Capital Group Global Balanced Fund
- Morningstar Medalist Rating: Bronze
- Morningstar Rating: 4 stars
- Morningstar Category: Global Neutral Balanced
- Fund Size: C$1.9 billion
With the stock market rally broadening and an attractive outlook for bond yields, the backdrop appears solid for the C$1.9 billion Capital Group Global Balanced Fund.
The top-performing fund targets a portfolio allocation of 60% stocks and 40% bonds. It has a solid weighting among technology stocks, but it’s also tilted toward healthcare and consumer defensive stocks, and is hunting among energy names, according to Julie Dickson, investment director at Capital. On the bond side, the fund is leaning into mortgage-backed securities and emerging markets debt to capture higher yields and diversify returns away from stocks.
With a strong stock market and bonds turning the corner with positive returns as the Federal Reserve shifts into easing mode, the classic 60/40 portfolio is on a winning streak.
That’s certainly the case for Capital Group Balanced Fund, which sports top returns within the global neutral balanced fund category. Over the past year, the F class of the fund lands within the top 10.00% of the category with a 24.28% return, well ahead of the 20.10% return for the category and a 20.47% return for the Morningstar Canada Neutral Target Allocation Index.
For the last three years, the fund has returned an average of 5.27% per year, qualifying it for the 15th percentile in its category. It looks similarly strong for its five-year returns, where a 7.14% annualized gain lands it in the 13th percentile. In terms of both its three- and five-year returns, the fund is comfortably ahead of the index.
Capital benchmarks the fund’s performance against a 60/40 blend of the MSCI ACWI Index and the Bloomberg Global-Aggregate Total Return Index Value Unhedged USD indices. The year-to-date return still shines compared with their combined performance of 11.34%, but pales slightly compared with their one-year combined return of 18.59%.
Like other Capital Group funds, the portfolio is managed in “sleeves.” Five managers are each responsible for a 20% share of the fund. “Each portfolio manager has a lot of freedom to invest according to his own style and preference, though they all have in common a focus on growth and income,” Dickson says. Their individual stock picks and allocations are assembled to form the total portfolio. No individual centralizes all decisions; instead, a principal investment officer facilitates coordination and communication between the managers.
The Capital Group strategy aims to hold closely to the 60/40 split. “We don’t allow it to stray to 75% stock holdings, for example,” Dickson says. “So investors have a balanced fund at all times.”
Bonds Return to Role as a Stabilizer
Presently, a few tailwinds favor both Capital Group’s fund and balanced funds in general. Though the Bank of Canada and the Federal Reserve are now cutting interest rates, the end of the higher-rate environment that began in 2022 has created a very positive yield environment. “The lower end of fixed income is finally getting compensated without taking on excessive risk in high-yield bonds,” Dickson says.
“Investment-grade bonds have de-correlated from equities and are contributing a stabilizer effect again,” she continues. “So investors can take risk in equities, knowing that they can find compensation in bonds.” In fact, she thinks bonds are now in the best of all worlds: They can protect against stock market downsides, generate income, and even contribute a significant portion of a portfolio’s growth.
The Broadening of Stock Returns Beyond Tech
Another favorable wind is starting to blow in the stock market: Returns had been dominated by giant technology companies, but they’ve started to encompass a wider group of stocks. “With more investors focussed on only one aspect [of the market], it was more difficult for investors in other assets to outperform. We expect markets to broaden more. The mega-techs have grown beyond earnings capacity, prompting the market to pay attention again at valuations. We see more normalized earnings ahead, notably in Europe and in emerging markets,” Dickson explains.
However, until this happens, the slow retreat from the technology darlings is creating a strong headwind in the form of volatility. Capital Group’s fund is investing in other sectors where it manages “to find long-term growers,” Dickson says, along with dividend payers and strong cash flow generators.
Another headwind is the high level of uncertainty surrounding consumer sentiment, especially in the United States as the Fed tapers rates. “If consumer sentiment softens too much, it could lead to a recession,” Dickson adds. “At the same time, the Fed has to strike a very fine balance between making too many rate cuts too fast and stimulating inflation while not leading the economy in a ditch.”
Capital Group’s Global Balanced has a global focus, as its name suggests, but the portfolio includes a substantial weight in US stocks (32% of holdings) and bonds (18%). The European weighting includes UK investments that stand at 15.5% in stocks and 6.1% in bonds, and emerging markets at 6.0% stocks and 4.0% bonds. When it comes to Canadian investments, the portfolio counts 6.4% in stocks and 0.5% in bonds. Overall, bond quality is high, with 79% rated A and above. “Multiple countries, sectors, and currencies give a broader opportunity set,” Dickson says.
Opportunities in Bonds and Stocks
On the fixed-income side, the fund is overweight in mortgage-backed securities. “They offer higher yield than Treasuries, they’re agency-backed, they’re highly rated at AA, yet they’re less correlated to equities,” Dickson says. Another opportunity in bonds lies in emerging market debt. “That’s another source of uncorrelated returns.”
On the equity side, Dickson points to three sectors that stand out in the Global Balanced fund: energy, healthcare, and consumer staples. Energy is somewhat an unexpected favorite, especially since the fund’s managers don’t exploit it only on the renewable energy side. “The energy story has become a lot more compelling, recovering strongly,” Dickson says. The fund invests in pipelines and in fossil energies, but with an eye on producers’ renewable energy policy. On the renewable side, the set is large, including nuclear power and hydrogen production alongside wind, solar and energy storage.
The fund’s healthcare play follows the AI trail, where the leading-edge technology is opening new frontiers. Dickson lists many large sectors where AI has made significant contributions, initially in the production of mass-produced generative drugs, then in biotechnology, where it really started to take off--notably in the development of protein-based therapies. More recently, it has infiltrated genetics, “where AI broke through sequences, leading to better knowledge and better targeted therapies.” Now it is charging into surgical robotics, precision technology, advanced diagnostics, and less-invasive interventions. “We’re just at the beginning of this cycle,” she says.
Dickson also points to consumer staples, which she considers “a wildly overlooked area where some companies are paying seven, even eight times dividend yields. This provided ballast in the portfolio when the markets fell.”
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