Nicolai Tangen: Hi everybody. I'm Nicolai Tangen, the CEO of the Norwegian Sovereign Wealth Fund and today I'm joined by Mike Gitlin, president and CEO of Capital Group, which is one of the world's largest investment managers with more than three trillion in assets. Now, more importantly, Capital Group has a unique approach to investing owned by its employees and I kind of think that you are the gold standard in investing, Mike. So, great to have you here.

Mike Gitlin: Well, thank you. We can end it there.

Nicolai Tangen: No way. No way. Now, Capital Group, you've been around for nearly 100 years. But for those of the listeners who don't know, what do you do?

Mike Gitlin: So, we manage money for people around the world and those people may be served by a financial advisor and they may be a part of a large-scale institution like a sovereign wealth fund, a defined benefit plan, a defined contribution plan. So, it's both a wealth management business and an institutional business, but at the end of the day, all of that is managing money for people at the end of the day.

Nicolai Tangen: And you've got a lot of you run the retirement funds for a lot of people. How many people are you helping?

Mike Gitlin: There's over 20 million families in the US, for example, that own something that Capital Group does, whether it's a mutual fund, an ETF, a collective investment trust, whatever way they consume that service. and globally millions of people as well.

Nicolai Tangen: What is it that make you guys unique?

Mike Gitlin: I'd say it's two things. One is how we manage our business and the other one is how we manage our money. So in terms of managing our business, we don't have to think about quarterly earnings in the public space. And we have shareholders internally who understand that we're investing in the business for the long term. So the S&P 500 can be down 20%. And we can still invest in that technology project that at another company might just get stopped. So we're able to invest through the cycle in our own business which helps our clients because we're stable. We're not super reactive to the market conditions in that regard. And then how we manage our money. In 1958, we launched something called the capital system. It's just a different way to manage money than everybody else in the world.

Nicolai Tangen: That's like your secret source, right?

Mike Gitlin: It is. And I can speak about it. It was a brilliant concept, but it came out of a moment of challenge. At that time, our founder had had a heart attack, survived. when he came back to the office said we can't manage money with key person risk. It's just not good for the clients. And so the capital system was formed where the analysts themselves are investors. They're not credit raiders or stock raiders. They invest real client assets. And then you'd have multiple portfolio managers collaborate in a portfolio as opposed to just one person managing all the money.

Nicolai Tangen: Why is why is that good?

Mike Gitlin: It's good for a few reasons. One is an analyst who manages money has skin in the game. That's real client assets. It's not a buy rating or a sell rating. It's money. That's a very different responsibility when you're actually managing money.

Nicolai Tangen: So you make sure that more people sleep badly at night.

Mike Gitlin: So one thing you could do when an analyst manage money is they understand portfolio risk. They understand diversification. They understand how to participate in the new issue or the IPO market. They just have a different way they go about them than an analyst who raised credits. And then for portfolio managers, I think the biggest difference is you're not left with one individual's 300th best idea. You get the strongest convictions from several portfolio managers in the same strategy. Everything's open. Everybody can see everything. But you can express conviction without feeling like the weight of the entire portfolio is on your individual shoulder. But one person is responsible for each investment. Each investment strategy has a principal investment officer. They are the conductor of the orchestra and they have accountability. But there'll be a research portfolio and there'll also be other portfolio managers alongside all in the same strategy all expressing their conviction. It's just different.

Nicolai Tangen: So if one product does badly, you do you fire the whole team or you fire one person or what what do you do?

Mike Gitlin: Well, we don't really think about it that way. We we think about who's participating in the portfolio. What are their risk characteristics? We try to combine people with complimentary skills. We have so much data on them. So we know their upside capture, downside capture. We know how they manage money because as an analyst, remember is how much of an increase in a share price do you actually manage to or the overall market when the market's going up a lot or down a lot? How much do you participate? Are you more defensive? or you're more offensive.

Nicolai Tangen: How does it help learning? How does it help learning and knowledge transfer? The fact that you have these people working together,

Mike Gitlin: I think what you have is you have people sitting around the table in a certain investment unit and everything's open. There's no hierarchy. You're a portfolio manager. I'm an analyst. It's not hierarchical. And so we all share ideas. All the portfolios are open so everybody can see them. And what it does is it gets the ideas all on the table. And because you and I can express our convictions, it doesn't promote an environment of groupthink.

Nicolai Tangen: These portfolio managers, they hang in there for ages, right? I mean, is is it right that the average tenure is more than 20 years?

Mike Gitlin: Yeah. Our folks stay. Why? They stay because of the culture. They stay because of the nature of the shareholding. Um, and they stay because they love Capital Group. I mean, they come. We tell people when we're interviewing, if you don't think you're going to be here for your entire career, don't come. So our attrition rate for investment professionals is in low single digits. I mean they do come for their careers.

Nicolai Tangen: Now who does best at capital? What are kind of the quality characteristics of the best portfolio managers?

Mike Gitlin: Portfolio managers who get smarter and smarter over time but don't engage in style creep. They know the kind of manager they are, the kind of investor they are. And when markets are really skewed one way or the other, they don't engage in style creep so that when the market reenters, they're not caught off sides.

Nicolai Tangen: Now another thing which has changed is the whole kind of active passive strategy. So, how do you see that impacting the asset management industry?

Mike Gitlin: Well, 30 years ago, a little more than 30 years ago, passive didn't exist. So, now it's about half the marketplace in equities. So, it's massively impactful. Um, and what it's done with flows into passive is it makes a benchmark even more concentrated. When I look at our institutional business, we're seeing our requests for proposals, our RFPs go up to the right. So why is that? One, I think it's because people recognize the benchmarks are super concentrated with half of the assets going into passive and fewer amount of assets in active management in relative terms. That skews the market and it makes this concentrated benchmark. So people are literally looking for diversification away from a concentrated benchmark. I never thought I'd say that.

Nicolai Tangen: Tell me why is it so difficult to beat the index?

Mike Gitlin: Well, it was difficult in the last decade because of how skewed it became and in some rules around especially in the US and 40 act rules around how funds can be managed, you had concentration limits of how much you can actually own in a single stock. So, as the benchmark got more skewed, you weren't even able to do that if you wanted to. Um, and that became an issue. As the market broadens, there's no excuses for active managers not to beat benchmarks. And I think you will see a market broadening. You're already starting to see that.

Nicolai Tangen: Moving on to AI. How do you use AI in capital?

Mike Gitlin: Well, it depends on the group. The operating group taking commoditized functions, having them go away and having those individuals spend their time on higher value added activities. In the client group, you're going in to see a financial advisor on the wealth management side. Hit the prep me button. It tells you everything about that financial advisor that you've already put in the system. So you can make it a more productive interaction with the advisor. Translation makes it available immediately for everybody around the world in their language. On the investment management side, think about 94 years of data. We've digitized our entire library over 94 years. Every single report on every single stock ever written at Capital Group, that's a proprietary advantage. I'm an investor. I've been at Capital Group 30 years. This environment has rates that are coming down. Valuations are relatively high. What mistakes have I made in the past in the similar environments? Goes through all of my data managing money and it tells me things to be aware of.

Nicolai Tangen: Another thing which is changing is of course the private market and you just entered a partnership with KKR. Why did you decide to do that instead of starting on your own?

Mike Gitlin: Yeah, it's a great question. I mean we had three choices. We could have bought something, we could have built it ourselves, or we could have partnered. To build it ourselves, you would then have to be willing to practice on your client's money, right? And you'd also have to be willing to either bring in a team which could be a cultural challenge or take people on your existing team and tell them to do something different which would distract them from the $3.2 trillion dollars we're already managing today. So we weren't willing to do that. The acquisition side again was a cultural challenge. So the only thing we had to believe in partnering is whoever we partnered with could do it better than us. We ended up with KKR. They've done it for 50 years. We'll let them do the private portion. We'll do the public portion. We'll blend it together in a client-friendly solution.

Nicolai Tangen: Another way you are differentiated is the way you are owned, right? So you are owned by the partners. How does that work?

Mike Gitlin: Well, I would say it's rented by the owners, meaning the owners own it until they retire and they sell it back to the next generation. 94 years ago the founder says in three generations from now, none of my family will own any of the stock. It will all be owned by the people who work at Capital Group at the time. So, the mentality is if you're in it, if you're picking stocks and bonds all day long and servicing our clients all day long, it's about you, not necessarily the people who are retired.

Nicolai Tangen: Now many partnerships have gone public and listed on a sock exchange, right? Goldman Sachs and so on. Why have you been close to doing that or is it something you cannot do?

Mike Gitlin: We could do it, we wouldn't do it. Why would you take what may be one of your biggest advantages and willingly give it away? We have an incredibly strong balance sheet. We have no long-term debt. We don't need to sell the business. Any one of the past generations could have monetized for their own financial gain. It's a mentality thing. We're supposed to take care of the business, make it even better than it is today, and pass it off to the next generation to do the same.

Nicolai Tangen: It's a long interview process. How long is long?

Mike Gitlin: It can be anywhere from 6 to 12 months. Someone said have you ever lost a candidate because the process was too long? And I said, 'Yeah, of course we have, but it's worth it over the long run to take that time. The good thing is nobody has veto power on anything. But everyone has a voice. If you're an investment professional and you're joining, you conduct an industry review. Meaning, we tell you, don't be quote unquote productive day one. Take three to six months, look at a certain industry, research it, and come to the whole group and tell them what's your portfolio going to look like as an investor.

Nicolai Tangen: What are the other cultural things?

Mike Gitlin: Integrity. Diverse perspectives. Long-term. We talked about eight-year number driving quantitative bonuses. Community. And the fifth one is client focus. The one thing that we're getting better and better at is not associating excellence with speed or the lack thereof. At times in our past, we would be so slow to do something because we were so measured that we ended up at times priding ourselves on slowness. I think now the whole organization recognizes we can move at pace and still be excellent.

Nicolai Tangen: When do you wake up in the morning?

Mike Gitlin: Four. Well, it doesn't take me a long time to do my hair, so I quickly get ready and go into the office. I'm in the office by 5. I like doing the early stuff. I'm not too bright at nighttime.

Nicolai Tangen: What do you read?

Mike Gitlin: I'm a big fan of fiction as opposed to non-fiction. My life is a non-fiction story. So, I read a lot of fiction. Anything that Jeffrey Archer writes, Steve Barry, Daniel Silva, I love those kind of books. I read the regular publications like the FT, Wall Street Journal, Barons.

Nicolai Tangen: If you were not in asset management, what do you think you would be doing?

Mike Gitlin: Probably be a teacher. Right when I left university, my first job was teaching in Australia, and I loved it. I'd probably be a teacher, maybe English or history.

Nicolai Tangen: And what would be your advice to these young students generally when it came to their lives?

Mike Gitlin: One, I think when you're young you think you have to know your future then, which none of us do. The second part is be excellent at what you do before you assume that you're capable to do the next thing. You'll stand out if you're excellent. Be curious and don't plan too far ahead.

Nicolai Tangen: Well, Mike, you clearly are excellent in what you do and so when you become a teacher, I'll sign up for your class as long as you're willing to learn history and English. Thank you. I appreciate it.