Will McKenna: Hello and welcome to the Capital Ideas Webinar series. Our topic today is Capital Group's midyear outlook, and it really couldn't come at a more dramatic time in geopolitics, markets, and the economy. So in the next hour we're going to dig into your key questions. What does war in the Middle East mean for markets and investors? How will uncertainty over tariff policies impact the U.S. economy, and other countries around the world? Where are we seeing the greatest opportunities and risks in stock and bond markets as we look ahead? And what does all that mean for your portfolio? So we're going to answer those questions in the next hour, and we have two great speakers to help us do that.
Martin Jacobs is an equity portfolio manager on the Capital Group Dividend Value ETF among other strategies. He has 37 years in industry experience, he's been with Capital for 24 years. Earlier in his career as an analyst, he covered U.S. industrials, machinery, and electrical equipment companies. Martin got his MBA in finance from Wharton and a bachelor's right here from USC. He's got the Chartered Financial Analyst designation and is a member of the CFA Institute, and Martin is based here in Los Angeles. By the way, if you haven't seen Martin's podcast episode with Mike Gitlin, I'd encourage you to go back and listen to that about his pickup basketball game with Michael Jordan, among other topics relevant for investors.
John Queen is with us. He's a fixed income portfolio manager of many strategies, including the Capital Group Core Balanced ETF, as well as our new public-private solutions. He serves on our fixed income management committee and portfolio solutions committee. He has 35 years experience, been with Capital for 23. John got his bachelor's from Purdue and also attended West Point. He too holds the Chartered Financial Analyst designation, and is based here in Los Angeles. So here we are at the midpoint of 2025. We've got war in the Middle East, we've got shifting trade policies, a lot of other uncertainty in the investment environment. Given that backdrop, Martin, why don't you start us off with your big picture outlook. Where are we today, and where do you see us going from here?
Martin Jacobs: Sure, Will. Well, first of all, it's a pleasure to be here. And what's helpful for me is to always kind of look at these long-term charts to help put things in perspective whenever we're going through an episode of volatility. And if you look back to the 1980s and you look at these long-term charts, it's kind of a chart of my career really. I mean, I really started right after the stock market crash of 1987. To this day, it remains the single worst day in U.S. equity market history. And then since that time, we had market disruptions around both of the Persian Gulf Wars, the demise of long-term credit asset management. Obviously the big one was the global financial crisis. And then more recently we had COVID in 2020. And in each case, the market came roaring back and rebounding, and point to point, the returns have been really exceptional for U.S. investors that were willing to simply stay the course.
And so not certainly to trivialize current events, but they're very serious, right? At one point we had tariffs across over 200 countries. We had 57 select countries where tariffs were anywhere between 11 to 50% reciprocal tariffs. And then at one point at the peak, we had tariffs with China above 147%. Certainly, if those tariffs had remained in place, we would've triggered a recession in the U.S. economy, and potentially a recession, if not a slowdown, in the rest of the world. And fortunately, we reached a more manageable level around tariff negotiations. And the market quickly recovered from those events. Having said that, more recently we've had military strikes in Iran from both Israel and the U.S. and a counterstrike in Qatar across our military braces, which were largely broadcast. So pretty minimal impact there. We still have now year three of the war in the Ukraine, so there's a lot to be worried about, no doubt.
But here we sit year to date and the U.S. equity markets are up 4%. Non-U.S. markets, for the most part, are up even more. As I look across the U.S economy. I mean the consumer is relatively healthy. Inflation stands at 2.4%, so a bit above the Fed's target, but certainly manageable. We have companies that continue to invest in technology, invest in people, invest in infrastructure, and there's a lot of optimism around Fed easing over the second half of the year. And so while we're not out of the woods by any stretch of the imagination, we'll have more tariff negotiations. Certainly, we will be in the midst of a long and probably heated debate around this current budget. And then certainly, the situation in the Mideast at best could be maybe characterized as fragile. But, as we sit here today, I think things look pretty constructive for the balance of the year for U.S. equities. And I would say even more so if one is willing to take a multi-year view.
Will McKenna: That's great. I love you talking about your experience, the chart of your career, that would make a good story. And your point about, in a way, the current environment always feels more uncertain in real time, than some of the ways we look back to the past. John, similar question. Let's get your outlook on broader macro environments and interest rates, inflation. Take it away.
John Queen: Yeah, I mean to echo what Martin started out with, right? Uncertainty is nothing new. And I often joke that I've managed money through eight or nine once-in-a-lifetime markets, and this is another one of those. Uncertainty is certainly nothing new, it's probably higher now. You don't typically have the traditional uncertainty of a budget. There's always seems to be uncertainty around the budget in the U.S. Also, geopolitical always something going on there. We've got more than usual perhaps, but not that surprising to have geopolitical uncertainty.
Policy uncertainty around trade is not typically one of those components. And the fact it is now, I think continues to have a little bit of reason to be concerned in the U.S. economy. But as Martin said, we have, what I think is, an economy that traditionally is better than any other at dealing with uncertainty. It's the most adaptable entrepreneurial economy in the world. And so, you're seeing us seem to power through much of the trouble that goes on around it, the uncertainty concerns about tariffs that seem to fade away a bit. There's still some tariffs there that are bigger than before, still some more uncertainty around policy than before.
We're seeing a few early signs perhaps of slowing. We wouldn't be surprised to see that. Again, you had quite a robust economy going on earlier in the year. You've had a few things happen since then that might give pause to a company investing in a new plant or equipment simply because of uncertainty. When are they going to go do that? So we've seen some very early signs that there may be some slowing, but again, slowing is very normal. It's a very cyclical process. It doesn't mean we're about to push into a recession or something like that. And so, we're watching it closely. But I think my view would be very similar to Martin's. I'm pretty constructive on the U.S. economy. I think we're going to be able to make our way through the various uncertainties around. Obviously, it's our job to continually lose sleep and worry on our client's behalf about the things that could go wrong. And so we're watching all of that. But at the moment, I do feel pretty sanguine about the U.S. economy and its ability to navigate these tricky waters.
Will McKenna: That's great. And I love the idea you've lived through eight once in a lifetime, maybe this is your ninth live there. One of the things you talked about is how we think about uncertainty, and there's a group at Capital called the Night Watch that helps us grapple with uncertainty, and think about things like scenario planning rather than point-to-point predictions. John, can you talk about that work and how you factor that into your investment process?
John Queen: Yeah, it's a great question. That is a great group, but it's one of several groups sort of like that we have that go in depth on different aspects of the economy or the global situation. Part of my job as a generalist portfolio manager is to have kind of a lot of knowledge, but a little bit of knowledge about a lot of areas. Fortunately, we also have people who know a lot more about all of those areas than I do. And the Night Watch is a great example. They really dig down into potential scenarios. So thinking back about the tariffs, and Martin covered the range of tariffs we saw, what happens if those stay on at their full size? What happens if they pull back quickly? What happens if they stay on for a while, and then pull back? Really being able to work through those scenarios, helping me as a portfolio manager understand potential outcomes, not likely outcomes necessarily, but potential outcomes, is really important to thinking about how our client's portfolios might behave in those circumstances.
More recently with Iran, Israel, how could that get bigger or smaller? And again, what are the potential scenarios there? I think one of the really important things is that, people in finance use a lot of models. We look at how the economy works, how finance works, and we model everything. And there's this assumption about what's called a normal distribution or the kind of traditional bell curve. The fact is we don't live in one of those. And so playing out those tail scenarios that could be extreme, understanding what might trigger them, and how things might behave in those circumstances, gives us a better, clearer view of what's really going on, and why maybe we're not going into those.
Will McKenna: Right. And probably helps portfolio managers imagine those ahead of time so they're not on their back foot when they come to pass.
John Queen: Absolutely, mitigate some of the risks.
Will McKenna: OK, great. Great start. We now want to dig deeper into equity and fixed income markets and opportunities. And Martin, let me start with you maybe on kind of a two-parter, but you touched on this in your opening comments. I'm certainly struck by how resilient markets have been, given everything that's going on. Can you say more about that in terms of what's beneath that? Is it earnings power? Is it markets looking through all of this turbulence to the future? What do you think is really driving that resilience that we're seeing?
Martin Jacobs: Yeah, great question. I've always been impressed at how efficient the market is in its ability to look through events that ultimately are short-term or temporary in nature. Which is not to say that there's not a lot of angst and anxiety around the announcements of events, and the potential risks, and the potential long-term implications. But once the market kind of reaches a point where there's some resolution around a more favorable, reasonable outcome, it moves very quickly and efficiently to rededicated focus on the long-term underlying fundamentals of companies and businesses, which is what we try to do every day. And at the end of the day, as John touched on, the U.S. economy has historically been very resilient. And at the core of that is really the U.S. consumer, which represents roughly 70% of GDP. And while consumer spending is certainly slowing, it's still positive. Incomes are rising, unemployment rates are low. We saw a big, big decline in consumer confidence in early April. Similarly, we saw a spike in business uncertainty. And in both counts, those have come back to more normal levels. And as we talk to companies, which we do really on a daily basis, companies are continuing to invest here and abroad. They're investing in technology, they're investing in people, and I think that's really what the market is focusing on.
Will McKenna: OK, great. Well, let's pick up on that and talk a bit more about U.S. markets as you see them going forward, as well as markets outside the U.S. I know you're primarily a U.S. investor. Maybe two sides of this. I think you mentioned non-U.S. markets have been ahead this year so far. Do you expect that trend to continue? We see new catalysts for growth over there potentially. Where do you see that going? U.S. markets, we've had this intense, incredible run, 10 or 12 years. Is that kind of run out of steam or are we setting ourselves up for another leg of growth? Maybe take us on your views across those couple of markets.
Martin Jacobs: Yeah. Well, it's an interesting question because if you look all the way back to the 1970s, basically U.S. and non-U.S. markets have gone through these roughly eight-year cycles. The U.S. market will outperform non-U.S. markets for eight years, and then non-U.S. markets will outperform U.S. markets for eight years. And so what we've witnessed here recently is quite the anomaly. We've actually gone through up until recently, more than 14 years of U.S. outperformance. And a lot of that is attributable to really just a handful of these big mega-cap technology companies.
And it's really a testimony to their growth, the reach that they have, the profitability, but the commonality is just their tremendous ability to scale on a global basis and the expansive of markets that they're able to not only participate in, but to actually grow, which is really a unique period, and it's very unique to those business models. Now, having said that, when you looked at valuations of U.S. markets relative to non-U.S. markets, they had gotten to a level of disparity that most of us have never seen in our lifetime. And there was probably a fair question around whether or not U.S. markets had really just gotten overvalued relative to the values and the opportunities that we see outside of our borders.
Will McKenna: Well, I mean, I got to admit I was ready to capitulate on my non-U.S. holdings at the end of the year. I know that's a classic investor mistake and I should know better, but I'm glad I didn't.
Martin Jacobs: Yeah. Well, the thing that you have to remember about this reversal that we've seen is that there were fair questions being asked about this narrative around U.S. exceptionalism, the fact that we've always been a country where you expect stable economic policy, and that's been called into question. The value of the U.S. dollar relative to currencies around the world also has been under pressure. So it's not surprising that in that environment, non-U.S. markets are starting to act a lot better.
Now, whether or not that will continue, it's hard to say, but there's certainly valuation disparity that needed to be remedied. And I think part of that is playing out. Now, longer term, I still remain bullish on U.S. equity markets because I feel like the U.S., the advantage is really around our innovation, our technology. We are not long natural resources, although we're certainly well positioned there. We're certainly not long population. I mean, we're just 5% of the world's population, but we, more than any place in the world, have this incredible model around bringing invention and innovation to commercialization that is simply unparalleled around the world. And that's what really gives me optimism about U.S. market potential for many years to come.
Will McKenna: Cool. I'm going to follow up later and ask for some examples of that. Given your background in industrials and that cycle, you mentioned innovation to commercialization. Sounds really interesting. John, a lot of eyes on the Federal Reserve. They're in kind of a difficult spot. Take us into your, and we have a rates team, the team's thinking around cuts and what we expect in the second half of this year. Where are we netting out?
John Queen: Sure. Well, I think that, as you say, the Fed's in a bit of a tough spot. Things are pretty good overall, but it's important to remember that they have two mandates. Full employment, which they define as many people employed as possible without becoming inflationary because the other side of their mandate is stable prices, which they define as about 2% inflation. Right now, we're a little bit above that 2% inflation, although it has been coming down, as Martin pointed out earlier, we're down to 2.4%, give or take a little bit depending on which measurement you're looking at. And then we're at pretty full employment, look good on the unemployment rate, look good on our non-farm payroll numbers. So it seems like they don't need to do a lot right now, but as inflation's coming down and there's some early inklings perhaps of slowing in the economy and the fact the Fed has said themselves that they think they are moderately restrictive at these levels, they do want to cut.
What we look at is so rather than give a finite point estimate on where we think they'll be, because inherently we're overlaying what we think they should do versus analyzing what they will do, we look at what the market's pricing in, what we see in the economy, does that look reasonable? And right now, rest of the year, two, two and a half cuts. And that seems very reasonable given, as I say, a little bit of slowing in the job side, softening and inflation to where it feels more comfortable. And so we do think that's a reasonable estimate that they'll get to two, two and a half cuts this year. So it'll be two to three cuts obviously this year.
Will McKenna: So more or less in line with consensus.
John Queen: Exactly. Yeah.
Will McKenna: OK, great. Martin, let's talk a little bit about where you're interested, focused, excited about investment opportunities, you and the analysts that you work with. Where are you seeing those in this environment? And maybe give us a lens into your process. During that period of market volatility in April, were there opportunities you and the team used to see longer-term buying opportunities? But broadly, where are you focused on opportunities?
Martin Jacobs: Yeah, it's a great question, Will. As long-term investors, we kind of are opportunistic, right? Most of the time we don't do a lot because we were looking at companies over multiple years, and unless the thesis changes or the valuation gets just out of whack, there's no reason really to make a lot of changes. But from time to time, the market offers you these opportunities. And we saw that in early April where there were certain sectors, particularly technology, industrials, consumer discretionary, and anything else that was either economically sensitive or impacted by tariffs that had sold off a lot. One of the areas that I liked a lot were, for instance, the semiconductor area where most of those stocks were off were more than 30%. Great companies like Nvidia, Taiwan Semiconductor, Broadcom, AMD, Micron. And interestingly, we sit here today and all of those stocks have fully rebounded and more so because I think people appreciate the fact that they literally are at the core of this large growth in compute capacity.
Will McKenna: The AI revolution.
Martin Jacobs: That's exactly, driving all of the demand for these large language models, whether it be training models or inference models, and they are at that kind of core infrastructure layer. And so those companies are vital. And so as a result, these are companies where we saw huge intrinsic value. They were on sale. And so as a long-term investor, you love these dislocations in the market because it provides you with an opportunity to add to positions in long-term secular themes that you like a lot. And if there were anything I would complain about, it was just too short.
It literally just lasted about six weeks, and the market was almost back to where it started. But we saw a lot of opportunities in industrial companies and consumer discretionary as I mentioned. And so for me, that was an opportunity to make a few changes at the margin, but it doesn't necessarily change my positioning for my portfolios long term. I still like technology, innovation, disruptive companies. I think there's a lot of opportunities in industrials around areas like commercial aviation. There's great opportunities in social media companies. I just got my Meta glasses for Father's Day. They're great. Netflix, which is a fantastic company with over 300 million subscribers. They were in the midst of a streaming war. They won the war, and now they're going to generate something like 90 to a hundred billion dollars of free cashflow over the next 10 years. And they're really unmatched in terms of their global presence and their franchise and their business. So we see a lot of great long-term opportunities, both in the growth side as well as growth and income.
Will McKenna: How different is your Netflix profile versus your wife's?
Martin Jacobs: Yeah, my Netflix profile?
Will McKenna: Or what on the home screen versus what your wife's-
Martin Jacobs: Oh, that's a great question. I would say we're probably maybe about 30% overlap. She's big on the rom-coms and I'm big on the adventure, action-adventure.
Will McKenna: OK. That's exactly my split too. Just one quick follow up. You talked to industrials. You've had a lot of years experience in that space. Can you bring that to life with an example? What are the kinds of innovations or companies that reflect that type of innovation that you're looking at right now?
Martin Jacobs: Yeah, so in the industrial realm, I feel like whatever you see play out in the technology realm gets played out in a lot of other industries, but particularly the industrial realm because those companies are essentially leaders in driving productivity and innovation and operational efficiency. So to the extent that they can bring more data and predictive maintenance into what they do, that makes those companies not only more cost-efficient, but they can also provide more value to their customers. And so companies on the leading edge would be companies that we've traditionally talked about in the past, like a GE Aerospace, which is using more predictive analytics around safety for their engines and across the whole kind of aircraft platform. We talk about companies like Rockwell Automation, which is a key player in the industrial automation market.
And we're going to see a lot of innovation in that space over time, as you see more AI models brought into the way that we manufacture goods and distribute goods across the country. And then obviously beyond that, all across the distribution phase. A lot of what you see in the warehouse technology at Amazon and other companies is being duplicated across the industrial sector and the industrial distribution area of the market.
Will McKenna: Right. That's great. John, we're getting a fair number of questions about national debt and deficits. Not a surprise. That would be a top of mind topic. And also the fact the one big beautiful bill act is winding its way through Congress even as we speak here. How are you and the team thinking about that bill and its impact on the bond market? Take us inside your thinking there.
John Queen: Sure. Well, I think the important thing to remember is that concern about the debt and deficit is, again, like I was talking about on uncertainty, is nothing new. When I first started in finance, probably the single biggest worry was the unsustainability of our deficit and the debt. So that was a long time ago. And I don't mean to trivialize it because we have had significant increase in the debt level relative to the size of the economy over the past decade or more. But our unique position as a reserve currency, despite a lot of news around it, continues to be largely unchallenged. The fact is that as big as our Treasury market is, the debt effectively that's been turned into Treasury bonds, the rates market built around that is vastly larger. So swaps and futures that people trade U.S. rates around it. So the market's ability to set pricing on U.S. interest rates is fairly complete. And Martin talked about it on the equity side, the ability of the market to look through current worries and look in the long run and price that in well, is very efficient. So as we look at what's going in on the bill right now, certainly we continue to worry about the overall size of the debt, what that might mean for financing costs, how much debt the Treasury needs to issue. But we don't have any unique insight. The market is seeing all of that too, and it's priced into Treasuries. In fact, I was in a board meeting for our mutual fund boards a couple of weeks ago. And one of the questions was that Thursday was the 30-year auction.
What's going to happen if nobody shows up for the 30-year auction? Well, the fact is that the market had known for months how big that 30-year auction was going to be, and they were able to price exactly what they wanted to buy those 30-year Treasuries at well ahead of time. In fact, when the auction happened, Treasuries actually rallied a little bit because it went a little better than expected. So it's a worry, but when it actually may bite is completely unknown and there have been for decades now, people predicting catastrophe right around the corner. And so I'm not going to predict that. I'm instead going to say, I think the market's really good at pricing those things. We're going to continue to watch it and see what impacts it might have on our portfolios. And make sure we're protecting our client portfolios appropriately, and take advantage of things when a little catastrophizing happens and maybe we get some opportunities.
Will McKenna: They're mispriced. That's great. Martin, you talked a little bit about the growth of your end of the spectrum where you're seeing opportunity. You also wear a dividend investor hat. What are you seeing that's interesting in that part of the market?
Martin Jacobs: Yeah. Well, investing in higher dividend paying stocks I think is always interesting because you're essentially in a pond where there's a lot of doubt and skepticism and you're looking at a lot of unloved companies, if you will. And so it requires, I think, a unique set of analysis to look at both risk and opportunity because it's a bit of a minefield. Many of these companies actually are in fact troubled companies that will become more troubled. And so this is one of those areas where we really, really leverage the deep expertise of our analysts and the fundamental research that we do. But as I look at that area, there's a few different baskets that I try to focus on. And one are just companies that are out of favor because of the cycle or what's going on in the economy. And those would be, for instance, a lot of great industrial companies with strong dividend policies.
An example would be International Paper or Stanley Works, which were impacted both by recessionary fears as well as the impact of tariffs. And those are companies that have kind of recovered nicely from their lows. A second would be a category which I would call maybe more kind of core dividend paying stocks. So that would be maybe some select utilities as well as, for instance, the tobacco companies. Tobacco is actually an interesting example because two years ago sentiment around that group was really, really negative. The mindset was that these companies were in secular decline. There was absolutely little to no value given to their investments in smoke-free products. And now we look at a company like Philip Morris, and it's been deemed essentially a growth stock. It's basically growing this smoke-free part of the portfolio, which has been doing very well in the market.
They're selling nicotine patches and it's growing very nicely. So that's an example of something that might be more kind of in that core camp. And I think the commonality is, once again, it really is about leveraging the deep work of our analysts to figure out what's differentiated, what are the things that people aren't seeing. So there's a lot of great examples there.
Will McKenna: OK, great. So out of favor and the core.
Martin Jacobs: Yes.
Will McKenna: John, I want to come to you. Martin's been talking about areas that we're seeing opportunity. Can you do that for us across the bond sectors? Where are you and the team finding interesting opportunities across mortgage-backed, corporate, high-yield, munis, go down the list?
John Queen: Right, sure. It's interesting, the fixed income market has actually kind of followed a similar path to what Martin's describing on the equity side. And we do think of, say corporates as within bonds kind of risk assets, and they do tend to move a little bit alongside equities. So we saw a significant cheapening of investment-grade corporates, high-yield corporates, some of the emerging markets areas, structured credit, during that sell-off. Most of that has come pretty much all the way back and I would say we're not finding a ton of value in broadly investment-grade corporates, high-yield corporates. Structured credit still looks a little bit more attractive. It hasn't come all the way back alongside those other two. Mortgage-backed securities continues to be a place that we think has some real value. We don't think there's a catalyst for it to significantly outperform and have major capital appreciation, but rather it's trading a bit cheaply.
We think it will continue to offer some excess yield in very high-quality securities. And additionally, if we tend to stay within a relatively tight range of interest rates, the options that are effectively embedded in mortgage-backeds where people can refinance, tend to not hurt you very much. And so those we think are quite attractive. I would though echo what Martin said, which is where we're finding the most value right now rather than sector-wide, is really in idiosyncratic opportunities where our deep fundamental analysis can uncover in investment grade, in high yield, in structured credit, emerging markets, better than the rest of the opportunities kind of bonds to buy. So maybe individual companies that we think are de-levering or the market doesn't fully understand. Maybe a country that our emerging markets analysts really like better than we think is priced in the market, or on the structured credit side where we can...
For example, the last couple of years you had commercial mortgage-backed securities do very poorly. There was a lot of concern that no one would ever go to the office again, that cheapened up. And so we were able to buy a lot of those. We continue to see those kinds of opportunities within structured credit today where we can do that deep fundamental analysis and uncover sort of an unloved category that we can put into portfolios and our clients can benefit from.
Will McKenna: And in addition to all that, we have an exciting new opportunity in a public-private credit solution that you're a big part of. Maybe talk about opportunities you and our partner KKR are seeing in private credit. But then help our audience, tell them a little bit about this new product we have.
John Queen: Sure. Yeah, private credit is very exciting. It's something that certainly has had a lot of press over time. And I think one of the questions that comes up a lot is, boy, there's been a lot of press, a lot of money going into private credit, is that sustainable? And the fact is, I think it's part of a very long-term trend called disintermediation that we were hearing about when I was first on the trading desk back in the early '90s, banks used to loan everything to everybody and then keep all the loans on their books. And now banks loan to some people, sell most of those loans out to the market and other people have stepped in to loan to companies, consumers, et cetera. And so private credit is another important piece of that puzzle. There's two flavors that we're utilizing.
One is direct lending, which are sort of traditional business loans underwriting by banker-type individuals. And then selecting the few that they think are really good credits, putting those into portfolios. The other is asset-backed finance, similar to what we do on the structured credit side but much more private, much more helping issuers who issue loans, package those and maybe securitize them for the market. We really like both of those because they offer both as they are private and less liquid and a little bit less transparent to the outside world. They offer some diversification. They don't tend to trade alongside of either equities or regular fixed income.
And so we've packaged those two with what we think of as relatively traditional public fixed income components, a core plus. So for somebody who has a credit component to their fixed income portfolio already, 60% of that less liquid than the core plus plus but still quite liquid compared to what we see on the 40% private side. And that combination that we think is a really powerful opportunity for our shareholders. So we're really excited about offering this.
Will McKenna: That's great. Now, I would just encourage everybody in the audience reach out to your Capital Group team to learn more about this. It's quite new. It launched in April. And yes, please reach out and learn more about it. Let's pivot and talk about some of the portfolio implications here. Martin, you covered a lot of this I think in what you were talking about in terms of taking advantage of opportunity as well as in the dividend space. But how are you thinking about positioning your portfolios these days? You are in some growth portfolios, you're in the capital group dividend value ETF, what are you doing differently, if anything? How are you thinking about positioning in this environment as you look ahead the rest of this year and into '26?
Martin Jacobs: Yeah. Well, for me it's pretty simple, Will, I am what I characterize as a pro-market investor, which is to say I don't try to time markets. I believe that markets go up over time for a lot of strong reasons, including globalization, innovation and productivity, which are incredibly powerful forces. I believe that markets will continue to go up more often than they go down, which has been roughly a factor of two to one over the history. And I don't think the future's any different. And so as a result, when you look at my portfolios, it's kind of a combination of these, what I would call core long-term compounding companies. Companies that would be characterized by superior or organic growth, margin expansion, strong free cashflow generation and strong capital allocation. And importantly, have very strong leadership teams. And I put a lot of emphasis on the CEO in particular.
And so these are companies which I would characterize as they have this kind of systemic element to them where they have the ability to, on a sustainable basis, create shareholder value year after year after year. Those are very rare companies. And so when you find them, the tendency is you want to hold them for decades if you can. And then of course, I kind of balance that in more of a barbell-like strategy in my growth and income responsibilities against the core kind of income opportunities, which we've talked about. So it would be kind of core income opportunities like tobacco and utilities against those companies that are having higher dividend yields, because of some level of skepticism around either the cycle or they're in a turnaround state or perhaps there's an industry transition. So that really, for me, hasn't changed much over time.
Will McKenna: Did I miss something on your dividend comment? You talked about the out-of-favor bucket, the core. Was there a third or was this mainly those two that you spoke to?
Martin Jacobs: It's mainly those two. There are variations on the out-of-favor, but really in general terms, it's really core and skepticism if you will.
Will McKenna: And I would encourage you, go listen to your podcast with Mike Gitlin. I know you get into more of it, and I think you talked about, Martin keeps a very concentrated like 20 or fewer stocks, oftentimes fewer than 20 in his portfolio. He also wrote a cool research report about a year ago called Profiles in Superior Leadership, where you talked about CEOs in your many years of experience that have those kinds of characteristics. Stay tuned. We'll probably publish that on Capital Ideas later this summer if and when things calm down. But we shall see. John, I think when you think about your portfolios and positioning, I'd love to focus in on the concept of you're on the Capital Group core balanced ETF strategy. So a classic 60, 40 stock bond or somewhere in there, 65, 35. When you think about that 35, 40% in the bond portfolio, how would you think about or talk to our audience about allocating that bond portion among the different slices of the bond market?
John Queen: Sure. I mean, first I just want to question why you're trying to boost Martin's numbers on the podcast over mine.
Will McKenna: Martin and I have an arrangement. We worked out an arrangement before this. You know my phone number. Give me a call.
John Queen: But it's a great question and I think it's something we think a lot about. I mean, when we manage fixed income portfolios, nobody buys their bond portfolio for maximum total return. They want it to play a role in a portfolio, and so we think very deeply about how does this fit into the broader portfolio context. So in a time like now where there is elevated uncertainty around policy and some other areas, we think that the opportunity on the equity side still looks good, but we want to make sure that bonds are able to play, particularly when pricing is the way it is, a defensive role if needed.
So it doesn't mean that our bond portfolio is super aggressively defensive in that it's all treasuries or it's all looking for downside, but we want to make sure that if we get some hiccups along the way, and certainly there have been a few over the last few months, that it can play the role it's supposed to play next to those equities. And so if you look at what our portfolio strategy group, who does the macro overlay is doing or what I'm doing in portfolios and how I'm thinking about it, we've got a little bit more rate duration than probably we might on average. And that would be the place where if we start to see a hiccup, typically interest rates tend to decline. Prices on treasuries go up, so we want a little bit more aggressive positioning there, which is defensive. It also means that it helps offset where our corporates or something else might do poorly in that moment.
We think that if something does happen or if we get some slowing in the economy, the short end of the interest rate curve will tend to move down more quickly than the long end. We want to be a little more focused there. We're a little lighter in investment grade corporates because of that as well. Pricing isn't attractive and there's reasons to worry about hiccups along the way. We want to be positioned to take advantage of those rather than suffer from them if we get one of those hiccups.
Will McKenna: That's great. And again, all good topics to go deeper with your Capital Group team to dig into some of those specific details. OK. Maybe turning to some closing comments with you two. On a lighter note, any good book recommendations that you're thinking about these days? What's on your nightstand that has your attention?
Martin Jacobs: Yeah, well there's a book I finished recently and it was really, really kind of life-changing in some ways for me. It's called Outlive by Peter Attia. It came out a couple years ago and Peter's a physician and he talks about essentially health and wellness. Best book I've ever read on the subject, but a lot of it is about nutrition and working out and sleep and he provides obviously the scientific perspective as a physician, but also he shares a lot of his own personal life journey and the struggles he's gone through both physically and mentally. And I feel like it's really helped me kind of change some behaviors and patterns and I think it's the best book I've ever seen around preventative kind of techniques to really live a longer and healthier life.
Will McKenna: Cool. You look great, man. But whatever, it's working. You look fit, you look healthy. And I will say your partner, Chris Buchbinder, made the same-
Martin Jacobs: Oh, wow.
Will McKenna: So Chris and Martin are both on the-
Martin Jacobs: OK.
Will McKenna: Dividend Value ETF.
Martin Jacobs: OK.
Will McKenna: John, what about for you? What's had your attention?
John Queen: Certainly echo that. I think all of us as we get old start to gravitate toward the Peter Attia book because it is really powerful, but actually for a management off-site we’re doing, we were tasked to read Rebel Ideas by Matthew I think it's Syed and a very interesting book on making sure the different perspectives and how they influence decision-making. That also got me to rethinking and I've taken back out, I haven't restarted it yet, but the book on Lincoln a, oh, I had it in my head.
Will McKenna: Team of Rivals.
John Queen: Team of Rivals.
Will McKenna: Yeah.
John Queen: The idea that multiple perspectives, people who don't necessarily agree coming together to make better decisions. I think those are really powerful for us to think about and it helps me think a lot about navigating what we navigate every day at work, where you're being bombarded by all these different views and as I said earlier, catastrophizing in some cases how to sort of take those in, try to parse them and come up with something that makes a more rational view in the middle.
Will McKenna: So Rebel Ideas, that sounds interesting. Can you give us any insight? How did that go at the off-site? Was there-
John Queen: We haven't had the off-site yet.
Will McKenna: Oh, you haven't yet?
John Queen: Rereading it.
Will McKenna: Oh, tune in next month.
John Queen: Yes, exactly.
Will McKenna: We'll see if it was hot debate there, but that sounds like a good one. I know the audience always likes to hear those. So again, Rebel Ideas and Outlive, which you've heard on this show before, but worth picking up. Why don't we round home and talk about some of the key messages you all would like our audience to take away from this discussion? John, why don't you start us off?
John Queen: I mean, I think the biggest takeaway probably is where we started, which is it's really easy to be caught up in uncertainty, volatility, the worries. And it's important to remember that whether it's news shows, or financial news shows, or editorials and papers, their job is to get you worried or excited and keep you watching. The fact is uncertainty is nothing new, volatility is nothing new. There are always things going on in the world, in the economy, in policy, and so keeping a level head through that, keeping a longer term perspective on your portfolio, your client's portfolios, the goals that you have, and focusing on investing for those rather than worrying about the latest news headline that's causing volatility in markets. I think that's really the key. And so both Martin and I have talked about the fact that over our careers, you've seen multiple episodes like this or worse and the economy in the U.S. in particular, but the global economy tends to come through it quite well and we're going to be watching and making sure that we're invested to take advantage of those things for our clients.
Will McKenna: Martin, same question. Key messages you want to leave with our audience today?
Martin Jacobs: Yeah, yeah. Well, my comments are going to be very similar to John. I talk about investing in general, but investing in equities in particular to think about it as a marathon, right? It's not a sprint because the power of compounding is really powerful. You go back to that long-term chart, which once again maps most of my career. Every calamity that's highlighted on that chart I lived through and I remember the anxiety, the concern, the world's coming to an end and yet we continued to rebound. The U.S. economy, the global economy generally is incredibly resilient and these things do pass. But you just have to be focused on the long term. You have to understand there's going to be intermittent volatility along the way. That's just part of what happens in capital markets. But those who are able to kind of stay the course I think will do just fine.
Will McKenna: Well, and people like you, active managers whose job is to during those tough periods, go in with conviction on some of those companies you've spent years researching and know about and can help identify good times to get them. That's a great concluding thought.
Before I sign off, I do want to remind everybody, please download a copy of our Midyear Outlook. This was a sort of tricky one to put together given the period that we've been living through, but I think good stuff in there and should be helpful to you. Also, please mark your calendars for our next webinar, which is July 31st, right before the kind of August Aloha period. Our topic there is Asset Allocation in Uncertain Markets and we have Paul Benjamin and Hilda Applebaum on that. Also, let me just thank everybody for your engagement. It's really because of you that Capital has been voted number one for thought leadership recently this year for the sixth time. And finally, let me thank these guys, Martin and John for a fun conversation today. Some great insights. I hope you all found this as interesting and engaging as I did. And let me end by just saying thanks again and enjoy the rest of your day.
