HEAD-TO-HEAD: Blackrock versus Capital Group

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INVESTMENT APPROACH

Despite both funds fitting into Morningstar’s moderate risk category, the funds differ in many ways, according to Möttölä.

The Blackrock fund has “more components” than the Capital Group product, he said

First, it has an ESG mandate (since recasting from a traditional allocation approach in March 2019) which limits investments in some sectors and can create a quality bias to the portfolio. Most of the stocks are picked by Blackrock’s quantitative equity team (who follow the ESG mandate here), and second, the fund’s allocation team creates thematic buckets as well as selects the impact investments.

“The benchmark-aware process is solid, but we think it’s still too early to have conviction about the approach in its current format,” said Möttölä.

Asset-allocation limits are fairly broad (20%-80% for both equities and fixed-income), but the fund tends to move fairly conservatively at the asset class level. Instead, managers use intra-asset class weightings to express their views.

As part of their ESG screening, the managers exclude stocks from nine sectors (including tobacco and thermal coal), and the fund can only invest in stocks with an MSCI ESG rating of BBB or above, which is quite a high threshold.

“Together these screens cut out around one third of the global stock universe and can lead to a growth bias,” said Möttölä.

On the fixed-income side, exposure is mostly to government bonds, but the fund can also buy corporate credit.

To express their macro views, the managers can also invest in commodities as well as alternatives (mostly closed-ended funds), with some of the latter also serving as impact investments, according to Möttölä.

The strategy at the Capital Group’s fund follows the firm’s distinct, bottom-up-oriented multimanager approach, which lets the six managers play to their strengths.

“The approach is simple but effective,” said Möttölä.

The managers each run separate slices of the portfolio, with four balanced sleeves accounting for 75% of assets. Two fixed-income sleeves make up the other 25%.  Based on the balanced managers’ views, the fund’s equity weight can vary between 45% and 75%.

Historically, the portfolio has displayed a quality bias, as evinced by higher-than-average Morningstar Economic Moat Ratings. The fund is typically placed in the large-cap blend or growth section of the Morningstar Style Box, but the fund’s sector weights can change considerably over time as the managers and the research team backing them reassess their convictions.

“Each balanced manager has a unique investment approach, which leads to style and risk diversification at the portfolio level,” said Möttölä.

Yet, all balanced portfolio managers generally follow a long-term-oriented, high-conviction approach with usually around 25-50 holdings each, mostly large-cap stocks. The bond sleeves are managed conservatively, consisting of government and investment grade corporate bonds with a similar credit quality than the benchmark and no unrated or high yield issuance, according to Möttölä.

“With the fixed-income portfolio as ballast, the equity side drives results,” he said.

Principal investment officer Paul Flynn oversees the portfolio and its risk drivers, but because of the relatively low overlap between the different investment approaches, adjustments for risk-management considerations have been rare so far.

Comparing the two funds, Möttölä said that “the level of risk at the strategic (mid- and long-term) level is different,” said Möttölä.

The managers at Capital Group start from a 60% equity weight, while Blackrock’s fund is based on a 50% strategic equity weight, and “this should lead to a slightly higher risk in the Capital Group fund,” he said.

In terms of asset classes, Capital Group is limited to stocks and bonds, whereas Blackrock has added some derivative strategies, and also holds alternative assets such as infrastructure, real estate and impact investments, mostly through closed-end funds.

“These should provide some diversification but may also create complexity,” said Möttölä.

Nevertheless, looking at the latest equity portfolios the funds are relatively similar, with technology at a large weight; both bond portfolios focus on lower-risk investment, he noted.

“There are some differences, such as industrials being a key weight in the Blackrock fund, partly from the impact focus of clean energy production.

“But overall, the funds are in fact driven by quite similar factors, but the Capital Group process is more time-tested and thus has an edge in our eyes at this point,” said Möttölä.

Fund characteristics

Asset allocation:

Source: Morningstar, 31 Jan 2021

Equity sector allocation:

Source: Morningstar, 31 Jan 2021

Equity region allocation:

Source: Morningstar, 31 Jan 2021

Top 10 holdings:

Source: Fund factsheets, 31 Jan 2021

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