Speaker 1:
From the Library of the New York Stock Exchange at the corner of Wall and Broad Streets in New York City, you're inside the ICE House. Our podcast from Intercontinental Exchange on markets, leadership and vision and global business, the dream drivers that have made the NYSE an indispensable institution of global growth for over 225 years. Each week we feature stories of those who hatch plans, create jobs, and harness the engine of capitalism right here, right now at the NYSE and at ICE's exchanges and clearinghouses around the world. And now welcome Inside the ICE House. Here's your host, Josh King of Intercontinental Exchange.
Josh King:
Every year on the fourth Thursday of November, millions gather around their dinner tables with family and friends by their side to enjoy the Thanksgiving feast. With various autumnal aromas filling the air, everyone begins to map out what they want on their plate, a little turkey, some mashed potatoes, a few green beans, and a tidy helping of pumpkin pie. Others, with a different appetite, might opt for cranberry sauce, cornbread, and stuffing. So that's a Thanksgiving appetite, but in the beginning of this holiday season, what about an investment appetite to end the year, perhaps one looking forward to 2024?
Today on the show, we're going to be putting together an ideal Thanksgiving inspired ETF. Do the ingredients include freshly cooked US equities or simmered US bonds? Are there enough side dishes of non-US equities, non-US bonds, and cash and equivalents for every risk averse palate? Most important, how are the ingredients allocated to create the most profitable Turkey Day ETF?
We'll get closer to figuring out the answers to those questions in our conversation with our guest today, John Queen. Currently, a fixed income portfolio manager for Capital Group, John comes with over 20 years at the firm. Having worked as a trader, dealer service representative, COO, CCO, and managing director throughout his career, John brings 33 years of overall investment experience and expertise here Inside the ICE House.
In our conversation, we're going to hit on his time with Capital Group, the firm's move into ETFs, and his outlook on the markets as we look ahead to 2024. We'll also get his take having taken a few laps on the race car circuit, given John's engineering pedigree and his longtime connection to the Long Beach Grand Prix. Our conversation with John Queen is coming up right after this.
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Opportunity is using data to create a competitive advantage.
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It's raising capital to help companies change the world.
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Josh King:
Welcome back Inside the ICE House. Remember to subscribe wherever you listen and rate us and review us on Apple Podcasts. Our guest today, John Queen, has spent over 20 years in two separate stints at Capital Group, a firm that I should note is invested in Intercontinental Exchange. That's NYSE ticker symbol ICE. He's currently a fixed income portfolio manager for the firm. He also held senior roles at Roxbury Capital Management and Hotchkis & Wiley Capital Management.
John, this is going to be airing on Thanksgiving week, so I should begin saying Happy Thanksgiving and thanks so much for joining us Inside the ICE House.
John Queen:
My pleasure. Thank you, Josh. And Happy Thanksgiving to you as well.
Josh King:
So where will you be spending Thanksgiving this year? What are the particulars of the Queen family traditions?
John Queen:
Well, this year we're actually going to my sister's house for Thanksgiving, which is pretty exciting. We don't usually get everybody together in one place, and so it's fun to get together with my brother, my sister, their families, my parents. And we'll have the full spread Of all the various items that you mentioned in the intro.
Josh King:
What would be the rough number of Queens there and is your sister up to this task?
John Queen:
16 people. And maybe, we'll see.
Josh King:
As for the King family, we're going to be upstate Windham, New York where I like a table highlighted by a big bird, but complemented with pumpkin pie, mashed potatoes, and green beans. If I were to drop in unannounced at the Queen household, what do you think I'd find?
John Queen:
About the same kinds of things. I suspect there might be some different options in stuffing, but there will certainly be at least one pumpkin pie, perhaps a few other dessert items as options as well.
Josh King:
Were your mom and dad big Thanksgiving folks and traditions begun there? Where was that?
John Queen:
Definitely. So I grew up in Southern California. My mom always had a big Thanksgiving feast laid out, really following on her mom who was a big entertainer. I remember when I was a kid watching the carving or shredding of the Turkey depending on who was doing it, lots of silver laid out. It was the big formal occasion. So it's always been part of our family.
Josh King:
Talking about dropping in unannounced to places. I dropped in unannounced earlier this afternoon to some of Capital Group's activities downstairs here at the New York Stock Exchange. Talk to me about how things are going and who you have here and what the feedback's been.
John Queen:
Well, so far the feedback's been terrific. It's a group of our very involved investors, advisors who use our products, funds and ETFs. And so we're excited to talk about a lot of our new ETF offerings as well as just kind of updating our views on the economy, on markets, on the firm broadly. And I think it's been going very, very well. The feedback, as I say, has been really good.
Josh King:
It's a great room and a great place to bring people in. Are a lot of people sort of New York-based or are they flying in from different places to participate with you?
John Queen:
It's a mostly outside of New York team. There are some New York-based people here. And I agree with you. I've never been into the New York Stock Exchange and it is absolutely spectacular inside. And that is a gorgeous room and a perfect venue for the event.
Josh King:
Have you been on the trading floor yet because you're going to be ringing the closing bell in about two hours?
John Queen:
Not yet, but I'm looking forward to it.
Josh King:
Excellent. I will go down there with you. I'll see if I can see in your eyes the same sort of wide-eyed joy and fascination with capital markets as the folks up in the podium bring this $30 trillion marketplace to a close.
Now John, you've flown into Manhattan from the West Coast. You said you haven't been here to the NYSC before, but as a guy who's spent his entire career in finance, what are your memories of what sort of New York and the city represented to your industry as a whole?
John Queen:
Well, it's always really been the heart of a lot of what goes on. So Capital very intentionally had built itself to be outside of that to a certain degree, to have some sense of isolation as we're doing our work. But clearly, if you're not connected in and coming back to see New York, to be part of New York, to be part of the finance community here, then you're really missing out. And I mean, a fun story is my dad worked his whole career at Merrill Lynch. I was here visiting one time when I was with Hotchkis & Wiley down at the World Financial Center and in the check-in room with security, and I ran into my dad not knowing we were both going to be in New York at the same time or going into the building at the same moment. So it's always been a big part of my career and fun to be back.
Josh King:
Part of my sort of interloping downstairs at what you guys are doing is I was watching the fireside chat with Grant Cambridge, who's one of your portfolio managers, talking about the different role at Capital Group's of specialists and generalists as people have been coming up through the firm. And one thing that the question to Grant was, "You've spent time at Capital offices all over the world. You're currently based in Los Angeles." And based on my relationship with John Emerson, who's Mr. Los Angeles when he's not Mr. Berlin, I know that Capital has always sort of prided itself on its West Coast and Los Angeles basing. What do you think advantage has been to the firm of being 3,000 miles away from the capital of the world financial system?
John Queen:
I really do think that that sense of removal gave us the room from the very beginning to really have a different way of thinking about investing in part by being longer-term focused. I think that being part of the financial markets on a day-to-day or moment-to- moment basis really brings you into the trading environment, the thinking shorter term. And it's always been our goal to be longer-term focused, looking at fundamental opportunities and how they might play out in the long run. And it was important to be able to really with our privately held nature, with our slight isolation from that day-to-day, moment-to-moment trading activity to really be able to focus on those things and then connect back in rather than being part of it all the time.
Josh King:
The headline in the slide over Grant's talk, the quote was, "Is Human Insights Still Relevant in investing?" And I didn't hang around long enough to hear Grant's view on that, but given your own experience and given what people might expect happens inside the sausage making of a portfolio, they might say, "Well, why do I need your human expertise in this?" But how would you answer that question?
John Queen:
I mean, I would say unquestionably it is. And you can see the fact that in fixed income, for example, active managers regularly and we particularly beat the indices. If our insights weren't important, we wouldn't really be able to do that.
I also look at what goes on on the equity side, how fixed income and equity markets behave. One of the things I've often said is that we have a lot of really good models, risk models tracking our other ways to look at portfolios that take that human insight out. You're really mechanically looking at the portfolio. And yet the saying I use is that all models are wrong, but some are useful. The fact is that they're telling you an answer. You know it's not the answer. You know it's an answer based on a great number of assumptions that had to go into it to simplify the ability to use that model.
So what we need to do is understand why does the model say what it's saying? What does that suggest to us from an investment perspective? And then the other piece I would say, and this is true on both the equity and fixed side, but perhaps even more so on the equity side, I think there's this real conceit as financial people that markets are really good at being forward-looking. And the fact is that I think markets are really good at looking at information today and extrapolating it out and assuming it's going to continue the way it is.
And if you look at whether it's forward curves or Fed fund futures or anybody's projections, they're almost always wrong. And so our ability to sit down, look at all the opportunities we see, apply this isolated sort of human insight into it and experience is what gives us the ability to actually look forward and maybe try to predict some things that are different from what the market is supposedly pricing it.
Josh King:
Talking about what a human does in their performance of their duties. If you and I were to go back to our younger days, John, I'd assume that one thing we might talk about is race cars and the work of what you do in the cockpit behind a wheel of a race car. We had Zak Brown, the CEO of McLaren, on this show before. He's a guy who ICE is in business with. We sponsor part of the McLaren team, also a product of the Southern California racing circuit. Your dad was founder of the Long Beach Grand Prix back in 1975. It was a Formula 5,000 race at the time. Growing up in the circuits, was there ever a dream of John Queen professional race car driver? I mean, there's not a lot of space in terms of the number of letters used between John Queen and Steve McQueen.
John Queen:
That's true. Yeah, there certainly was. Just to say, my dad's one of the five guys who founded it, not founded it on his own. But definitely people always tell you the truism do what you love. Well, if I did what I loved, I'd either be a fighter pilot or an F1 driver. And I'm not good enough at either of those things as it turned out to make a career of it.
Josh King:
Are you licensed to fly, though?
John Queen:
No, no. It turned out, I guess if it wasn't a fighter plane, it wasn't quite as enticing. I've done a little bit of racing. I've done racing schools and some of that. And I enjoy it and I'm okay. But there's clearly a level of talent as well as skill that separates like in anything else the really good people from the rest of us, and I'm the rest of us.
Josh King:
And you share an affinity with our founder and CEO, Jeff Sprecher, who also fashions himself like should have been a race car driver. But he often quotes when he actually thought he might give this a try Mario Andretti who said, "You can't have any fear behind the wheel." And Jeff said, "I have no fear." And then he realized at a certain speed he was freaking scared.
John Queen:
It's really easy to take the lessons, be very precise, focus on what is a sport that's heavy on concentration. If you can stay focused during lots of things going on, that's a big part of it. And so you get better and better and you go faster and faster. And then you suddenly hit a point where you're thinking, "I'm just going much too fast." And so the fear kicks in pretty easily. But I would agree, you can't be afraid because if you're afraid, you can't be focused the way you need to hit those spots on your lap every time. And again, there's something that separates the rest of us from the people who are really good at it.
Josh King:
Talking about being really good at something. You graduated from Purdue University in West Lafayette, Indiana, which is really not that far. A quick road trip from the Brickyard at Indianapolis Motor Speedway where the Indy 500 pace car is always the Chevy Corvette. And you have an affinity toward that automotive icon. What draws you toward the particular build of that car and its performance?
John Queen:
I just have always really liked them. I guess part of it is having watched Formula 1 as a kid, I loved Ferraris. I loved the old 250 GTO, which was truly one of the classic Ferrari, beautiful race car. And the Corvette, especially in getting into the 70s, was a bit of a wannabe Ferrari 250 GTO. It's American. I love the big V8. And so one of my first cars was a '70 Corvette, rebuilt the engine, did a lot of work on that. I've had a couple others since then and always really enjoyed them.
Josh King:
I invoked Sprecher's name earlier. I'll add that he has a garage full in Atlanta of vintage Porsches and I don't know what model he's working on rebuilding right now. But what's in the Queen garage? Do you currently have a project or have you just finished one up?
John Queen:
I don't have one right now. I did just finish far from a Corvette. I rebuilt my son's Jeep. He has an old '93 Cherokee and had blown the head, so we had to go back and either get a new engine or rebuild it and thought it'd be fun to rebuild it, bore it, stroke it a little bit, little hotter head, things like that and boost the horsepower bit. So that was a lot of fun. It actually, it didn't make it fast, but it made it no longer super slow. So it felt like it was a real pickup.
Josh King:
I have a '83 CJ-7 that could probably be shipped out to you guys if you want to do some work on it. I'd love that CJ-7 to perform a little bit better than it does.
John Queen:
I mean, I'm very expensive and not very efficient, so happy to work on it though.
Josh King:
Do you think there's a correlation between your engineering background, your tinkering under the hood of some of these vehicles, and your work as a portfolio manager tinkering under the hood of investments and fixed income instruments?
John Queen:
I think so. I mean, there's no doubt that what I really enjoy is that sort of puzzle piece construction, putting things together, seeing how they work, checking it, rearranging it. Going back to rebuilding the engine, it's a perfect example of that. You're seeing what parts can we improve a little bit here? What parts go together easily? Wow, I haven't worked on one of these before. Let me go do a little bit of learning about how exactly that engine works versus the V8s I'm used to.
And portfolios are very similar. I have a lot of experience. I've got a lot of amazing analysts and traders and other PMs around me that have their own bits of information that I'm trying to incorporate and kind of build the best engine, build the best portfolio that I can. And then yeah, constantly tinkering, making sure that as new information comes available, I'm incorporating that and not necessarily rebuilding the whole engine but be adding some new parts to it as I go along.
Josh King:
So you're this Southern California kid who heads out to Indiana, gets an engineering degree, and then you might go into sort of Midwest industrial work or back to California and aerospace work. Instead, you head into finance work. What brought this Purdue engineer into the world of finance?
John Queen:
I think two things. One, as I mentioned, my dad was involved in Long Beach Grand Prix. He was also involved in finance on the brokerage side. And so I had some exposure to that growing up. And so always found an affinity for thinking about finance, the math, all the same things that apply in the engineering side of things. And the farther along I went into engineering, I also recognized that there are aspects of it I really enjoyed, particularly learning about how things work and how things are constructed and put together. But I also wasn't sure I actually wanted to be an engineer. There wasn't a lot to it, maybe other than working on cars, that would've really appealed to me designing parts or something.
And so I came back home and had some conversations with my dad about it and he said, "Across the street is this place, Capital Group. They're fantastic. Why don't you go apply there and see if you can get into the industry?" So I did and had a couple interviews and started the career.
Josh King:
Yeah, so you started that career at Capital. As we implied in the introduction, you've had a couple of different stints. You were a trader right out of college, held that position until '97. And then after 12 years away, you found yourself back where it all began, back in 2009. What led to this return 14 years later, the return of the prodigal son to Capital Group?
John Queen:
What led to the return was what first led to my leaving and that was that I loved trading as a day-to-day job, but what I really wanted to do was be a portfolio manager. Again, going back to the puzzle piece and building the construction of the portfolio, thinking about the big-picture components. And the way Capital was constructed at the time as a trader, not having gone and gotten my business degree and MBA, it wasn't really going to happen there. And so I just kept my eyes open for opportunities and got hired at Hotchkis & Wiley as a portfolio manager, generalist on fixed income portfolios.
And so I built my career along that path always hoping if there was a way to ever come back, this is where I'd want to work. And so, in fact, my last job at Roxbury, I had a conversation with the CEO when he asked me to stay on as chief operating and chief compliance officer. At the very end, I said, "You know what? I'll do it. I like what we've got. I think we're building something good here. And I'm not interviewing right now. I don't know of anything. But just so you know, if Capital ever calls with a portfolio manager job, I'm gone that day."
Josh King:
As someone who started with Capital, when if you went down to the New York Stock Exchange, back then paper orders would still litter our floor after our four o'clock close. That's a couple stories below where we're sitting today. How have you seen the whole field transform with the advent of technologies and the society and sort of investment expectations that have changed as well?
John Queen:
Well, I mean, the field obviously has changed dramatically. You pointed out the amount of paper. When I started trading, there were two ways for me to get information, faxes that would come through and I'd be pulling the faxes off the fax machine looking through for offerings or bids from people, and then talking on the phone to the sell side traders, seeing what they had to offer, what they saw going on in markets.We had one Telerate machine in the trading room to see what markets were doing broadly. It was just an entirely different information flow era for us as investors, for society generally. I try to explain to my kids what it was like before there was an internet, before everybody had a phone with all the information in the world on it.
And so thinking about not just the information flow, but then as a portfolio manager, the quality of information and tools we have to analyze risks, build portfolios and see how different things we want to do might affect them. I sort of jokingly say that fixed income portfolio manager's a little like 4D chess. You've got so many variables that you're trying to account for as you're building a portfolio. It's really hard to measure all of those and incorporate them and look at then how something's going to impact that. But as tools have developed, computers, the internet, modeling capabilities, really gives us, I think a much greater understanding of the risk we're taking in portfolios and making sure we can then build those portfolios to meet our shareholders or clients demands.
Josh King:
If you think about your firm founded in 1931, it now manages $2.2 trillion for investors in institutions worldwide, if I've got that number somewhat in the ballpark. And you touched on this a little bit earlier, John, but what do you think makes Capital Group and what you do different from other large investment managers?
John Queen:
I think there's a few things, and I'll start with the private side and the long-term focus side because I mentioned those before and I think they're very important. When the firm started back in the 30s, that was the focus, fundamental research, long-term focused, staying private. That has been incredibly valuable to us. It allows us to ignore many of the short-term vagaries of the marketplace, making some kind of quarterly earnings, showing things to potential shareholders out there who are going to wonder why we're doing one thing versus another, judging our internal investments. So we can really focus on doing what we do best and providing excellent results for our shareholders in the long run.
The other piece of it I think is what we call the Capital System, and that incorporates a couple of different things. Mostly it's every fund is managed by a series of individual managers who can build high-conviction portfolios based on their own experience. And those are then put together into make the entire portfolio. So it allows higher-conviction individual portfolios. It allows diversity of views and opinions to get into portfolios without watering them down through a team approach. But it also allows what might be I think our greatest advantage, which is we then have a portion of that portfolio that's managed by analysts. And so our analysts, instead of being spreadsheet people who make recommendations to portfolio managers, they are specialist investors. And you mentioned that you heard Grant talking about that.
It's really maybe our magic sauce is that our analysts are investors from day one. They're not just saying, "I like this company or I like this bond." They're saying, "I like this company, I like it at this price, and I'm putting this much of my portfolio into it. And here's where I think I see it going and here's what would change my thesis and when I might sell." That's incredibly powerful that everybody involved in the portfolio is an investor. It's not just people who are offering information and then those few elite or whatever are coming up with the answers.
Josh King:
Right. I mean, Capital Group is, as we've mentioned, looking at its hundredth anniversary in a couple of years, but it even right now undergoing a leadership change as CEO Tim Armour plans to retire at the end of this year and the company's former head of fixed income and global trading Mike Gitlin gets behind the wheel, as it were. How has Tim helped shape the firm in your history here and what do you look forward to as Mike takes over as CEO?
John Queen:
Well, I think Tim has been a terrific leader. He started his career at Capital and has been here for before I started and has done an amazing job. A big part of what I think our leadership needs to be able to do is grow the business in a responsible way, provide opportunities for the people internally, but doing all of that and meeting changes in the marketplace. I mean, you talked about how the entire environment has changed since I first started. You always need to adapt and evolve to keep up with that. But the real key is in Capital's case, keeping our culture intact. It is that culture where it's incredibly collegial. We're all on the same team. Even though we don't team manage portfolios, we all want the other to succeed because if everybody's doing well, our clients are doing well, that's good for the firm. And so maintaining that culture through differing economic and societal periods is not an easy thing. And I think Tim's done really remarkable job doing that.
I think Mike is an outstanding individual. I have really enjoyed working with him during his time at fixed income. I think he is more of an outside-facing kind of CEO than we've had in the past. He's an amazing voice and face of Capital Group and a terrific leader. And so I think we are going really from strength to strength in terms of the leadership of the company. And for a non-investor to have won over the entirety of the investment group and be made the leader I think says a lot about Mike.
Josh King:
So talking about non-investors and investors, Capital Group has debuted nine ETFs in 2022, that's last year. And in September of this year, you launched five more here at the New York Stock Exchange. These editions upped Capital Group's existing suite of ETFs to 14. How does this selection help Capital Group and your clients core portfolios?
John Queen:
One of the things we've always been extremely focused on is making sure that whatever investment opportunities we provide, the things we manage, they are because we see an investment opportunity or a real need on our client's part to be able to invest in an area. We don't tend to start a new fund because something is hot and getting a lot of money in it. And so we've always been very deliberate about beginning new funds and offering those.
The ETF, the active ETF area is one where rather than finding new investment areas, we want to make sure, like with SMAs, like with CITs, like other vehicles, that we're providing the best opportunity for our clients, our shareholders, to have every way to invest in those same funds or similar funds outside of maybe traditional channels. And again, it points back to that idea that technology, society, the economy changes over time. We need to be able to meet our clients where they are. And there's no question that ETFs have become a bigger part of the investment landscape, and so our ability to offer active ETFs where we think our real strength lies in this active management of both equities and fixed income, offer them in this format means that some of our shareholders or clients who might not have been able to access us because they like ETFs or needed an ETF for some reason now have the full suite of opportunities across their investment spectrum.
Josh King:
Meeting clients where they are. To that end, among the five recently launched funds from September this year, you are the principal investment officer for the Capital Group Core Balanced ETF. That's NYSE Arca, ticker symbol CGBL, which we see on all those baseball hats downstairs, which I'm going to get my hands on one before we leave today. What separates this ETF from the other four that launched in September?
John Queen:
Well, this is really our first and we think maybe the first active, if not the first, one of the first active multi-asset ETFs out in the marketplace. We're incredibly excited about it. One of the things I've found as I go out on the road, once in a while they bring us investment folks out on the road with our marketing people, is that when... You went through my bio. When they announce me and they say, "Well, he's principal investment officer for Intermediate Bond Fund of America," talk about different funds, people are taking notes and listening, and "American Balance Fund," the whole room perks up. It's I think our most popular fund out there. It plays an incredibly core role in portfolios.
And so the ability to offer a multi-asset approach, stocks and bonds, balanced, excellent active management on both sides of it, and then an active approach to asset allocation that really looks at not just do we like the market in stocks, do we like the market in bonds, but in fact, how are our equity investors investing in this portfolio.
So right now, for example, our equity investors may be a little bit defensive relative to the S&P, a little more dividend heavy. Well, that tells us something about how volatile that piece of the portfolio is and maybe we can own a little bit more of it and still be a little bit defensive because we know what's going on under the hood. Same with the fixed income portion where we're actively monitoring what we're doing in that piece and how that fits in with the equities. And so it's the kind of thing we hope that people, like with our other multi-asset offerings on the fund side, can take and just make a core holding and then build your portfolio around that if you want to own a little more international or little more growth equity or whatever it might be.
Josh King:
I mean, you mentioned it as one of the first ETFs in this multi-asset offering sector. Bring us a little bit... You guys are all based in Los Angeles, so to give an entertainment metaphor, bring us in like Dr. Frankenstein's laboratory and when the original spark or light bulb went off to say, "We can put all these things together in one big mix and it'll come out in the investor's favor." Tell us how it all came to be.
John Queen:
I think we're really the leader in active multi-asset funds with American Balance Fund and Income Fund of America and some of the others. And so it was always something we felt really good about our ability to offer our investors. As we began with the ETF suite, needed to stay kind of plain vanilla. We're in the market for the first time. We want to make sure we're checking every box, doing it correctly, understanding fully what we're doing as we move along in the process.
But the whole time, one of the most requested things was when are you going to do a multi-asset? When are you going to do an asset allocation fund? And so we'd always had the plan. Again, this is something we feel like we're good at. We think we're good at both the equity management and the fixed income management and we think we add some additional value in how we put those together and our clients agree. And so they were really clamoring for that.
The real key was, as you say, in the lab really putting the pieces together. How do we go about doing that? The whole create-redeem process. Are we going to get equities? Are we going to get bonds? And so what we've ended up doing is combining dedicated equity portfolio with shares of an ETF that we manage, an active ETF as the bond portion because that was what allowed us to get to market and get that opportunity out to our shareholders.
Josh King:
You say your clients agree. It's now been a year since Capital Group launched ETFs. How has the culture and support been internally around ETFs compared to traditional funds management? You guys have had to change some of the skin and operations in the place.
John Queen:
Well, it's definitely had an impact on the operational side. The process of creates when money comes in is clearly different from getting cash, going to the portfolio manager, having them or analysts go out and invest that. That still happens, but it goes through that process of what are the bonds we want to see or the equities we're willing to take in, having those come into the portfolio. So we've spent a great deal of time building out our team that's focused on that piece of it. They do an amazing job. There's a lot of detailed work that goes into that and making sure that portfolio at the end of every day looks the way we want it to look for our clients.
And so that's been incredibly well-supported I think by management. This was clearly a mandate to do it well and get it out there in a way that will benefit everyone. The investment team is thrilled by what we're seeing. It gives us another opportunity to find places to offer our best ideas and we've got what we think in place a great team to put those ideas into practice.
Josh King:
After the break, John Queen and I are going to continue to discuss ETFs as well as the market outlook going forward. Our conversation with John Queen of Capital Group is going to continue and it's all coming up right after this.
Speaker 15:
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Josh King:
Welcome back. Before the break, if you are enjoying our conversation and want to hear more from our guests, like John Queen of Capital Group, remember to subscribe to Inside the ICE House podcast wherever you get your podcasts. Give us a five-star review if you can on Apple Podcasts. It helps other people know where to find our show.
Before the break, John, you and I were discussing your affinity toward race cars, your time at Capital Group, and the firm's latest ETFs launched here at the New York Stock Exchange. Between all the ETFs you offer and specifically the Capital Group Core Balanced ETF that you oversee, how has the reception been from the advisors and institutions you serve? You were talking about going out with some of the marketing folks and looking across the table. Is the light bulb going off in their head?
John Queen:
It certainly seems to be. I mean, we've seen it both from the immediate reaction as you talk to people. As you mentioned, we've been involved in a number of marketing presentations with different groups of advisors who like us already for our funds or perhaps weren't using our funds because they're more in the ETF space and seeing a very immediate and positive reaction there. We're also seeing some really positive flows. It's been very exciting to see the active ETFs really gain assets at a faster rate than we'd projected. And we're not focused on the number of assets per se. We're focused on really providing an excellent investment service. But when you see the shareholders, the advisors agree and start sending money and it's a really great confirmation that we're doing the right thing.
Josh King:
I mean, talking about active, Capital Group always known for active management. That style now translating itself into the ETF space. Curious if this could have been accomplished by others. And further curious, how is Capital Group leveraging this active experience to its own advantage and your clients advantage with your new suite of ETFs?
John Queen:
I mean, again, I think could others have done it? There are other active ETFs out there I think. I don't focus a lot on who else is doing what exactly. My brain is pretty full with the investment side of things. But I think the way we're leveraging it is really finding some niches perhaps that we were covering with a couple of funds somewhat, but needed something that really focused there a little bit more directly. Also, again, really utilizing the active ETF space as a way to get into a lot of additional portfolios, in many cases by the same advisors, same clients who had maybe a smaller account, wanted something that was multi-asset but needed an ETF for some reason. And now we're seeing those slot into that.
So again, it's really leveraging what we already do well. You mentioned active is something we're known for. It is kind of our raison detre. It's what we believe is best for our shareholders and making sure that we're in every channel where they want to be able to invest in our products. And so that's really how we're leveraging it.
Josh King:
So let's pull back the aperture a little bit as we head toward the backside of our conversation and look at the big picture of the market economy, John. The Fed has decided to keep interest rates steady earlier this month, but warned maybe that cuts could still be really around the next curve. If you're a race car driver, you can't really see them if you're trying to make that turn. Let's hear what Fed chair Jerome Powell had to say about this recently on CNBC.
Jerome Powell:
The fact is the committee's not thinking about rate cuts right now at all. We're not talking about rate cuts. We're still very focused on the first question, which is have we achieved a stance of monetary policy that's sufficiently restrictive to bring inflation down to 2% over time sustainably? That is the question we're focusing on. The next question, as you know, will be for how long will we remain restrictive? Will policy remain restrictive? And what we said there is that we'll keep policy restrictive until we're confident that inflation is on a sustainable path down to 2%.
Josh King:
How do high rates right now as well as high inflation as the chairman just talked about, impact ETFs and your role as a portfolio manager?
John Queen:
Well, both of those things directly impact how we want to think about investing those portfolios. So ETFs are the vehicle. What we're doing within those is really focused very heavily on what Chair Powell is saying right there. And the fact is he's been very consistent in his message along the way. I think to a large degree, you have to take the Fed at their word. They can't always predict what they're going to do next month or next quarter, but they can tell you how they're thinking about it right now. And I think the thing about Powell is going back to his discussions over the past couple of years is he doesn't want to be Arthur Burns. He doesn't want to ease too soon when inflation seemed to come down and then have it take back off and require the Volcker coming in and destroying the economy for a while to get it back under control. He has Volcker's book on his desk. He wants to tame inflation.
Inflation is not yet down to their 2% target. I think it's reasonable to say they're going to wait with rates, maybe keep them going up, although it seems like they're probably done at this point, but certainly hold them high until they're confident that inflation has moderated and is sustainably at their 2% rate.
So as we're thinking about portfolios, that means we think rates are going to stay up fairly high for a while, 4.5, 5%. Now, I say high. I could also say normal. Prior to the great financial crisis, most of my career rates have been at this level or higher. But they're going to stay around here, give or take a bit for a while. The economy seems to be handling it pretty well. And I would say from the Fed's view, things are going just about as well as they could hope. Inflation's moderating, the economy is still good, but moderating a little bit. All of these things playing into the possibility of a soft landing.
It is a hard thing to achieve, but we're kind of still on the path that would allow that to occur. So for the portfolios it says more of the same and volatility in fixed income markets might be reduced a little bit as if they're done hiking, but the economy is still pretty good. Inflation's moderating, but it's not low enough yet. So we're going to kind of keep plugging away the way we've been I think for the next, call it six to nine months.
Josh King:
Your marketing guys always want to have more flows coming in quarter-over-quarter. You, the portfolio manager want to have more resources to work with. Regarding the overall bond market right now, there's so much money still on the sidelines, even while opportunities for positive returns are there to be had. Why do you think investor hesitancy is high and is there a positive outlook that some of the money that is sitting out on the sideline could soon return?
John Queen:
Well, I hope it'll soon return, not because I want to get it in personally, but I think it's better for investors. I mean, the fact is that in every volatile or negative market timing kind of experience, investors pull money out of the market, sit in cash, and they tend to sit there until it's too late. And so having 15 years of incredibly low interest rates, to be suddenly getting five percent-plus on cash sounds very attractive.
Josh King:
Sure.
John Queen:
But the fact is that cash reminds me a little bit of the legal concept of attractive nuisance where it pulls people in only to hurt them. And if you go in cash because you want a time in the market, almost inevitably you'll wait too long, the cash rates will start to come down, but by the time you make that decision, because cash rates have come down, bond yields have come down, bond prices have gone up, the equity market has delivered excellent returns, and you're missing out on positive total returns because you were trying to wait in time in the market and the "safe asset." It's a safe asset that over a full market cycle will deliver less than inflation. In other words, if you're sitting in cash, the risk-free asset, over a full market cycle, you will be losing money relative to the cost of goods and services in the economy.
So I think it's really important for people to take a long-term view. And you don't have to do it all at once, but begin moving money out of cash. Bond funds are yielding more than cash anyway. Start moving them out that curve a little bit. You're taking a little bit more risk, but it also means you got a lot more opportunity for positive total returns.
Josh King:
I mean, talking about bonds and equity and how they're performing right now and staying on the topic of bonds, there's this correlation between bonds and stocks and historically the two have been negatively correlated. But as all markets seem to be bucking prior trends, is this positive correlation something that we should not ignore?
John Queen:
You certainly shouldn't ignore it. I think correlations are, going back to my comments on models are something that it's really easy to get lulled into a false sense of security by the way things have been going lately. And I think if we look back over the past, call it since the late 90s, you've had a timeframe of global disinflation. The Fed has not had to worry about one of their two mandates, stable prices. They couldn't get inflation up, let alone worry about trying to keep it down. So they only had to worry about the jobs piece of the mandate. So anytime there was a bobble in markets for the last 25 years or so, they could immediately step in, or the market could assume they would, and you got this almost day-to-day negative correlation between equities or risk assets and rates.
If you look back further though, that's not always the case. Most of the time they're zero to maybe positively correlated on a normal ongoing basis. However, when you got to the moments of relatively large negative equity volatility, you're falling into recession, some big event happens globally that causes worries about that, that's when that negative correlation kicks back in. And I do think that's the kind of situation we're in now.
The Fed wants to beat inflation. They're going to be focused on keeping rates a little bit higher, stamping inflation out, more worried on that side of their mandate. But if we fell into a real recession, an equity market started really selling off because of that, I think you'd find once again that the negative correlation would happen, rates would decline. The assumption would be that the Fed is happy to get inflation out, but they really don't want to let us fall into a significant recession if they can help it.
Josh King:
How, as we begin to wind up here, John, do you differentiate between the portfolios of younger investors, like young Lance here, who may have a long time horizon ahead of him compared to a middle-aged or older investor, like perhaps me, with less of a return timeline when we're closer to retirement?
John Queen:
The real answer is that when we look at a balanced portfolio like a 60/40 portfolio, it's a good sort of middle of the road for most investors starting point for your thought about risk and return, balancing the equity upside with the fixed income to kind pull you back a little bit in terms of volatility.
When you're younger, you can accept more volatility. And so maybe a 80/20 is the right one, or 100/0. I think that's unusual. But something that's much more heavily skewed toward assets that will grow over time and you can afford and probably allow yourself to stay invested through those difficult periods when there's higher volatility.
As you become more seasoned, as you and I perhaps are, we're moving toward a point where I don't need to worry about getting a lot of growth. I still want growth if I can get it, but I'm also getting closer to the time when a really bad equity market is going to take a bite out of when I might be able to retire or perhaps how well I can retire down the road. So you start thinking about shaving back off some of that volatility, allowing, accepting a slightly lower growth outcome by having perhaps fewer equities and a little higher fixed income component.
Josh King:
So let's just look ahead for a couple of minutes. There's been a lot of excitement with Capital Group's push into ETFs and now with a current selection of 14. What does the firm's future look like in the space? Do you think we should expect more of these funds on the horizon?
John Queen:
I wouldn't be surprised if there's more. I think there are probably more parts of our relatively broad swath of mutual fund and other offerings that could benefit from an ETF format. I don't know of any off the top of my head. I'm pretty focused on the ones I'm working on. But I think as you look at what our leadership is trying to do, and again, it's focused on our whole point of improving people's lives through successful investing. We want to make sure that we do a really good job providing excellent investments for our clients and shareholders and making sure that we have an opportunity to allow them to participate in that in whatever format is necessary. Again, meeting our investors where they are.
And so I would expect that process to continue. I don't know if we'll come up with new funds in new markets necessarily, but we'll probably continue to grow the way we offer the funds and the investment ideas we have in different formats like the active ETFs.
Josh King:
We listened to what Jay Powell said earlier about the Fed's decision to hold interest rates steady. If you and I were sitting down here inside the ICE House about 12 months from now when Capital Group comes back to the New York Stock Exchange, we hope, do you think we'd be recapping a more positive 2024 or a more negative 2024?
John Queen:
I think it'll be a reasonably positive one. I mean, usually US bond investors are the pessimists, but I really think the economy looks more solid than I could have expected six, nine months ago. We're seeing real wage growth continuing. People are able to then spend that money. Companies are still doing pretty well. They've moved out. In a lot of cases, the large companies have moved out their debt stacks while rates were super low in '20 and '21, allowing them to have a little less interest rate sensitivity. So even though rates are higher, they're still able to provide good profitability. I think that's likely to continue for longer than most people expect.
The US economy is dynamic, it is adaptable, and that's really one of our real strengths. So the longer we kind of stay here with things going okay at higher rates, the more the economy and consumers and companies will adapt to those higher rates. So I think a year from now, I wouldn't be surprised if Fed funds are right where they are and the economy is still plugging along pretty well and we're talking about maybe some upcoming maintenance cuts because at that point, inflation may have come down close to their 2% target or to the 2% target. And they don't need the difference between Fed funds and inflation to be quite as high, so they might be thinking about beginning to cut at that point.
Josh King:
So some time ago, to bring this conversation all the way back to the beginning, we talked about when John Queen's dad took his Purdue engineer aside and said, "Son, I've been at Merrill Lynch a long time, and this may be an industry that you want to look at. These guys, Capital Group, they do a great job. You may want to sit down with them." And I'm curious to what extent you mentor and counsel the next generation or generations thinking about whether this path could be good and fruitful for them. What do you think of the future of your industry and whether you'd be taking an engineer from Purdue and saying, "Go knock on the door at Capital Group"?
John Queen:
It's hard to say on the industry as a whole. As there have been over the last 35 years, there are pockets of the industry that have really done extraordinarily well and other parts have just sort of gone away. And I think that's likely to continue. It calls to mind the entirety of the US economy where there's a little bit of chaos all the time as new emergence come up and some of the old things go away.
What we do at Capital Group will continue to have real value for our shareholders and clients. And as long as that's the case, there will be an important place for us in the industry and I think it will continue to be a great place for aspiring finance people, whether they're engineers or some of our great investors have been English majors. People who can think and look forward and really drive value for our clients, I think there's always going to be a place for them at Capital.
Josh King:
Always a place for them at Capital. I look at the clock, John, and I realize we are ticking the minutes down to the closing bell, so we should probably wrap this up and go down and close this market. But thank you so much for joining us Inside the ICE House.
John Queen:
Thank you. Pleasure to be here.
Josh King:
That's our conversation for this week. Our guest was John Queen, fixed income portfolio manager for Capital Group. If you like what you heard, please rate us on Apple Podcasts so other folks know where to find us. And if you've got a comment or question you'd like one of our experts to tackle on a future show or hear from a guest like John Queen, make sure to leave us a review. Email us your suggestions at [email protected] or tweet at us @ICEHousePodcast. Our show is produced by Lance Glinn with production assistance, editing, and engineering from Ken Abel. I'm Josh King, your host, signing off from the Library of the New York Stock Exchange. Thanks for listening. We'll talk to you next week.
Speaker 1:
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