Featuring:
Paul Benjamin
Equity Portfolio Manager
Hilda L. Applbaum
Portfolio Manager
Will McKenna
Content Director
Will McKenna: Welcome to Capital Ideas Webinar series. I want to thank everybody for joining us. Good to be with you. I hope everybody's having a great summer so far. Our topic today is Asset Allocation in Uncertain Markets. In the next hour, we're going to dive into your key questions, including what's our outlook on the economy and markets in light of elevated uncertainty? Where are we finding interesting investment opportunities in equities and fixed income as we look over the horizon? And how can you as investors approach your asset allocation positioning to help navigate through this complex environment? So we're going to answer those questions and your questions, and we have two really great speakers to help us do that.
Hilda Applbaum and Paul Benjamin are both what we call hybrid or multi-asset portfolio managers on our flagship balanced strategy, American Balanced Fund. That means they invest in stocks, bonds, and cash, which is a relatively rare thing here at Capital Group. I think we have fewer than 10 portfolio managers who are hybrid in that way, and that's why they have a really distinct perspective on asset allocation.
Now let me give you a few more details in each one of them. Hilda Applbaum is also Principal Investment Officer on the Income Fund of America, among other responsibilities. She has 41 years of experience, been with Capital for 30. Early in her career as an analyst, she covered global convertible securities, and she holds a master's in economics from New York University and her bachelor's from Barnard. She also holds the Chartered Financial Analyst designation. Hilda is joining us today from San Francisco.
Paul Benjamin, first of all, I heard that today is his 20th anniversary at Capital Group, so please join me in congratulating Paul on that milestone. He is a Principal Investment Officer on that flagship balanced strategy we were just talking about. He is also a portfolio manager on the Capital Group Growth ETF among other responsibilities. Paul's doing value and growth, so we're going to be digging into that and his views there. Earlier in his career as an analyst, he covered U.S. large cap software company, so we're going to dig into his views on tech and AI and all that good stuff. He got his MBA from Stanford and a bachelor's in finance from Northwestern College. Not to be confused with Northwestern University where Leo McKenna just graduated in Evanston, Illinois. Paul is joining us from Los Angeles today, and I'm joining you from New York, so you've got us all over the place today, and we're really delighted to be with you. Thank you guys for joining us.
Let's jump right in. Paul, I want to start with you. It's safe to say there's been a lot going on in the investment environment this year. We've got multiple wars, a trade war shifting geopolitical alliances. More recently, we've got some trade deals that have come through, but tomorrow there's another big tariff deadline. Against that complicated backdrop, 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?
Paul Benjamin: Absolutely. These things can change, and they can change on a dime. Unfortunately, I won't be there to say if I've changed the view, but my current view, there's no question the stock market is historically expensive. We're certainly not at an economic cycle trough because we have 4.2% unemployment rate, but we've had very, very slow growth globally for the last two years.
Industrial production growth was very, very slow to negative. The global PMIs were below 50 for over two years, which by the way, they were only below 50 for 18 months in the financial crisis. The Conference Board Leading Economic Index has been declining for over two years. It only declined for 18 months in the financial crisis. I think that there's a very real scenario where what we have is very easy comps globally on industrial production and economic activity, even though the unemployment rate remains low. I would say I'm optimistic that we could see reasonable amounts of economic growth, particularly there are a number of stimulative things in the One Big Beautiful Bill as it's called. Also, that will continue to run large fiscal deficits. Those deficits are stimulative to the economy. Some people talk about there being a fiscal multiplier where when the government spends a dollar that you get actually more than a dollar back in economic growth.
I'm not a believer in that at all, but let's say you thought the fiscal multiplier was even 0.5. So if the government spends a dollar, you get half a dollar of economic growth. A 7% deficit could give you three and a half points of economic growth. These deficits are supportive. Then if you look at what's happening with money supply and the dollar, is growing very healthily in the United States, it's been accelerating for 12 months. It's growing even faster globally and continues to accelerate particularly in dollar terms because the dollar has been weakening.
A weak dollar is quite supportive of global growth for a number of reasons. Most countries or companies around the world when they have their debts, they're in dollars. If the dollar goes down, that means their indebtedness just went down and they can either take on more debt to stimulate growth or they just feel a little freer to spend. I guess, what I would say is the broad picture, while stocks are not cheap, we are coming off a fairly slow economic period. We have easy comps, we have a lot of M2 growth, and we have fiscal stimulus from the government. I'm on the margin. I'm generally very bearish. I would say I'm slightly less bearish than usual.
Will McKenna: You covered a lot of interesting fundamentals there, but you didn't really reference what's going on in the geopolitical sphere. Say more about that. Why are you not as focused on that perhaps?
Paul Benjamin: I'll say this, even when we were talking about 50% tariffs on everybody in the world, our rates team were very, very good at measuring inflation and inflation impacts, did all this work. They were very nervous about what these tariffs could do to the economy, but in their estimation, the 50% tariff on the world would be about two to three points additional to. My guess is if you look at what the European deal just came out at, I suspect we'll see 10 to 15% tariffs. So you're going to see a fraction of that two to three points increase in CPI. My view is that that is not enough to cause us to break down economically globally, given the comps that we have. Frankly, Trump, while he does a lot of stuff, and particularly he starts with a high anchor on any negotiation and then he brings it down, he's very responsive to financial markets.
Will McKenna: Got it. That's helpful. Hilda, over to you. Similar question, can you start us with your outlook on the macro and market environment?
Hilda Applbaum: Well, I'll start by saying, had you read me the headlines of 24 or 12 months ago of what was going to transpire, I would not have predicted an up market and certainly not an up market as strong as it has been. That's one reason I'm not a strong believer in tactical allocation, because sometimes even with perfect knowledge, you certainly at a minimum don't get the timing right. I do think you get opportunities to make strategic decisions when you think the long-term view that you see for the market differs from what the market is pricing in. I think the last couple of years have given us a bit of that opportunity, and this will be a way for me to moderately disagree with a little bit of what Paul said. That is I think the market has been overly optimistic, particularly the bond market in terms of how quickly rates would come down.
I think we went into 2024 thinking that we were going to get seven-plus rate cuts. We came into this year maybe less optimistic, but thinking that the interest rates would come down beginning in the early half of the year. None of that has happened, largely on the back of concerns about tariffs and inflation implications. I don't disagree with Paul that the tariff implications for inflation are not as great as some would have you believe, but on the margin, they make inflation a little bit more sticky. As we've seen, the Fed has been reticent to cut interest rates in advance of greater tariff certainty, and certainly, we have not hit their magic 2% inflation rate. I think the tariffs make hitting that 2% inflation rate a little more challenging.
With respect to the bond market, higher deficits are problematic. Even if the Fed does cut interest rates on the short end of the curve, we might be in a situation where the long end of the curve remains elevated, largely because deficits are higher, the dollar is weaker. I agree with Paul, it can be stimulative in terms of giving foreigners more purchasing power, but it makes our debt market far less attractive in terms of investing, particularly at the long end of the curve. We may be in an environment where while short-end rates start to come down, long-end rates may not. That has implications for the mortgage market. That has implications for debt financing for corporations. On the margin, I agree, I do think we will get positive economic growth. I think the on-shoring will offset some of the tariff and inflation concerns, but I do think on the margin, economic growth might be a bit weaker than it would otherwise have been, were we not in the current tariff environment and deficit environment.
Will McKenna: OK. I heard you say you're not a strong believer in tactical allocations, but much more strategic and focused. Obviously, we're going to get to that in more detail when we talk about asset allocation in detail and some disagreement. We like that, Hilda, at the Capital System here, we like having different views, so hey, the more disagreement the better makes for good TV on this program. But that's a very good start. Thank you.
I want to shift gears now and talk about where you're all finding opportunities in stock and bond markets these days. Paul, I mentioned it in your introduction. You were a tech analyst for many years. I know your coverage included Microsoft, which just became, I guess, the second $4 trillion company. Given your experience in tech, how are you thinking about, first of all, the AI revolution, AI investment opportunity and what that looks like going forward as well as maybe tech more broadly?
Paul Benjamin: Yeah. Well, you're hitting on my favorite topic here. I'm probably spending more time researching AI right now than anything else. I covered software and hardware actually here, started that 20 years ago, and before business school, I helped start a tech company in the dot-com boom. Been around multiple tech cycles for a long time, and this is unlike anything we have ever seen. It just sets the stage of prior tech cycles.
In the early 2000s, we went from the standard form of distributed computing to software-as-a-service with applications. What's happening with AI right now is so much faster than that. In fact, last year Nvidia had several quarters in a row with over 400% year-over-year growth and they did that with $100 billion in revenue on their data center chips. So we're at a scale of growth we have never seen before. I would also say that anecdotally, if you looked at how much an iPhone improved year-over-year and even in the early years, it was improving, but it wasn't blowing your mind. Public cloud, it was a new thing, it was great, it improved, it had features, but nothing was transforming, whereas if you look at ChatGPT, it was less than three years ago that we saw ChatGPT2.5 when it would hallucinate like crazy and it was wrong about everything.
And now, we're at a stage where I find, it blows my mind. 12 months ago, there's a Norwegian IQ test that's considered the gold standard in the world, most of these AI models were scoring about an 85 or a 90, they're scoring high 120s to 130 now. So they're two standard deviations smarter than the average human now. And that's happened in just one year. So if you just talk about experientially what you see out of the models, what they're performing at in IQ tests, the rate of growth that we're seeing has just never been anything like it.
Microsoft Azure just accelerated to 39% growth year-over-year in the most recent quarter, and that's at a $75 billion run rate, accelerated to that despite the fact that they're not, for various accounting reasons, not actually recognizing the open AI training spend as revenue, and they're sold out. They thought that they were adding and data center capacity so fast, they've been sold out for 12 months. They thought they would finally catch up with demand by this quarter, and now they've pushed out. They don't think they'll be able to catch up to demand until the end of the December quarter.
So given that... Another thing I'd say is the big picture. To me, what I'm seeing out of these models, the capability that they're producing, it feels like obviously to me in the last 300 years, the biggest innovations for businesses society would be the railroad, the internet, and AI now. If you look at historical cycles where these platform shifts go on for multiple decades, I feel like this is an area that's ripe for investment.
Will McKenna: So some of the near-term concerns about valuations, you're seeing a longer-term potential runway there?
Paul Benjamin: Yeah.
Will McKenna: And anytime you can reference 300 years of history, we love having that on the program. That's great.
Paul Benjamin: Well, the other thing I would say on valuations, the truth is they look nothing like the dot-com bubble peak. Nvidia's P/E is high at 30. It's about 50% higher than the average stock in the S&P 500 but for 20 years, it has traded at about a 50% premium to the S&P 500. Microsoft is about that level as well. Microsoft is a 95% recurring revenue subscription business growing earnings in the low-to-mid twenties. Those are not multiples that kind of give you nosebleeds. And then, you have companies like Alphabet, which continues to grow earnings around 20%, trading at a material discount to the S&P 500. It's 20% cheaper than the average company in the S&P 500 and they have one of the best-performing AI models in the world. Meta is only a 20% premium to the S&P 500. The multiples, on some regards, if you looked at EV to sales they don't look low, but as multiple earnings, they are not terribly high in my estimation.
Will McKenna: Got it. Hilda, let's bring you into the conversation. I know you and Paul have some different styles in the portfolios you build. Where are you seeing opportunities that you're focused on and has this year's volatility offered you any interesting buying opportunities?
Hilda Applbaum: Yeah, so I always find it interesting that the market tends to either fall into love or to hate. And Paul just talked about the part of the market that has fallen into love and tangentially, I'll point out that even though railroads, internet and now AI were truly revolutionary and changed the world, Penn Central did go bankrupt, the internet bubble did burst.
Paul Benjamin: Boo.com went bankrupt, yeah.
Hilda Applbaum: So that is an aside. But I want to talk about the part of the market that the market hates. When the market hates, it hates very passionately and valuations tend to come down much harder and much faster than the actual earnings come down. And I find that to be an interesting part of the market to explore and investigate. Now, the market is the collective wisdom of the crowd. So I don't think just because the market hates something, you should assume that they're wrong and that something is undervalued. I think it's really important to have an underlying investment thesis and understand why you believe differently and why the market might indeed be wrong. One example, and I don't have a conclusion yet, but if you look at 2025, you look at the managed health care companies, they have, for all intents and purposes, had poor earnings, fundamentals are challenged, but valuations have come down much more dramatically than have the earnings. The market's telling you that something has changed, the business model has changed, patient spend has changed, government threats to pricing are, going forward, going to be different than they have been in the past.
And that all may be true and we won't know for some time to come. The flip of that maybe, we've seen managed health care cycles in the past where risk is mis-priced, companies have been negatively selected in terms of risk pools and insurance company with very short-lived insurance plans. So over the course of a year or two, they can reprice and when they do reprice, that can be very lucrative and they can return to profitability very dramatically. So therein lies an example where the market is saying one thing, history suggests another, and we need to do the work to figure out do we think it's a new paradigm going forward or is this just like some of the previous cycles and this is in fact an opportunity.
More specific and maybe a little bit easier to grasp is individual companies, kind of the fallen angels of sorts. If you look at a Nike or Starbucks, they were under- or mismanaged companies where previous managements had lost the plot of what makes the company attractive and what makes the business run. The boards in both those cases have brought in either turnaround specialists or people who had previously been successful in the companies and they have a plan. Now, only time will tell whether that plan will come to fruition, but I find a lot of opportunity in some of those unloved, overly punished parts of the market, whether it's a sector or individual companies.
Will McKenna: Paul, let me come back to you because I know beyond tech, you also have some interesting opportunities or themes that you're focused on. Do you want to touch on a couple of those that are maybe kind of at the opposite end of the spectrum?
Paul Benjamin: Yeah. Yeah, it's interesting 'cause I am equally in love with the AI stocks as the stock market, as old as it. And then, I also am strangely in love with some things the market hates. If you were to look at materials as a percentage of the S&P 500, we're sitting here at 1.8% today and historically, that's ranged from about 2.5 at the bottom to 8 at the top. The last time materials were this low as a percentage of GDP, it was 1.7% at the very peak of the dot-com bubble, and that was the other lowest in history. So we're kind of sitting here at dot-com-bubble-like low share of the S&P 500 for materials. And what's interesting about that is we really have not invested in extracting materials from the earth in about 14 years since the prices peaked in 2011. And if you were to try to build a new copper mine for example, in general, that takes 10 years in the most lax jurisdictions and 20 years in an average jurisdiction to build a new copper mine and no one's been trying to do that.
But if AI takes off, like I think it will, we are going to need gobs and gobs of copper. Even if it doesn't take off in that way, we're still going to need a ton of copper. Electric vehicles use a lot of copper, solar uses a ton of copper. When you put solar or wind to generate power, it's far away from a city. So you need way more transmission distribution than you would have for traditional power generation, that requires a lot of copper. And it looks like we could go into a period of nearly flat copper supply growth in the world because of the lack of investment in those mines. So I think there's a chance that could be very good.
Agriculture looks incredibly cheap relative to a whole bunch of long-cycle metrics. And I'd say broadly across the materials space, you're looking at stocks that on price-to-book or price-to-replacement value have only ever been this cheap last in the dot-com bubble peak. Energy is another interesting one. It's super controversial. People absolutely hate it, but that's sitting at 3% of the S&P 500. That historically would range from 7 to 16. The prior low in history was 5% of the S&P in the summer of 1998, and that caused the emerging market crisis that caused long-term capital to fail and had the Fed come in to bail them out.
I remember experiencing it viscerally. I lived in Venezuela that summer, and the price of oil had gone from 25 to about 10, and it's what motivated the Venezuelans to elect Hugo Chávez. But if you think about the EM crisis in '98 being that 5% historic low for energy as a share of the S&P 500, and we're sitting here at 3% today, it's really truly remarkable. And we've had a multi-year period now where depreciation has been higher than CapEx for these energy companies, meaning they're just not replacing their reserves.
And we'll find out what OPEC has for spare. Right now, we're very nervous that OPEC is increasing their production and we think that they have 2 million barrels of oil to go up spare, but they've been raising quotas for several months now and their production's not actually going up, and we're not seeing inventories levels rise in the United States or anywhere else in the world. So maybe they don't actually have all that spare. If it turns out they don't, oil markets are very tight globally. Inventories in the U.S. are actually lower levels relative to demand than they were in 2022 after Russia when prices got into the 100s. So I think there's a chance for energy companies to do very well also. Perhaps it'll take a couple of years to let the OPEC spare unwind and then we find ourselves are tight, but maybe OPEC doesn't have as much spare as they claim and it could happen sooner.
Will McKenna: That's great. Thank you. And just a quick follow-up for you, Hilda. Scott asked you were talking about healthcare sector. Any companies that you find interesting or that you might use to express an example of what you were talking about?
Hilda Applbaum: Yeah, so I'll use two and I'll contrast them. CVS is a health care company, I mean they're known as a pharmaceutical company, but they own an insurance company and a PBM, and they were negatively selected in terms of the enrollees that they took on a couple years ago. They mispriced the risk terribly. They were an under-managed company that was in denial for a couple of years and very much in keeping with prior history, they got part of their pricing back one year, they got more of their pricing back another year, changed out management. They did have an activist come on the board, which I think expedited some of the changes in some of their realizations. But now two to three years on, they're seeing better results in a number of other health care companies. As a matter of fact I think they reported this morning, they did not see any of the pricing pressure and some of the negative impacts that some of the other companies had reported earlier.
The flip of that is UnitedHealth, which was the darling of the managed health care sector, and didn't show the early warning signs that CVS did two and three years ago. Those chickens are coming home to roost now, and it's unclear why the depth of their problems are as great as they are. And the real question is is something broken in their business model or is this going to be the CVS playbook and it's going to take two or three years for them to get back to correctly having priced their book of business and returning to profitability? So there are the same, higher costs, medical costs, and Medicare and Medicaid, pricing pressures exist for both companies. In one case, it hit much earlier. In another case, it seems to be hitting later and the question is why? And is something broken or is something not broken?
Will McKenna: Yeah, interesting for us to compare and contrast and see where those both go. OK. We're going to turn our attention to bonds in one second, but first, let's introduce our first audience poll. Here we are at the end of July, and I think the real question for our audience is what is your favorite summer activity? You might be able to guess what mine is by that picture on the slide. But let us know in the comments what are some of your favorite activities and what kind of fun have you gotten up to this summer, and we'll take a look at those.
OK, back to the show. We've talked about equities. Let's talk about bond markets. Where are you both seeing the biggest opportunities across bond sectors these days? And maybe how does your outlook for Fed policy influence your views? I don't know if Paul, you want to go first and then turn it to Hilda?
Paul Benjamin: Yeah, I would say there's a lot of big picture things in bonds, but if I think in the near term, near term being, let's call it, 12 to 24 months, maybe the most important thing that's going to happen is we're going to have a new Fed chair next summer and we know exactly how Donald Trump views monetary policy should be run. It should be loose with low rates and we should run things hot. And so my guess is the closer and closer we get to the next Fed chair, you're going to see it get priced in more and more. And to me, it's actually hard to know if that means bond yields go up or down. If you run the economy very hot, long-end yields often rise. So even if you cut the front end, you could see the back end yield rise. Now let's say the economy just does very, very well, you'd probably see long-end yields rise.
And so I think having a steepener on is a stronger view than what I think about duration. So I'm uncertain as to the level of rates, but I'll bet you that the curve steepens. So either, something bad could happen in the economy and the Fed cuts the front end, that would steepen it in a bear market. If the economy runs super hot, long-end yields rise, that could steepen it. And a new Fed chair who wants to cut the front end when they shouldn't, that would bring front end down and possibly long-end yields even up. So I'd say a steepener is probably one of my highest conviction views in bonds. And the other would be TIPS. Real yields are around 20-year highs across the curve. And when your debt to GDP is at 125%, you just can't afford real yields at this level. And you think about a Fed chair coming in 12 months who wants to run things hot, you could see inflation even tick up a bit while they cut the front end. And so that would be terrific for TIPS as well.
Will McKenna: OK, great. What about for you, Hilda? How are you thinking about bonds in your travels, in your portfolios?
Hilda Applbaum: Yeah, Paul and I are exactly aligned on this and I'll add to pressure on the long end is the fact that with a weaker dollar and higher deficits, foreign investors who are large purchasers of U.S. Treasuries at the long end are probably going to be somewhat less interested than has historically been the case. So I completely concur with the steepener, agree that if the Fed cuts and it stimulates the economy, that's going to tend to create inflationary pressures. And so the TIPS look attractive to me as well.
And I'll add to that what doesn't look attractive, there's been so much demand for corporate credit, whether it's investment-grade or high-yield credit that we maybe not are at historically tight credit spreads pretty darn close. So that part of the market doesn't look particularly attractive. I know our bond folks are investing more in structured credit and mortgages where they're seeing some opportunities. That's not an area that I traffic in to anywhere near the same extent. It's less liquid. It's more technical. So I leave that to the experts. So I agree, a steepener and TIPS, and actually my cash is running a little above its average level right here. So that's where I've been gravitating to as well.
Will McKenna: OK, good. Less debate there. I want to turn to asset allocation and really dig in there. But first let me read out some of the comments you all left. Thank you for that. Some fun ones in here. Water-skiing, golf, some that you would expect. Outdoor concerts, paddleboarding, golf, two exclamation points, four exclamation points, sailing, road trips, hiking and kayaking. Here was my favorite golf one. Golf, I'm not sure why, it's a love-hate relationship. Getting out of the heat and into the ocean or a lake. Travel, we're going to France this year. Drinking grape juice, dot, dot, dot, the fermented kind. OK. And then umping in the summer.
Paul, isn't it safe to say you're doing a little refereeing this summer? Isn't that your favorite activity? Give us a quick-
Paul Benjamin: Well, not refereeing, but I will say the most fun that I've had in my adult life is coaching my son in flag football. And we've been at a bunch of big tournaments lately. We just got home from the Junior Olympics this weekend. Doing that together with him is just so much fun I can't stand it.
Will McKenna: So cool, right? So cool. That's great. And I think Hilda, you've got a daughter getting married later this summer, so congrats to you. So we're all having a lot of fun this summer, which is great. Let's do this. Let's pivot a bit to talk about asset allocation since that was the title of our event.
First, before I turn to these guys, let me give you in the audience a little bit of context on Capital Group's approach. I think we have a slide here that shows that our asset allocation process happens both at the bottom-up and top-down levels. And really at that top layer, our Portfolio Solutions Committee is responsible for setting strategic allocations, not tactical, strategic allocations across our multi-asset solutions. So that includes things like model portfolios, active-passive models, and so on.
Now at the same time, portfolio managers like Paul and Hilda are making bottom-up allocation decisions in our strategies that underpin the solutions that we offer. And the balanced strategy that they both manage on is an anchor in many of those solutions. So today on this call, we're really focused on that bottom-up process. I will say if you do have more detailed questions about our approach to asset allocation or our solutions, please reach out to your Capital Group team because we won't get into tremendous depth here, but there's a lot in here you may be interested in.
Let's start here. Can you both just explain your approach to asset allocation both in your own portfolios and in the balanced strategy as a whole? Paul, kick us off.
Paul Benjamin: Sure. So I guess I'll start with my own, that's in some ways an easier one. And I do some things that are fairly unusual. So I almost never hold corporate bonds, and I will almost always hold materially less fixed income than I have in my multi-asset benchmark. But then in my equities what I do is I'm replacing a lot of fixed income exposure with gold royalty companies. Historically, gold acts very much like TIPS bonds, but kind of super TIPS. So in an environment where real rates are very negative, gold can be extraordinarily good. And there's 300 years of very good data on how gold stocks and bonds behave in different environments. It was the one thing that hedged you out.
And so because American Balanced Fund is a fund where we really, really care about downside protection and we want to be able to provide downside protection in every environment, one of those environments, stocks and bonds are both happen to be bad. So it was a terrific ingredient to have in the fund. And so that's what I do personally in my sleeve.
At the fund level, there's a huge advantage having one consolidated balanced fund versus let's say you have a job of a financial advisor and you have your client maybe in an S&P 500 Index fund or an S&P type of mutual fund relative to a bond fund. And what's different about it is I know what sorts of equities we hold, and I know how risky those are and how much, I don't know exactly how much downside capture they will have but I can estimate it to some extent.
The other thing about the process, if you're in a period like the last couple of years where stocks are going up so much, you're doing allocations periodically out of equities into bonds to keep the allocation from getting out of sorts. And what happens, the managers are getting this callback from their equities at a time when stocks have been very strong. And they comb through the portfolio and typically there's things that have done the best and run the most are getting the most expensive, and they'll often trim those. So as they trim those, you're getting a more defensive portfolio when the market's really gone up a lot. And then in the reverse, when stocks go down a whole bunch, the allocation then gets too low into equities and we have to start selling. And bond prices typically will go up in a sell off. So you're selling your bonds, which have gone up, providing cash to the portfolio managers after stocks have gone down a lot.
And if you were in just an S&P 500 Index and stocks go down a whole bunch, your portfolio is actually becoming more defensive every day it goes down because staples are outperforming tech and materials and things like that. And so your portfolio becomes much more staples or health care or something as the stock market is going down. And so then when it recovers, you're not getting a full recovery you could have if your portfolio hadn't become more defensive on the way down.
Whereas in AMBAL, as we give the portfolio managers fresh money to invest at the lows, they tend to buy things that have been the most beaten up and the portfolio doesn't have that same mix shift towards defensiveness.
I think in conclusion, I guess I spoke a while, but I think it's really powerful to have the stocks and bonds within the same fund because of how it ends up impacting manager behavior.
Will McKenna: Really interesting to hear about allowing you all to maybe take that higher than a typical 60/40 let's say 60/45. And I wasn't aware as much about that callback process giving the strategy of a structural reason to systematically rebalance in the way that you just described. So interesting to hear that.
Hilda, let's get your view. I know you guys run quite different portfolios, but how are you thinking about asset allocation in your portfolio and more broadly across the strategy?
Hilda Applbaum: Right, so as you say, we have lots of resources that sort of come up with the top-down view, and Paul and I and others get to sit in on those calls and hear those inputs. And so that's very helpful to my process that you have all this deep research going on, but then I bring it home personally and in terms of mapping that to my worldview. In an environment where I think the market is perhaps being too sanguine, whether it's about inflation or tariffs or deficits or valuations, I will adjust my asset allocation, but I don't tend to make big frequent adjustments. And I, like Paul, run a little heavy on the equity part of my responsibilities. And unlike Paul, it's not because I'm holding gold royalties, but it's because I run a very defensive portfolio.
So I tend to traffic in more lowly valued, higher-dividend-yielding stocks with lower volatility and that lets me hold more equities and yet still have market sensitivity far less than a either the market broadly or even AMBAL specifically. So I will tend to be the most defensive manager in the portfolio, so probably lag in a raging bull market and hold up better in a moderate to weak down market. That's my style.
And I see, Will, you've put up the chart that sort of backs the reason that I do what I do. Over the last 35 years, dividends have outperformed non-dividend paying stocks. And if you were able to grow your dividend if you had that sort of business model where you could not only have a high starting dividend but actually grow it, you did better still. The last dozen or so years have been less kind to dividend-paying strategies, but that has made them very inexpensive and has made the dividends quite high. And if you look at what happened in 2025, you've kind of seen the market broaden. You've seen some of those dividend payers start to get more attention than they've gotten in the last dozen or so years, and even more so outside the U.S. than inside the U.S. So that's been my strategy. It particularly shined during that whole Liberation Day turmoil, but it's continued to persist as the market has broadened out, even as AI has remained the darling of the market.
Will McKenna: Hilda, I would love to hear you give us ... And I see a couple of questions come through from the audience asking for maybe some specific examples, but U.S. dividend payers that reflect the theme you're talking about and maybe outside the U.S. as well. Any examples come to mind for you?
Hilda Applbaum: Well, it's interesting. I feel like whatever happens in the U.S. happened outside the U.S. somewhere three to five years later. So U.S. bank stocks are very good dividend payers with the economy doing well here with regulation becoming a little bit more, I would call it, rational, but a little lighter than it has been previously. You saw U.S. bank stocks do exceedingly well over the last number of years. You're starting to see regulation outside the U.S. starting to moderate. You're starting to see banks outside the U.S., particularly in Europe, behave more akin in terms of how they manage their businesses. You're starting to see some merger activity start to happen. And non-U.S. banks, particularly in Europe, have been extraordinarily strong in the last 12 to 18 months. So some ways, I think you can watch the U.S., see what's gone well or what hasn't gone well, and then look to Europe and expect them to replicate that some years down the road.
Will McKenna: OK. And Paul, similar thing for you. We had a callback from someone in the audience about examples in AI that you are focused in on, whether those who are kind of specifically focused in the AI space or I think his point here is sort of the picks and shovels. He talks about the shovels and blue jeans during the gold rush, so pick and shovel providers. Any examples come to mind for you that you're focused on?
Paul Benjamin: Right now, Nvidia GPUs have something like 97% share of the compute architecture underneath AI models and we have not yet seen anything else that's truly proprietary. I mean, you can host GPUs at AWS and Azure. You can host them at GCP. There's a company, CoreWeave, that just went public that hosts them. That, so far, is looking like it's actually quite a good business. It's great for Microsoft. But I would say if you were looking for someone who's just a picks and shovel type player, Microsoft would fit the bill. The core infrastructure is on Nvidia GPUs. Their nascent competitor is Broadcom, Broadcom has a whole bunch of other businesses, but they are making custom AI chips.
And what they'll do is if you want to run lots of flexibility around your AI models, you need an Nvidia GPU. But if you kind of know roughly what you're doing, you don't necessarily need all the functionality on the Nvidia GPU, and they will give you a custom chip that maybe only has half of the content so you pay half the price. And Google has something called the Tensor Processing Unit, the TPU, which they run about half of their AI workloads on and Meta is building a custom ASIC with Broadcom. It looks like OpenAI is working to do one. ByteDance, who owns TikTok, is doing one. So I really think Broadcom and Nvidia are probably the most direct.
A company called Quanta Services that what they do, they have linemen. These are the guys who go around and they upgrade your transmission and distribution network. It's a guy in a truck. Now they have a proprietary patented robotic arm that they use that they call Hot Stick, they've got another one called Cold Stick, but they can actually upgrade your transmission lines while the power is still running through them. And that has been an extraordinary business over time. which will require far more hardening of our transmission distribution plus additional creation of new transmission distribution, and they're a key player there.
Will McKenna: That's great. Somehow I knew you were going to reference a guy in a truck. I know you love to ...
Paul Benjamin: I like these guys in trucks. I like big trucks.
Will McKenna: To combine high-tech and also just guys out there doing the work, that's a good way to barbell your portfolio. Well, listen, audience. There's a ton more that we could get into on asset allocation and please connect with your Capital Group team to talk about also the broader solutions and how we approach that. I thought I might pivot to maybe some closing comments. By the way, one more for you, Paul. Charlie in the audience said, "Hey, tell Paul I've been a high school or college referee for 45 years." So you got a few years to go, Paul.
Paul Benjamin: All right.
Will McKenna: Thank you for that comment. Charlie. Maybe on a lighter note, any good book or podcast recommendations that you all want to share with the audience? Maybe Paul, then Hilda.
Paul Benjamin: There's a book I've actually now read twice, and I'm sure I'll read it again and I'm giving it to family members, called The Psychology of Money by Morgan Housel. It is not the deepest book in terms of content about markets, but the way it helps you think about money and think about investing I found to be really profound and it moved me, and everyone I've recommended it to loved it.
Will McKenna: Cool. Couple of good ones there. Hilda, what about for you?
Hilda Applbaum: Yeah. So I turned a vacation into a staycation and read a book called The Covenant of Water. One of my favorite books was Cutting for Stone and that came out in 2009, and the author, Abraham Verghese, was meant to come out with a book shortly thereafter. And 14 years later, there was The Covenant of Water. And I waited for a staycation to read it because it's over 700 pages, but it's just magnificently written. It is a multi-generational family saga with tremendous historical depth, some spiritual themes, and really written about times and places that I just had no knowledge of and exposure to. Just a fun, beautiful read.
Will McKenna: OK. Let's head toward home base. Key messages that you'd like to leave our audience today to take away from the discussion. Hilda, why don't you lead us off on this one?
Hilda Applbaum: Great. So my key takeaway from 40+ years watching markets and people interact with markets is that I've never met anyone who's successfully market-timed on a consistent basis. I've seen people get out in a timely manner and then fail to get back in. And the opportunity cost of not getting back in, they probably lost more money not getting back in than having gotten out in a timely fashion. That old joke of people correctly call nine out of every two recessions, it's true. I think what drives this home for me, that this 20-something-year-old daughter who's actually getting married at the end of August called me a couple days after Liberation Day and said, "Mom, my 401(k) is down so much. Should I sell it all now so I don't lose more money?" And my advice to her is my advice to everyone. Take a breath. Walk away from the screen. Get on with your day because by the time you need that 401(k), it's not even going to be a blip on the graph.
So I think Paul did a beautiful job explaining why having a balanced fund where you can move between various asset classes in a much more sophisticated and nuanced way than managing it yourself, I think, was beautifully said. And I think it keeps people from buying high and selling low and I think that's human nature. It's not just the 20-something-year-olds' human nature. Even professionals. I mean, look at the market. There's a reason that there are bubbles and people unwilling to buy at bottoms. It's just because it's really hard to fight that human instinct. So I thought Paul's articulation of what makes AMBAL so special and how we do asset allocation and how we can run a little hotter in terms of stock ownership by virtue and by dint of higher-dividend-yielding stocks and marrying various portfolio managers in an elegant fashion is beautifully said. So key takeaway: figure out what your investment objectives are, your time horizon. Pick a manager or sets of managers that you really think have a long-term focus and let them do the worrying and avoid the buy high, sell low phenomenon.
Will McKenna: Outstanding. Paul, bring us home.
Paul Benjamin: Well, Hilda kind of hit on my, maybe, key takeaway. I don't know if it's the key takeaway from everything we've said today, but one of the most profound learnings I've had in 10 years being in a balanced fund like this is understanding at this point because there are three drawdowns in the market, almost 20% plus the COVID drawdown in that period. And getting to watch how helpful it is to the money managers, to have assets taken away when stocks have run a lot, and then get fresh money at the lows when they've been weak, it's just so powerful. So many PMs in the fund do their very best because of that discipline that's created just by the structure.
And when you put them together in one fund, it is really powerful. And so I never really understood why that balanced fund structure, why it's been a 100-year-old structure that stood the test of time. But having seen it in place and in practice, I totally get it now.
Will McKenna: Really interesting point about that structure and thank you for that. I want to encourage everybody. Please reach out to your Capital Group team for more details. All right, before we do sign off, I want to remind everybody. Please download a copy of our Midyear Outlook. Also, check out the Capital Ideas podcast, which does include recent episodes from both Hilda and Paul. I think Hilda's is called Decoding Dividends. Not a big surprise there. Paul's is The American Energy Juggernaut. I wish I had the data on who were ahead in that horse race, but next time we'll let you know who's ahead. And please do mark your calendars for our next couple of webinars in September and October.
I want to thank everybody for your engagement. Great questions today. Didn't get to all of them, got to a few. But it's really because of you that Capital continues to be voted number one for thought leadership for the sixth time. Finally, let me thank these guys. Join me in thanking Hilda and Paul for their great insights. I hope y'all found this as interesting as I did. Thanks again and enjoy the rest of your summer.
1 hour CE credit for CFP, IWI and IAR*
Join portfolio managers Hilda Applbaum and Paul Benjamin as they analyze how to navigate market ups and downs through thoughtful asset allocation. They'll share their latest investment thinking as well as time-tested strategies for maintaining balance during uncertainty and positioning portfolios for long-term success.
Event date:July 31, 2025
Paul Benjamin is an equity portfolio manager with 19 years of investment industry experience (as of 12/31/2024). He holds an MBA from Stanford and a bachelor’s degree in finance and religion from Northwestern College.
Hilda L. Applbaum is a portfolio manager with 41 years of investment industry experience (as of 12/31/2024). She holds a master’s in economics from New York University and a bachelor’s in economics from Barnard College of Columbia University. She is also a CFA charterholder.