Kathrin Forrest, equity investment specialist at Capital Group in Toronto.The Globe and Mail
Equity investment specialist Kathrin Forrest and the team at global financial services firm Capital Group have a wide range of stocks they can invest in.
“We look for companies that can do well across various environments and geographies and in a position to be better masters of their destiny based on resilient and growing end markets, strong competitive positions, pricing power, financial flexibility, and sound capital allocation,” she says.
Ms. Forrest is part of the Toronto-based team that oversees $20.8-billion in assets for clients in Canada, while the firm manages about $3.7-trillion in assets for investors globally.
Her firm’s $12.7-billion Capital Group Global Equity Fund (Canada), Series F, has returned 21.3 per cent over the past 12 months. Its three-year annualized return is 4.3 per cent and its five-year annualized return is 11 per cent. The performance is based on total returns, net of fees, as of March 31.
The fund’s top 10 holdings as of March 31 were Taiwan Semiconductor Manufacturing Co. Ltd. (which trades on the Taiwan Stock Exchange), Novo Nordisk A/S (Nasdaq Copenhagen), Broadcom Ltd. AVGO-Q, Eli Lilly and Co. LLY-N, Microsoft Corp. MSFT-Q, Meta Platforms Inc. META-Q, Alphabet Inc. GOOG-Q, UnitedHealth Group Inc. UNH-N, Caterpillar Inc. CAT-N and BAE Systems PLC (London Stock Exchange).
The Globe and Mail spoke with Ms. Forrest recently about what the team has been buying and selling.
Describe your investment style.
There are three elements to our investment approach. The first is bottom-up research across sectors and geographies to uncover unique insights. The second is individual conviction. Each portfolio manager invests in their highest-conviction ideas, which means no one view dominates the fund and there’s no top-down direction. The third is investment time horizon. Our objective is long-term growth of capital. With these three elements, we’re looking to achieve diversification, flexibility and continuity.
What’s your take on the current market environment?
There has been some volatility, but if we zoom out a bit, global equity markets have rallied strongly over the past year. From an economic perspective, we’ve generally seen moderating inflation and more resilient growth, particularly in the U.S., and these have underpinned market expectations for a soft landing of economic activity and constructive growth for corporate earnings. There’s also been ongoing excitement about the build-out of artificial intelligence (AI) infrastructure.
However, equity market strength has not been uniform. The U.S. has led the rest of the world; developed markets have led emerging markets; large caps have led small caps; and growth has led value, especially in the U.S. A more recent nuance is whether inflation may turn out to be more sticky, which has resulted in more moderate expectations for central bank easing across several developed markets, including Canada and the U.S. For equities, it puts a spotlight on a company’s cost of capital and valuation. It has also helped broaden returns across different sectors.
What have you been buying?
AI is one area that has captured investors’ attention in recent quarters. AI looks to be a source of disruption for the long term, creating risks and opportunities for companies across industries and geographies. We’re focused on companies poised to benefit from the capital investment into expanding computing infrastructure – the picks and shovels – and that have stood a bit away from the spotlight. This includes some companies across the semiconductor supply chain with strong competitive positions and sound capital allocation. One company we’ve held for a while and have added to recently is Broadcom, which is an important supplier to Google’s cloud ecosystem.
This computing infrastructure build-out requires more than computer chips; it also requires land, physical structures and a power supply, which creates investment opportunities for some companies. An example is construction equipment maker Caterpillar, which, among other things, provides backup power generation solutions, including for data centres. In addition to selling new equipment, the company has meaningful recurring revenue from aftermarket servicing.
What have you been selling?
We’ve been trimming and selling companies with less resilient end markets and less financial flexibility, where revenue might be affected by uneven economic momentum or changing competitive landscapes across geographies. An example is the industrial sector in which some companies may face greater pressure from local substitution. We’ve also been trimming some companies that have seen meaningful stock price appreciation in sectors such as pharmaceuticals and communication services, taking profits.
What advice do you have for new investors?
The overall market can be a moving target. For example, when you look at the MSCI All Country World Index, the U.S. weighting has moved to more than 60 per cent from 50 per cent over the past 10 years. Also, the information technology and communication services weighting has moved to more than 30 per cent from 17 per cent over the same period. It’s a different market today. That’s why it’s sensible to review your portfolio from time to time to confirm that your underlying exposures are consistent with your objectives. The bedrock of portfolio construction is diversification.
This interview has been edited and condensed.