Fund has a very important role to play in lots of our target date funds and [for] folks who have time for the long-term investment approach. But if you're going to put money in one of our mutual funds for five years, it's probably not SMALLCAP.
Michael Utley: What sectors do you favor in SMALLCAP World Fund right now, and why?
Greg Wendt: If you look at my portfolio, it's very health care heavy. We've got terrific analysts in health care. I think we've got the best health care team we've ever had, with lots of medical and science backgrounds on it. Secondly, we're sort of in the golden age of medical device and biotech. Lots of good news is coming out there. If you have diabetes or different types of cancer, there's lots of progress being made.
Michael Utley: Absolutely.
Greg Wendt: I think everybody wants to live longer. And there's demand for the product.
Michael Utley: Again, lots of M&A in that part of the market.
Greg Wendt: Yeah. Big pharma has really abdicated research in a lot of areas to smaller companies with the view that they can joint venture or buy success.
Michael Utley: Are there any sectors that you're generally trying to avoid?
Greg Wendt: I've just never been a big natural resource investor. I've never understood how those stocks trade, and so, not that I have a view that they're cheap or expensive, it's just not an area I typically invest in.
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