Fall 2015

Investment Commentary Stocks pull back as slowing growth in China and a patient Fed rattle global markets

Analyst Perspectives Increasing affluence around the world is creating demand for high-end beverages

Wealth Strategies Steps every entrepreneur should take before deciding to sell a business

Author Interview Proven ways to find a great doctor and navigate today’s complex medical maze FALL 2015 OPENING THOUGHTS

Putting Market Volatility in the Proper Perspective After years of relative calm in the financial markets, the past few months have demonstrated two important points: volatility is a normal part of the investment process, and to make money in the market, you must have a long-term perspective. As one of our equity portfolio managers, Ted Samuels, pointed out at our spring client luncheon, the best way to get through turbulent periods like those we’ve experienced of late is to turn off the TV. After all, financial channels fill their time with competing opinions about what will happen in the next few days, hours or even seconds — all of which should be pretty meaningless to long-term investors. I always remind clients that they don’t own “the market” but rather shares of real companies with what our research suggests are growing earnings and favorable prospects. Sure, stocks will fluctuate from day to day, but if our analysis proves right, shareholders of these businesses should be rewarded over time. In each issue of Quarterly Insights, we give you our perspectives on some of these companies and our investment theses for holding them. For instance, Capital Group analysts favor a number of spirits manufacturers, which are enjoying growing I always remind demand from the increasing number of affluent consumers around the world. You’ll read more about this trend on page 10. In addition, recent innovations in the medical clients that they device industry are improving patient outcomes in ways thought unimaginable only a handful of years ago. The article on page 12 discusses some of the areas in which don’t own “the our clients are invested. And the growing adoption of robotics around the world is a market” but rather theme Capital Group analysts were early to identify that continues to gain steam, as explained on page 8. shares of real Incidentally, despite all the negative talk about the Federal Reserve raising rates this companies with year, history suggests this may not be such a bad thing for either stocks or bonds. We outline some of the reasons why on page 6. what our research Finally, Ralph Waldo Emerson once said that in life, “the first wealth is health.” Good suggests are health is also one thing money can’t buy. But getting the right medical care has never been more difficult, even for those of ample means. For insider strategies on how to growing earnings find a good doctor and be your own best patient advocate, I encourage you to read our exclusive interview with Leslie Michelson, author of the new book The Patient’s and favorable Playbook, on page 18. prospects. Enjoy the fall season ahead, and don’t hesitate to contact us with any feedback on this publication at [email protected]. With best regards,

John S. Armour President Capital Group Private Client Services On the Cover Fall 2015

Editor-in-Chief Kirk Kazanjian

Writer Walter Hamilton

Copy Editor 10 Ruth Hamel

Designer Zachary Self

Marketing Associate Brendan Heisler

Publication Coordinator Kathleen Park 14

Contact Information 12 | Advances in Capital Group Private Client Services Medical Devices 333 South Hope Street Promising innovations Los Angeles, CA 90071 are making the future brighter for many Website types of patients thecapitalgroup.com/pcs

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In This Issue

2 | Investment Commentary 5 | Q&A with Gerald Du Manoir 6 | Impact of Higher Rates Slowing growth in China and Assessing current stock What a move by the Fed an indecisive Fed rattle global valuations and the outlook for might mean for both stocks markets developing economies and bonds

8 | Efficiencies in China 10 | Affluent Tastes Lift Spirits 14 | Advice for Entrepreneurs How a rise in factory Rising demand for mixed What you need to know — automation may boost the drinks bodes well for premium and do — before selling a country’s fortunes beverage makers business

16 | Collecting Classic Cars 18 | Author Interview 20 | Notes from the Field A Capital Group analyst A leading expert reveals Observations and insights shares his thoughts on this how to find the best doctor from Capital Group analysts popular passion for you around the world

The thoughts expressed herein are current as of the publication date, are based upon sources believed to be reliable and are subject to change at any time. There is no guarantee that any projection, forecast or opinion in this publication will be realized. Past results are no guarantee of future results. The information provided herein is for informational purposes only and does not take into account your particular investment objectives, financial situation or needs. You should discuss your individual circumstances with an Investment Counselor. Any reproduction, modification, distribution, transmission or republication of the content, in part or in full, is prohibited. © 2015 Capital Group Private Client Services. FALL 2015 Q3 INVESTMENT COMMENTARY

For most of the past decade, China has been a financial Of course, it’s too soon to tell how U.S. stocks will fare in the final shock absorber for the rest of the world. The Asian giant months of 2015. Among investor concerns, weak global growth helped lift the global economy out of the financial crisis, and a strong dollar are pressuring the manufacturing sector and and its brisk expansion since then compensated for denting U.S. exports. The energy complex has been battered by listlessness elsewhere. The third quarter was a different sagging prices as high crude oil production overseas has offset story, as concern about China’s economic deceleration declining output in the U.S. However, far more is going right nipped stocks around the globe. It even gave pause than wrong for the country, including vibrant job growth, cheap to the Federal Reserve, which once again put off a imports and falling gas prices. Those forces have fed impressive move to raise interest rates. The U.S. was a distinct consumer spending and consistent gains in the housing market. bright spot, with steady job growth and energetic Overall, Capital Group economists believe the U.S. will continue consumer spending. But no major market was able to growing at a pace similar to its 2% to 2.5% level of the past few dodge China’s shadow, and volatility is likely to remain years. The weakness in exports could be counterbalanced by elevated until the extent of the nation’s slowdown further improvement in incomes and spending. In fact, if spending becomes clear. growth matches recent income gains, as has often occurred historically, consumer activity could reach its highest level in a After going more than four years without a significant setback, decade. U.S. stocks fell into a correction, with the S&P 500 index tumbling more than 12% before rebounding slightly to finish the quarter off A Fed rate hike might actually calm the equity markets. roughly 10% from its peak in May. That erased the slender gains from the first half of 2015 and left the index negative year-to-date. Given that backdrop, the Federal Reserve is still expected to Corrections — defined as a drop between 10% and 20% — have raise interest rates this year. The central bank delayed action been fairly infrequent in recent years. But while they can be in September because of the upheaval in China, turbulence in unsettling, they are a natural occurrence in the market. Although financial markets and the absence of inflation. However, Fed chair some selloffs give way to full-blown bear markets, they are usually Janet Yellen stressed afterward that policymakers expect to move temporary, with stocks ultimately regaining their lost ground. before the year is out. Ironically, that could ease some market

2 Capital Group Private Client Services jitters because the delay stoked concerns that the Fed may view the world economy Q3 Stock Market Index Returns Q3 as more troubled than previously thought. Year-to-Date But Yellen reiterated that policymakers simply opted to proceed cautiously and still intend to act before any worrisome signs of overheating take hold. -5.3% -5.3% -6.0% -6.4% -8.5% A lot will depend on China as investors -10.2% try to gauge the extent of its economic deceleration. It is widely recognized -14.7% that China’s growth rate is easing as the country attempts the ungainly transition -17.7% from an export-driven economy to one Global Stocks U.S. Stocks Non-U.S. Stocks Emerging Markets paced by domestic consumption. Still, the surprise devaluation of China’s currency Sources: MSCI via Rimes. MSCI World (Net) Index (Global Stocks); S&P 500 Index (U.S. Stocks); MSCI EAFE (Net) Index (Non-U.S. Stocks); MSCI Emerging Markets IMI (Net) Index (Emerging Markets). Index results are presented in US$ unless otherwise noted. — the yuan — seemed to underscore the magnitude of the slowdown. The devaluation followed a stream of from those countries and further straining accelerated. But such demand is expected dispiriting economic reports and came the demand for commodities, which are to lighten as the upgrade cycle turns, after other moves, including repeated priced in dollars. Conditions are more especially for the higher-end models often interest rate cuts, had limited effect. favorable in the developed world. Japan’s favored by Chinese buyers. economy contracted in the second quarter, Companies that export goods to China At the same time, our team has sought to but that stemmed partly from temporary face the prospect of a falloff in demand. cautiously take advantage of long-term factors, and growth is expected to pick However, the longer-term outlook opportunities created by the gyrations in up. Europe’s economy has shown modest remains encouraging. China’s troubled share prices. The plunge in energy stocks improvement. However, Japan and Europe real estate market, especially in major has provided a chance to pick up industry cities, has improved. Incomes are rising, also face reduced demand from China. leaders with superior balance sheets and the economic tremors have not and the financial wherewithal to not only In light of global conditions, portfolio deterred consumers, with retail spending withstand the sector’s downturn but also managers have positioned client equity growing solidly as the citizenry becomes to potentially acquire smaller players at portfolios defensively. For example, accustomed to outlays for fashion, compelling valuations. entertainment and other quality-of-life managers have significantly trimmed products. Also, American companies that holdings of luxury automakers. Car sales Our team also has made adjustments to manufacture goods in China for sale in boomed in recent years as drivers who health care holdings. The outlook for the the U.S. could benefit from the currency delayed purchases during the financial sector remains positive, but managers have translation. More broadly, China’s shift crisis bought new vehicles as job growth reduced some positions following sizable toward a consumer-oriented paradigm is part of the modernization process that countries go through as they mature from Q3 Fixed-Income Index Returns Q3 developing markets to more-advanced Year-to-Date economies. It’s a messy transformation 1.6% with inevitable down cycles, but there will 0.9% 1.0% 1.3% continue to be opportunities. 0.1% 0%

Reduced demand from China is weighing on other countries.

The weakness in China has chilled other -3.9% emerging markets, especially commodity producers such as Brazil, that are grappling -6.3% with falling prices for raw materials U.S. Treasury Bonds Municipal Bonds Corporate Bonds High-Yield Bonds ranging from iron ore to copper. Their woes could be aggravated by a Fed rate Sources: Barclays U.S. Treasury Index (U.S. Treasuries); Barclays 1–10 Year Inter-Short Municipal Index (Municipal Bonds); Barclays U.S. hike. Higher rates would likely boost the Aggregate Index (U.S. Investment-Grade Bonds); Barclays U.S. High Yield Index (U.S. Corporate High-Yield Bonds). Index results are value of the dollar, drawing capital away presented in US$ unless otherwise noted.

Quarterly Insights Fall 2015 3 gains. To stay ahead of rapid advances in drug development, they’ve redeployed some capital into companies with more 2015 Fall Client Luncheon promising research pipelines.

Bond yields decline as the Fed delays action on interest rates.

Despite widespread anticipation of a Fed rate hike, bond yields receded in the third quarter as investors sought refuge from the turbulence roiling the equity market. The yield on the benchmark Finding Value in 10-year Treasury note eased back to 2.04%, reversing a rise earlier in the year, when the global economy appeared to be Today’s Global on firmer footing. Our fixed-income portfolio team continues to believe the Fed will push up its key short-term interest rate Financial gently, which should limit the impact on bond investors. (A lengthier discussion on this can be found on page 6.) Markets The past few months have demonstrated why fixed income remains a vital part of overall client portfolios.

Given the expectation that rates will drift up over time, our managers have tended to position client fixed-income portfolios conservatively. One step they have taken is to shorten duration, which is a broad measurement of a bond portfolio’s sensitivity to shifting interest rates. Our team has also focused on revenue bonds — securities that finance the construction of specific In a world of elevated volatility and ongoing projects. Such issues stand to benefit as the U.S. economy macroeconomic uncertainty, where are we uncovering gathers steam. the most attractive investment opportunities right now? At our upcoming client luncheon, portfolio managers Within municipal portfolios, one preferred area has been Gerald Du Manoir and John Queen will share how they are putting assets to work in today’s fast-changing hospitals. This sector has benefited as mergers have fortified the stock and bond markets. balance sheets of leading medical centers. Our fixed-income analysts have identified capable management teams whose For more information, and to make a reservation to facilities are well positioned to prosper amid the swirl of changes attend, please contact your Investment Counselor. buffeting U.S. health care. And given that demand for medical services tends not to fluctuate with the economy, hospitals have some degree of insulation if U.S. growth were to lighten.

LUNCHEON LOCATIONS AND DATES On the taxable side, we favor asset-backed securities whose repayment streams are linked to mortgages, auto loans and Santa Barbara Tuesday, November 3 credit cards. The credit quality of these securities is enhanced as the strong job market bolsters the ability of borrowers to San Francisco Wednesday, November 4 make loan payments. Managers are also modestly overweight in corporate bonds, where yields have become attractive Los Angeles Thursday, November 5 compared with underlying benchmarks.

Volatility in fixed income may spike as the Fed moves forward Chicago Wednesday, December 2 with its rate plans. That may cause temporary dislocations Atlanta Thursday, December 3 in certain areas of the bond world, potentially creating opportunities for managers to further enhance yield. Regardless New York Wednesday, December 9 of the direction of rates, the past few months have demonstrated why fixed income remains a vital part of overall client portfolios. Beverly Hills Thursday, December 10 Bonds cushion portfolios by providing much-needed stability during volatile periods when equity prices can swing sharply. During such times, broadly based portfolios can help smooth the inevitable gyrations in the financial markets. g

4 Capital Group Private Client Services Technology is going to 25 Years in profession be a big factor, and it will 24 Years with Capital Group be felt in many ways. Gerald Du Manoir is a global equity portfolio manager at Capital Group doesn’t mean the best way to participate Private Client Services, based in our in this progress is through companies Los Angeles office. In this interview, headquartered in those areas. Instead, he shares his thoughts on China and there are many companies — based other developing economies. Gerald throughout the world — that will benefit also gives us a preview of what he from the growth of developing economies. will discuss as one of the keynote There will be demand for the best products speakers at our fall client luncheon. from the best companies, regardless of where the companies themselves are based. Also, it’s important to distinguish among countries in the developing world. Some are better positioned than others. What is your perspective on China given with them and, because of social media The concept of the emerging markets as the concerns about its growth rate? and all the information available on the a single entity is not as relevant today as it Internet, they are scrutinizing them very For many years, the Chinese economy was even 10 years ago. closely. Products that prove to have real has been driven by infrastructure value should do extremely well. What will you be discussing at our development, capital formation and upcoming client luncheons? construction. It’s now making a transition Technology is also going to be a big to a more consumer-oriented model. factor, and it will be felt in many ways. I’ll touch on several topics, including We are in a difficult period because the Consider the retail sector. E-commerce is current stock valuations and the outlook growth of the consumer-led paradigm has truly leapfrogging the brick-and-mortar for both economic growth and corporate not fully compensated for the slowing of model. It’s amazing that we’re no longer earnings. One issue is the earnings the investment-driven model. When an talking about same-day delivery — now visibility of companies and industries. This economy of that size slows down, there are it’s same-hour delivery. Look at what is an important topic that I am studying bound to be consequences. The impact on happened with mobile phones. It used closely. How sustainable are earnings, commodities, energy and industrial goods to be really hard for people in many especially if interest rates start to rise? is being felt around the world. parts of China to get a fixed phone line What do we think of valuations today because of the high costs and logistical and how do we analyze them? The ability However, I continue to think that there are hurdles. So they went straight to a mobile to identify companies with sustainable very strong underpinnings for long-term phone. And then they went to two mobile earnings is critical. That’s one reason active growth. For example, China’s phones — one for work, one for personal. management is so important right now. anticorruption campaign, targeting abuses The scope of the e-commerce evolution Are you concerned about the stock market in such areas as government construction is hard for people in the United States to following the recent correction? contracts, will bring much-needed reforms. imagine, but retail in China could become There is also a strong effort by the much more virtual than it is in the U.S. Although there is uncertainty around government to create a social protection economic activity in China, there are still The challenges facing China have affected net for its citizens, which bodes well in solid pillars for global markets to build the rest of the developing world. What many ways, including driving demand for on. The U.S. economy is growing. Europe is your outlook for other emerging health care services. is showing signs of domestic recovery. economies? Japan is determined to turn its economy Which sectors in China offer promising I remain very positive and believe that around. And through it all, company investment opportunities? developing economies will continue to balance sheets are very healthy. Continued Anything that is related to well-being. grow at an attractive rate over time. In productivity gains and innovation provide Food, personal care, health care, cosmetics terms of urbanization, technology and a good foundation for earnings in well- — basically, things you either put in or on income growth, the pace of expansion run companies. The short term may feel your body. We’re still very early in the in emerging economies is likely to be a bit unsettling, with periods of increased adoption rate of many of these brands. But quite good long-term compared with volatility, but the long-term outlook is consumers are becoming more familiar the developed world. However, that promising. g

Quarterly Insights Fall 2015 5 FALL 2015 ANALYST PERSPECTIVES The Fed’s caution highlights how different its goals are today from previous tightening cycles. In the past, the central bank forcefully pushed up the federal funds rate — the overnight rate at which banks lend to one another — to ward off inflation as growth accelerated. With the U.S. economy expanding at only a modest clip today, policymakers don’t want to blunt the expansion. They’re also cognizant of the potential threat from slowing growth in China. Thus, the Fed simply hopes to normalize rates by moving away from the artificially low levels that have prevailed for the past several years. It is likely to back off quickly if rate hikes appear to be undermining growth. Based on current conditions, the Fed may raise rates about 1% a year — a pace that is unlikely to derail the economy, Vandenabeele predicts. Beyond that, rates will also be kept in check by weakness overseas. Central banks in China, Europe and Japan have all cut rates to stimulate their economies, dragging yields on their sovereign bonds to levels that are even lower than those in the U.S. That’s likely One of the biggest questions on investors’ it once again delayed taking action, saying to lure foreign investors to U.S. bonds. minds is how the financial markets will it wanted to move gingerly following “Let’s not overstate the impact that react to an expected hike in interest rates. concerns about global economic growth a very gradual pace of tightening is Barring a significant economic setback, and a lack of inflation in the U.S. likely to have,” cautions Capital Group the Federal Reserve has indicated that economist Darrell Spence. “To the extent it is poised to begin raising its key rate “What’s important for investors in that the Fed raises rates, it signals that by the end of the year for the first time the months and years to come is the the U.S. economy is moving back to in nearly a decade. In one sense, that’s a pace at which the Fed raises rates,” normal, and that is a good thing.” testament to the U.S. economy’s powerful says Capital Group economist Anne recovery from the 2008 financial crisis Vandenabeele. “The Fed wants to move Bond investors need to think long-term. and to the favorable outlook for job and very cautiously, in line with economic To be sure, any rise in interest rates would income growth moving forward. But it’s fundamentals, and rates will continue strain the bond market and could result also stirred concern that higher rates to be very low in historical terms.” in near-term principal declines. As yields could weigh on the bond market. There’s no doubt that a rate hike poses risks, but the impact on investors may be much less than feared. There are many How Bonds Did During the Last Rate Hike Short-Term Bonds reasons for this, starting with the likelihood Interimediate-Term Bonds that rates will rise very gradually and remain extremely low even after the Fed 15% has acted. The central bank has gone out of its way to stress that it will proceed 10% slowly and deliberately, and will telegraph 5% its moves long in advance to give the markets time to prepare. Typically, rate 0% hikes do the greatest damage when they come quickly and aggressively. Measured Cumulative Total Return (%) Return Total Cumulative -5% increases, by contrast, may ease the Jan-2004 Jan-2005 Jan-2006 Jan-2007 pressure on bonds while reinforcing the economy and stock market. The Fed’s patience was evident in September when Source: Morningstar. Shows the returns of bond funds in Morningstar’s short-term and intermediate-term categories in the period before and after the Federal Reserve’s most recent rate hike.

6 Capital Group Private Client Services on new bonds move higher, the value of previously issued securities with lower coupons will decline. This is known as interest rate risk, and it represents the primary fear among investors today. It might seem counterintuitive, but Any losses in principal would be partly history suggests the stock market offset by the rising interest payments could fare reasonably well if interest on new issues. As older bonds mature, rates begin to edge up. It’s commonly managers redeploy the capital into higher- assumed that rate hikes weigh on yielding securities. Given the paltry yields equities by raising corporate borrowing of recent years, an upward tilt in rates could costs and dampening the outlook for be beneficial for investors with long-term economic activity. But in actuality, stock time horizons. Any pickup in volatility could prices increased following past rate hikes, as optimism about the Fed’s provide opportunities for our managers to ability to maintain growth and stave off purchase attractive securities that become inflation offset the drag from slightly oversold. This is one of the benefits of higher interest costs. active fixed-income management. An analysis by Capital Group’s in-house economics team shows that stocks As important, a rise in short-term interest historically have risen in the two years after the Federal Reserve starts to hike rates. rates may not trigger a corresponding Certainly, every period is unique and equities have declined in some cases. But, jump in longer-term rates. History shows in the 13 such occurrences since 1954, the S&P 500 Index averaged a gain of that long rates rise when the Fed starts roughly 15% over the next two years. to tighten on the short end. But longer- dated securities — including the 10-year “More often than not, when the Fed starts Treasury note, a benchmark used to set rates on home mortgages — are primarily to raise rates, the equity market continues influenced by expectations about inflation to go up.” – Darrell Spence, Capital Group Economist and economic growth. If investors believe that inflation is under control, upward “More often than not, when the Fed starts to raise rates, the equity market pressure on long rates may be minimized. continues to go up,” observes Capital Group economist Darrell Spence. “There’s Regardless of the direction of rates, a tendency to believe that it creates more difficulty for the market than it actually has.” it’s important to note that bonds have historically done well in a variety of Moderate rate hikes are unlikely to upset the economy. interest rate cycles. In fact, even during One positive for equities is that U.S. companies are financially able to withstand extended periods of rising rates, bonds higher rates. Companies have reduced their debt burdens and fortified their have historically notched positive total balance sheets in the past few years. In general, they are not relying heavily on returns. For example, rates rose from 1% debt to finance growth, suggesting that marginally higher borrowing costs would to 5.25% during the last Fed tightening not eat into profitability or their ability to grow. cycle, from June 2004 to June 2006. As In many ways, consumers and the U.S. economy itself are also well positioned shown in the chart on page 6, prices of for higher rates. For example, the majority of U.S. mortgage debt is fixed-rate as short-term and intermediate-term bond opposed to variable, meaning most homeowners would not face higher monthly funds declined early in 2004. But even as payments if rates climbed. On the downside, increased borrowing costs would rates continued to climb, cumulative total likely impinge on home sales by reducing affordability. But that should be partly returns were positive, thanks partially to offset by better job growth and improving household formation. higher coupon payments of newly issued More broadly, higher interest rates are unlikely to trigger a recession, according securities. Similar dynamics have occurred to research by Spence. The current economic recovery has now exceeded the during other rising-rate environments. average length of all post-World War II expansions by a year. However, neither Beyond short-term market movements, the length of a recovery nor the amount of growth in that span is a reliable it’s important to remember that bonds weather vane capable of forecasting recessions. Downturns typically strike when play an essential role in client portfolios. imbalances occur, such as surging inventory levels or unsustainable debt. Aside from generating income, fixed- “Recessions don’t just happen, and they certainly don’t occur simply because income securities provide much-needed we’re a certain number of months away from the last one,” Spence maintains. diversification that can counteract the “Recessions occur when there are excesses, and there do not appear to be any sometimes sharp volatility in stocks. g significant excesses right now.” g

Quarterly Insights Fall 2015 7 FALL 2015 ECONOMIC ANALYSIS

China’s surprise currency devaluation of Robotics. Increased automation will and the decline in its stock market have bring many benefits, including allowing underscored the challenges facing the the Chinese manufacturing industry world’s second-largest economy. After to progress from low-end commodity years of powerful economic expansion, products such as apparel to higher-value the increased volatility is largely a result of areas such as electronics and other forms By Stephen Green uncertainty about what will propel growth of technology. Capital Group Economist as China transitions from an investment-led Aside from the benefits for Chinese Stephen Green is an economist who economy to one that’s consumer-driven. manufacturers, this process is likely to spur covers China. Based in Hong Kong, One concern has centered on Chinese demand for foreign-made automation he has nine years of experience and productivity and a fear that rising wages equipment. Though China is working hard joined Capital Group in 2014. could weigh on economic efficiency and to expand its domestic robotics industry, hold back growth. I believe these worries much of its automation equipment, are not only unfounded but overlook some especially high-end components, comes of the encouraging trends in productivity from leading foreign companies. For and the labor market that bode well for example, Japanese-based corporations are China in the long run. among the top robotics suppliers to China.

A key positive is rapidly accelerating The opportunity for such companies is factory automation. The use of advanced strong in part because of the relatively low technologies such as robots and other number of robots in China. Despite growth complex machinery is just beginning to in recent years, the installed base of robots take off in China, and it’s expected to grow in the country is modest compared with the considerably in the next few years. China enormous size of China’s manufacturing is now the biggest market in the world for base and the number of workers it so-called industrial robots, and the number employs. Germany, for example, has a far of these machines in Chinese factories greater “density” of robots. The Chinese is expected to increase by an average of government is determined to change that, 25% each year between 2015 and 2017, as demonstrated by President Xi Jinping’s according to the International Federation pledge last year to pursue an “industrial

8 Capital Group Private Client Services robot revolution.” But although the domestic robotics industry will no doubt make progress, Chinese companies will not become technological peers with the Japanese and other outside suppliers in the next decade, meaning there should continue to be strong demand for foreign- made robots.

Despite rising wages, the outlook for productivity is encouraging.

The growth of automation is only one of several reasons for optimism about productivity in China. Gains in productivity have, of course, been central to China’s growth story for much of the past four decades. Since the government began implementing genuine economic reforms in the late 1970s, productivity growth has been nothing short of spectacular. Better education, the importation of foreign technology and massive infrastructure development have all helped feed productivity growth. Mass migration has also been a huge factor, as millions of people from rural areas have streamed into cities in search of better jobs. That has during and after these periods. In fact, the In a larger sense, it’s important to realize provided manufacturers with a plentiful clear lesson is that such fast wage growth is that rising wages are critical to the and inexpensive source of labor. entirely normal and to be expected. development of China’s consumer class. Not surprisingly, wages have risen as The country is slowly making the transition As its economy matures, China is moving the economy has matured. In the last from an economy dependent on heavy toward higher-end exports. few years, wage growth has outpaced industry and infrastructure spending to one productivity growth. That has stoked Labor productivity in China has been powered by consumer spending. Higher concern that escalating labor costs expanding at a faster pace than it did in wages will boost consumption as Chinese could eventually undermine productivity the other three countries at comparable citizens move up the income ladder. The and eat into economic growth. The points. This is quite an impressive feat. growing middle class will become a natural fear is that China could become less Even with higher worker salaries, China’s market for the goods produced by Chinese competitive if emerging-market rivals manufacturing wages remain extremely factories that were previously oriented toward overseas markets. are able to undercut it in manufacturing competitive. For instance, average Chinese salaries are only one-tenth the level of and production costs. However, I have There is no doubt that China faces those in the U.S., but China’s economy studied this issue closely and the evidence significant near-term challenges as operates at 40% of U.S. productivity. simply doesn’t back up this scenario. On the government addresses its slowing the contrary, I am very impressed with Beyond that, China is doing well in the economic growth. The transformation to a the dynamics in China’s labor market and high-value export industries that are most consumer-led economy will be inherently believe the country is well positioned in important to its future. It’s certainly true bumpy, with bouts of heightened market terms of productivity. that production costs have risen for labor- volatility. However, this is part of the intensive manufactured goods, especially process by which emerging economies To put China’s outlook into perspective, those where increased automation is too modernize. Put another way, this is how consider how other fast-growing Asian costly or logistically infeasible. That’s the sustainable middle classes are formed and nations — specifically, Japan, South Korea case, for example, in the footwear industry. how advanced economies evolve. The and Taiwan — fared at similar points in But no one in Beijing is losing sleep at fundamental building blocks are in place their own economic development. These the thought of the nation becoming for the long run, and I believe the current countries all went through multi-year less competitive as a shoe or sock changes will help pave the way for a new spans in which wages surged faster than exporter. Instead, thanks partly to greater phase in China’s development. There productivity. Rather than receding, growth automation, China is gradually shifting the are certainly challenges, but I believe the in each of those nations remained strong mix of its exports to higher-value goods. country is well poised to meet them. g

Quarterly Insights Fall 2015 9 FALL 2015 ANALYST PERSPECTIVES

Sit down at almost any bar or restaurant these days and you’ll quickly be handed a menu. But it won’t spell out appetizers, entrées or even happy-hour noshes. Instead, it will list a half dozen or more specialty cocktails featuring tantalizing names and exotic ingredients. This is one of the more visible examples of a “cocktail culture” that is burgeoning across the U.S. and other parts of the world. Demographic and economic shifts are spurring an increased taste for mixed drinks, which I believe will propel sustained growth in the alcoholic beverages industry in coming years. After expanding steadily from roughly 1960 to 1980, the spirits industry experienced a lull of sorts over the next two decades. Health concerns and the demise of three-martini lunches contributed to a decline in alcohol consumption. That has changed in recent years, with the liquor business being paced by many of the trends driving upscale food and deluxe coffee — namely, rising disposable income and an affinity for high-end offerings. The liquor industry is benefiting from expanded living standards in emerging markets. Products made by leading global companies are supplanting locally made alcohols. In some cases, the local liquors are little more than the modern equivalent of Prohibition- era moonshine. The local hooch is cheap and plentiful, but there are wide variations in flavor and quality. Foreign-made liquors, by By Archana Basi contrast, are prized for their consistent taste and the cachet they Capital Group Equity Analyst bestow. The developing world is also providing a significant boost to the Archana is an equity analyst covering beer industry. Even more than liquor companies, major brewers the alcoholic beverages industry. are grabbing market share from local players. That stems partly Based in London, she has 17 years of investment experience and has been from the lower cost of beer. As consumers with Capital Group since 2014. in the developing world move up the income ladder, beer becomes increasingly affordable. In some countries, there were no local beers before the introduction of foreign brands, so brewers in these markets have essentially created a new product category.

10 Capital Group Private Client Services Outside of the emerging markets, the Distribution networks are vital when prospects for the beer industry are more launching new products. subdued. Craft brews with distinctive Aside from consumer trends, large beer flavors and appealing brands are and liquor companies are able to use size gaining in popularity, but the outlook for to their advantage to fend off ongoing mainstream beer makers in the U.S. and competition from upstart brands. Leading Europe is modest. Growth has been held companies have the scale and financial back by ongoing concerns about drinking muscle to fund research, marketing and and driving. Beer makers have also been The introduction distribution, all of which are critical when unsuccessful in attracting female drinkers. of trendy drinks launching new products in an increasingly Despite countless marketing efforts, the in nightclubs has crowded marketplace. Given the consumer industry has made little headway with penchant for craft beers and liquors, large women and has returned its focus in recent broadened the companies have put an emphasis on years to men. Among beer makers, I favor allure of mixed research and development. Their goal is to companies that have loyal and growing introduce a handful of promising products drinks, with each year, and they rely on extensive customer bases in the developed world marketing and global distribution networks and strong prospects overseas. both men and women finding to get products into restaurants and Shifting demographics spur interest nightclubs. Large companies also have in mixed drinks. concoctions that the financial wherewithal to fund costly The flip side of the challenges for beer appeal to them. distribution efforts in emerging markets. companies is the brightening outlook To be successful over the long term, for liquor makers. Beer and alcohol companies need strong management with consumption in the U.S. used to follow the vision to anticipate consumer trends a fairly predictable pattern based on the — sometimes years in advance given the age of consumers and their stage of life. long lead times inherent in the distillation Typically, people favored beer in their process. Managements must choose the 20s, before their tastes branched toward is also gaining market share, but it makes right products to promote while effectively alcohol, and mixed drinks in their mid-30s up a relatively small share of revenue at motivating their sales forces. I meet and beyond. Increasingly, that dynamic publicly traded spirits companies.) regularly with company managements to understand their strategies and assess their is evolving as people become interested Perhaps surprisingly, the liquor business ability to anticipate consumer trends. in spirits earlier in their adult lives. As a is getting a boost from the aging of the group, millennials are known for their population, particularly baby boomers. As A few other factors appear to be pointing pursuit of new experiences and their desire they grow older, many tend to drink less in the right direction. The industry was hurt for products that are unique. Designer than they did when they were younger. in the past few years by an anti-corruption libations fit the bill on both counts. The That’s due to a variety of factors, including effort in China as the country’s leadership introduction of trendy drinks in nightclubs an awareness of alcohol’s high calorie cracked down on governmental fraud. The previously routine practice of giving a has broadened the overall allure of mixed counts. But while people may consume bottle of alcohol to an official as a courtesy drinks, with both men and women finding fewer drinks each time they go out, they’re fell sharply because of fears that the concoctions that appeal to them. (Wine willing to pay more for superior taste and gesture could be interpreted as bribery. an overall perception For major distillers, that meant dented of quality. That sales and inventory back-ups. I believe is spurring sales most companies operating in China have of higher-margin now adjusted their sales projections and liquors. In fact, such inventory levels, and will see improved “premiumization” is revenue moving forward. catching on among Also, the industry has finished a all age groups in the consolidation period in which some U.S. and even in the companies took on heavy debt to fund developing world. acquisitions. Debt levels have become Also, as drinkers more manageable, freeing up cash discover new tastes that can be earmarked for increased in bars, they buy the dividends and share buybacks. I believe liquors themselves to dependable growth in coming years will mix their own exotic allow companies to increase the amount of creations at home. money they return to shareholders. g

Quarterly Insights Fall 2015 11 FALL 2015 ANALYST PERSPECTIVES

As pressure to contain costs sweeps the next two to three years. Also, cardio through the health care sector, perhaps is further along in adopting some of the no industry has been more affected than broad reforms that are altering health medical devices. Hospitals, insurance care as a whole, meaning it may be less companies and the government have all likely to experience disruption than other become more discerning about expenses, sectors moving forward. By comparison, I By Kayvan Larizadeh carefully weighing the efficacy of medical am not excited about the prospects for the Capital Group Equity Analyst products against the expected costs. This orthopedics sector, where it is much harder increased scrutiny has brought about a to create differentiated products. Kayvan is an equity analyst transformation in the medical devices Within cardio, one area of progress covering the medical devices industry. Commodity components that has been in heart sensors, which are industry. Based in London, he yield only marginal patient benefits has seven years of investment small implantable devices that monitor face weak demand and non-existent experience and has been with cardiopulmonary pressure for patients pricing power. As a result, there is a Capital Group since 2013. with heart conditions. A sensor — basically newfound emphasis on innovation and the a computer chip requiring no batteries or development of cutting-edge products. wires — is permanently implanted in the I believe companies with devices that pulmonary artery, which carries blood genuinely improve patient outcomes will from the heart to the lungs. It transmits fare well as the health care landscape data to a nearby monitor that beams the continues to shift in the coming years. readings to a physician’s office. By giving Pacemakers, artificial knees and hearing early warning signs of cardiac distress, the aids are among the more common device not only has the potential to save medical devices. But medtech, as it’s lives but helps to avoid costly emergency known, also extends to imaging devices room visits and lengthy hospitalizations. such as MRI machines and surgical tools Another promising innovation involves like robots. Within the sector, the most transcatheter heart valves. Instead of exciting breakthroughs are coming in performing open-heart surgery to fix a the cardiovascular field. There has been valve on an elderly patient — which entails significant innovation in this sub-specialty great expense, risk and months of recovery and I foresee a strong product cycle in — a surgeon is able to insert a new valve

12 Capital Group Private Client Services will nearly double, compared with an Over the last six years expected 25% rise in advanced nations. That’s not to say there aren’t obstacles. or so, the industry has Patents and other intellectual-property evolved, with a renewed safeguards are weak in developing emphasis on research countries, leaving companies vulnerable to domestic copycats. Also, it takes time and development. to train enough doctors and build needed infrastructure, such as catherization labs. However, I’m impressed by how cautiously of surgeons nationwide are now employed most management teams describe this directly by hospitals. The new employment opportunity. In other words, they aren’t arrangements have reduced financial over-promising. This suggests that there conflicts of interest and cut into doctors’ may be room for upside surprises. ability to dictate when they will operate and which products they’ll use. The device industry has undergone a notable evolution in the last few years. It became apparent during this time For four decades, until roughly 2009, it that, after years of success, many device was seen as a structural growth sector. companies had grown complacent. Their That was due partly to the dynamics of pipelines were filled with uninspiring the broader medical industry. Cardiology products that were only fraactionally better and orthopedics have long been big profit than the models they were intended to centers for hospitals, so facilities gave replace. Over the last six years or so, the surgeons enormous latitude in deciding industry has evolved, with a renewed when to operate and which products emphasis on research and development. to use. And given that doctors were That has helped to yield a number paid based on how many surgeries they of medical advances. One promising performed, they had a powerful motivation treatment involves drug-coated balloons, to operate. Even as health costs kept rising via a catheter running from the leg to which combat peripheral artery disease, — from 7% of GDP in 1970 to nearly twice the heart. The procedures are minimally a painful leg condition that is often a that by 2000, according to the Centers invasive and some patients can leave the precursor to heart attacks or strokes. for Medicare and Medicaid Services — the hospital the next day. The balloons reopen blocked arteries government and private insurers largely in a patient’s thigh or knee. Another Demand for medical devices will yielded to doctors’ judgment. increase as baby boomers get older. area is subcutaneous ICDs, which are Throughout this period, doctors selected small defibrillators placed under the skin By 2050, an estimated 22% of the global devices based partly on aggressive pitches of patients with life-threatening heart population, or 2 billion people, will be from sales reps and financial inducements arrhythmias. The devices monitor heart 60 and older. That’s up from 11%, or from device manufacturers. Companies rhythms and administer small electrical 605 million people, in 2000. The need often signed physicians to consulting shocks when abnormal beats are detected. for medical devices is growing among contracts, giving them none-too-subtle To try to identify well-positioned different types of patients. Not surprisingly, incentives to favor their products. It companies, I focus on those that are people with chronic medical conditions, wasn’t uncommon for sales reps to earn genuinely committed to clinical innovation. or those who haven’t taken care of their more than $1 million a year in salary and There will always be strong demand for health, have a great need for cardio commissions. devices that save lives or reduce long- devices. However, demand is also rising The device industry is adapting to a term health costs, and those products are among people who are generally healthy, changed health care landscape. likely to have superior adoption rates and as baby boomers strive to maintain active pricing power. However, some companies lifestyles in their later years. The medtech sector reached a turning point around 2009. As health care costs are more dedicated to research and A clear area of opportunity is in developing eclipsed 17% of GDP, the need to rein better at it than others. While the quality countries, where most device companies in expenses intensified throughout of management is always important, I have a limited presence. Emerging-market the medical world. Hospitals, worried believe that’s especially true today. When populations are typically younger than about reimbursement rates from private evaluating such businesses, I assess their those of developed countries, meaning insurers and the government, shaved strategic vision and the quality of their there’s been less of a need for implantable costs by employing more doctors pipelines to uncover those with tight cost devices. That will change in the future. directly. (Previously, many surgeons control and the ability to successfully By 2050, the number of people in the were essentially independent contractors develop the most promising next- emerging world aged 50 and older affiliated with certain medical centers.) Half generation products. 

Quarterly Insights Fall 2015 13 FALL 2015 WEALTH STRATEGIES consult with a legal or tax professional before taking any action. Though no single formula is right for everyone, here are eight steps that can benefit those contemplating a business sale.

1. Plan well in advance.

It’s best to begin preparing months or even years before conducting an actual transaction. Early preparation and a well- conceived exit strategy help owners make the best decisions for themselves, their families and their companies. Among other benefits, early planning provides time to think through one’s options and goals, including long-range financial objectives.

Our Investment Counselors can provide assistance throughout the sales process. Although Capital Group Private Client Services doesn’t provide legal or tax advice, we have extensive experience in business sales and transitions. For example, we can help owners select advisors with investment banking and legal expertise. We can also assess whether the proceeds from the sale would be sufficient to maintain one’s chosen lifestyle well into the future.

2. Understand the emotional element.

Beyond financial matters, selling a company — particularly if it has been in the family for decades — can be deeply personal. In many cases, an owner has devoted many years to building a venture, The thought of selling a business can be and parting can be bittersweet. One’s both exciting and daunting. After years of self-image and sense of purpose — not to building a successful company, an owner mention the simple rhythms of everyday may want to retire, tackle other business life — can be bound up in the company. ventures or simply take a breather to Thus, it’s important to consider both the pursue long-delayed personal interests. By Paul Haaga III financial and emotional issues one may Wealth Specialist Whatever the reason, millions of business encounter. owners sell each year. In fact, one study 3. Prepare the business for sale. Paul is a wealth specialist for Capital estimates that more than half of all Group Private Client Services. He has 10 current entrepreneurs will part with their It’s crucial to ensure that a company is as years of investment industry experience companies over the next decade. financially attractive to a potential buyer and has been with the firm since 2013. as possible. This includes having efficient Selling a company is complex and entails operations and a clearly articulated a variety of decisions. Owners want to vision for growth. Depending on the feel confident that they’re selling at an circumstances, an owner may need to opportune time, securing the best price slash costs or widen a customer base and structuring the transaction wisely. before putting a business on the market. Entrepreneurs also need to understand Additionally, it’s advisable to get audited the potential financial implications for financial statements going back several To learn more about how we can help entrepreneurs prepare for the sale of a business, go to themselves — including the effects of years to prove that the venture is profitable thecapitalgroup.com/pcs/selling-a-business. income and estate taxes — and should and its accounting methods are sound.

14 Capital Group Private Client Services As part of the preparation, an owner involved in some capacity, even if simply to benefit of such a sale is the potential should gradually reduce his or her role. provide opinions or general guidance to a to receive a significant portion of cash This is a chance to demonstrate that the successor. That’s ideal for some, but others up front. Selling to a third party avoids company is self-sustaining and won’t miss a prefer an outright sale that frees them from concerns about treating one’s children beat under new stewardship. It’s also wise all involvement. unfairly or finding a child or employee to structure employee compensation to capable of running a business. However, People with more than one child have retain valuable employees. Buyers don’t unless one chooses to stay on board to additional decisions to make, including want to worry about a brain drain after they help run the business, the company’s whether to give equal ownership stakes to take over. culture may suffer a significant change. each sibling. The issue can be especially 4. Pick experienced advisors. tricky if only one child is involved in 8. Develop a thorough wealth strategy running the company. The goal, of course, plan. Selling a business requires a team of is to avoid conflict or resentment, and specialists with expertise in multiple Of course, the ultimate goal of a sale is the ultimate decision will rest on family disciplines, including investment banking, to financially prepare owners for the next dynamics. accounting and legal matters. It’s phase of their lives. Thus, it’s essential to important for entrepreneurs, who may not 6. Gauge the interest of co-owners and have a comprehensive wealth strategy be accustomed to relying on outsiders, employees. tailored to one’s individual financial to realize that they will need to lean on circumstances and personal goals. Our Beyond family members, other options outside advice. If we are brought in early Wealth Advisory Group can conduct an include selling to a partner who already enough, we can help owners select and analysis based on market assumptions to holds a stake in the company or to long- oversee a slate of experienced advisors to quantify the after-tax amount needed to time employees. If there is a co-owner, facilitate a seamless transition. endow one’s lifestyle with a high degree there already may be an agreement of confidence. We consider all personal 5. Determine matters of family in place that spells out the terms for goals to most effectively accomplish wealth succession. transferring ownership. If selling to transfer and charitable objectives. As employees is a possibility, owners must be One of the most basic decisions an part of that, we assess term sheets from comfortable that the workers can secure entrepreneur must make is whether to potential buyers to understand the pros the necessary financing and manage the transfer a business to his or her children. and cons of each offer as it relates to the company successfully. One option is to This can be straightforward if one’s kids owner’s long-range wealth planning. This sell company shares through an employee lack passion for the family enterprise. In can help, for example, in comparing the stock ownership plan. ESOPs have grown cases where children want to succeed trade-offs of an all-cash sale and a staged their parents, owners must determine in popularity lately, in part for their payment plan, which defers the proceeds whether their offspring can be successful. flexibility and tax-efficient structure. until later dates. Ideally, there would be enough time for a 7. Consider the benefits of selling to a child to assume a variety of management Although there are many considerations third party. roles with increasing responsibility. Even involved in selling a business, advance in such cases, it’s important for owners There’s also the possibility of a third-party planning can help it all go smoothly. to ask themselves whether they want to sale. A recent report found that half of Taking these steps should give owners remain even tangentially linked to the small-business owners who plan to part greater control of the process so that enterprise. When a company stays in the with their companies expect to sell to a they can make the right decisions for family, the older generation often remains competitor or other third party. A major themselves and their families. g

A Breakdown of the Types of Businesses Sold in the U.S. Each Year Source: BizBuySell.com

51.2% were restaurants, 37.1% were services, bars and other food 2.1% were wholesale such as dry cleaners, service businesses medical, dental, beauty and repair services

1.6% were construction

4.2% were manufacturing

0.5% were agriculture, communications and other industries 3.3% were internet related

Quarterly Insights Fall 2015 15 FALL 2015 PERSONAL PURSUITS

I was drawn to cars long before I was old a lifetime. But the current infatuation By Patrice Collette enough to drive one myself. As a boy, I gives me pause. Frankly, I worry that we Capital Group Equity Analyst pored over auto magazines and could are nearing the top of the market and proudly identify any make and model that newcomers who view cars solely Patrice, an equity analyst covering simply by listening to the rev of its engine. as investments could be disappointed. European chemicals and insurance, I bought my first car at 19 — a red 1965 I want to stress that I’m not an auto is a classic car enthusiast. Based MGB convertible. It guzzled oil and the analyst and I don’t follow the industry in Singapore, he has 19 years of roof leaked when it rained. But I didn’t professionally. I’m merely an observer. investment experience and has been care. Nothing was more fun than rounding with Capital Group since 2000. But for those who may be interested a tight corner or accelerating on an open in cars as either a hobby or a potential road. I still happily own that car to this day. investment, I want to share a few thoughts.

In the past few years, interest in classic cars First, never view cars as a central has grown enormously. This enthusiasm component of your investment portfolio. has been powered by a rise in the number Any money you earmark for automobiles of aficionados and a perception among should come only from surplus funds some that historic cars are a viable asset after the base and core elements of your class. The popularity is evident from the portfolio have been set. That’s especially skyrocketing prices that cars are fetching true now given the huge jump in the at auctions. Last year, a 1962 Ferrari 250 market. This doesn’t mean a widespread GTO sold for a record price of $38.1 price decline is imminent. But like the million. This August, a batch of 25 cars yellow flags at a racetrack that exhort that included Lamborghinis and Ferraris drivers to slow down, many signs today went for $67 million, the most ever for a suggest that collectors should proceed single collection. Over the past decade, cautiously. appreciation in the value of classic cars has handily surpassed that of art, wine and Upkeep and other costs can add up for coins, all of which notched considerable classic cars. gains themselves, according to the Knight Regardless of market conditions, keep Frank Luxury Investment Index. in mind the expenses associated with As an auto enthusiast, I’m glad to see maintaining a vintage automobile. Car people take up this hobby. Car collecting lovers are famous for tinkering under Capital Group analyst Patrice Collette, pictured with his red 1965 MGB convertible shortly after is rewarding in many ways, starting with the hood. I can certainly attest to the he acquired it in 1986. the fact that a prized vehicle can last pleasure of fiddling with transmissions

16 Capital Group Private Client Services — has compounded 25% per year since 2010, according to data from K500, a site that compiles auction results of classic cars. That far exceeds its 8% average over the past two decades. That’s great, of course, if you’ve owned the car for 20 years and want to sell. But longtime collectors who want to add new cars are dismayed by the prices they’re being forced to pay.

Other signs of froth include a virtual cottage industry of books and seminars, often tailored to newcomers. A conference in Germany this summer billed itself as a “symposium,” presumably to bestow a patina of credibility. Another promised to uncover “value” in the classic-car market. Likewise, I have never seen so many car auctions. Despite ever-higher attendance prices, many auctions are bursting at the seams.

As with other types of collectibles, investment funds devoted to historic and carburetors. But given the complexity fetched rationalizations about why prices cars have popped up. Their sales pitches of vehicles and the time it takes to were so high. For example, the ballooning emphasize the huge gains in cars master them, it’s often practical to turn values of Ferraris were predicated on compared with other asset classes. Beware, to a professional. That means money for the idea that prices would remain aloft however, of high expenses, including 1.5% restoration, maintenance and repairs. following the 1988 death of the company’s to 2% in annual management fees and 20% legendary founder, Enzo Ferrari. of profits. That’s not all. One fund permits If you buy an older car in original investors to view the cars it buys only once condition, restoration could cost tens That wasn’t enough to prevent the market a year. Another charges investors an extra of thousands of dollars and take a year from reversing direction in the spring of fee to actually drive a car. Including indirect or two to complete. Even for those who 1990. Signs of trouble appeared when costs, total expenses can reach 4% a year. buy restored vehicles, routine upkeep is sales records stopped being set, and the It’s impossible to predict the timing and a challenge. Unfortunately, the service extent of the weakness became apparent direction of the car market. This summer, station around the corner can’t fix a when demand fizzled for a pair of highly total proceeds at auctions headlined by vintage vehicle. The older the car, the touted car launches, the Jaguar XJ220 (275 the prestigious Pebble Beach Concours harder it is to find replacement parts units produced) and the Bugatti EB 110 d’Elegance fell shy of last year’s record but and qualified mechanics. Beyond that, (122 units produced). Prices fell for the next easily topped the 2013 mark. That could outlays for insurance can be hefty even for seven years and didn’t head noticeably presage a cooling of prices. The market’s higher until 2001. For the next several moderately priced cars. The same goes for been propelled lately by lower-tier vehicles years, prices rose moderately. The market professional storage facilities if you can’t as buyers scour for bargains among barely slowed when the global financial park the vehicles in your own garage. I less expensive models. However, I think crisis hit in 2008, and it has steadily gained think of these tasks as a labor of love, but conditions will slowly weaken and could momentum since then. it’s best to be aware of them up front. remain soft for several years. Excessive optimism is a worrisome sign. As for today’s market, it’s worth considering As I mentioned, there are lots of great some of the lessons learned from the As is typical, the rarest and highest- reasons to pursue an interest in vintage last boom. Fascination with historic cars quality cars have enjoyed the greatest automobiles. Many buyers favor cars that surged in the late 1980s, partly due to appreciation through most of this rally. In were popular when they were young. demand from Japan as that country’s recent years, however, prices for all types There’s nothing like going back in time by economy soared. Easy access to credit of cars — even lower-rated models — have getting behind the wheel of, say, a 1960s and investors’ wariness of equities after the accelerated drastically. For example, the or 70s muscle car. In other words, don’t 1987 stock market crash contributed to price of the Mercedes 280 SL “Pagoda” — a lose sight of the fun to be had from classic the frenzy. Over time, the typical markers fine model produced between 1968 and cars. Just remember why you’re buying of a bubble took shape, including far- 1971, but far from the most prestigious them — as a hobby, not as an investment. g

Quarterly Insights Fall 2015 17 FALL 2015 AUTHOR INTERVIEW

Few things are more important in life than getting the use for their kids, or the orthopedist who took care of their torn right medical care. But finding the best doctor can be knee. Call those physicians and ask not only who they might tough. You could ask a friend, or even do research recommend as a primary care doctor but also who they use. Then, online, but that doesn’t always yield the best results. go online. At the Federation of State Medical Boards website (fsmb.org), you can link to your state’s medical licensing body and Importantly, it’s essential to have an action plan for look up or verify a license. Make sure the physician candidates your medical care in place well before you need it. If an have no administrative proceedings against them and that they’re emergency strikes, which hospital do you want to be board-certified, part of your insurance plan and have admitting admitted to and how can you ensure the best specialists privileges to the hospitals you feel are the best in town. Finally, call will be on your case? their offices and make an appointment for an initial consultation to interview them. To help navigate today’s ever-changing medical maze, we spoke with Leslie Michelson, author of The Patient’s You mean you can actually set up an appointment to interview the Playbook: How to Save Your Life and the Lives of Those doctor before becoming a patient? You Love. Leslie has spent more than three decades It’s funny because in everything else in life, it seems perfectly helping patients master the health care system in a normal to interview a person before you hire them to do variety of capacities. As he notes in his new book, the something important for you. But with doctors, people feel as if difference in quality from one doctor to another can be that’s offensive. Fortunately, physicians are increasingly becoming far more substantial than most people imagine. Below comfortable with this idea. It’s invaluable to verify that you have he offers advice for being your own patient advocate. interpersonal chemistry with the doctor, and this is one way to find out before you commit. You say it’s essential for everyone to start by having a primary care physician they trust. What’s the best way to find one? Some doctors have great expertise yet a poor bedside manner. Which is more important? The first step is to write down all of the things that are important to you. Do they need to be in your insurance network? Must they For primary care, I believe feeling a strong interpersonal have after-work office hours or use electronic records? Next, connection is important. At the end of the day, you also need to consult with friends and family members for recommendations use your intuition. Does this feel like the right person to take about their favorite doctors. It might be the pediatrician they care of you?

18 Capital Group Private Client Services “For primary care, What do you think about some of the With all the changes in health care, some online review sites, such as Yelp, in terms doctors no longer accept insurance or are I believe feeling a of evaluating medical professionals? only on limited plans. Have you found any correlation in quality among such strong interpersonal In general, the data on social media rating physicians? connection is sites isn’t terribly meaningful. All too often important. “ people comment on things like whether Let me give you a little trick of the trade. their parking was validated or the room It’s a secret I’ve learned in over 30 years – Leslie Michelson was well lit. They don’t give meaningful of doing this. There is no meaningful information on a doctor’s expertise. relationship in medicine between cost and quality, unlike almost every other sector Is it the same process for identifying a You write in your book that you should specialist? of our economy. What that means is there always get a second opinion after is an opportunity for each individual to Yes and no. For specialists, my receiving a diagnosis. Why? exploit that disconnect. Here’s how you recommendation is to find someone I train people to go through a six-step do it: For significant conditions, go to who is an inch wide and a mile deep. process called the “No-Mistake Zone.” those institutions most likely to have more If you get diagnosed with the most Step one is to make sure your diagnosis is volume and expertise in your problem aggressive form of breast cancer, known specific and confirmed. We’ve had cases than your local community hospital. Most as triple negative breast cancer, you of extremely wealthy people being treated Americans live within an hour’s drive of a want an expert who has specifically for the wrong cancer because they had a major city housing a prominent medical treated many triple negative cases. Even misdiagnosis. I even encourage people center. Just about every one is in-network oncologists who see a lot of general to have a biopsy read by a pathologist for Medicare and most PPO insurance breast cancer cases may not have a similar at another center who is an expert on plans because they have to be. If the center takes your insurance, the doctors template to help you most effectively. the disease. Step two is to make sure who practice there will as well, and they As in all other aspects of life, experience you understand when and why the are generally the most experienced matters and practice makes perfect. disease needs to be treated. For most professionals around. How do you find someone with that level back pain, as an example, you should of expertise? avoid surgery for as long as possible. By Speaking of experience, do you contrast, if you get pancreatic cancer the recommend doctors who’ve been There are several ways to do it, and they’re way Steve Jobs did, it should be treated practicing for a long time, as opposed to all online. Start with the websites of major right away. The third step is to educate those more freshly minted out of college? hospitals in your community. Almost all yourself on the condition. There’s a It depends on what they are being list detailed biographies of physicians terrific website, uptodate.com, which has asked to do. If it’s a normal childbirth, an on staff, their areas of interest and their patient-friendly information on virtually appendectomy, setting a broken ankle or publications. Second, visit philanthropies every disease. The fourth step is to meet a similar routine procedure, even a new and foundations dedicated to your specific with physicians who are experts in exactly physician should be able to handle that disease. They all have a medical advisory what you have. Step five is to visualize fine. But if it’s a heart transplant or other board, and these people are not randomly your treatment plan and how you will be extraordinarily complex and technical selected. They’re leaders with deeper treated. The final step is that gut check procedure, you want someone with a lot of expertise in that disease area. Finally, — believing it’s the right course of action demonstrated experience. It’s less about expertscape.com searches all the articles and the best physician to carry it out. age and more about the level of expertise, that have been published on PubMed All of these steps are great when you have which comes back to all the other (an online medical library) over the past time to plan, but what if an emergency hits techniques I just let you in on. g 10 years. Type in your condition and in a and you need to make important decisions few seconds you’ll have a prioritized list right away? of experts and institutions that have the most distinguished records of publishing First, know that emergency rooms are scientific articles about your disease. graded from level one to level five. Level- one trauma centers have the greatest A lot of people ask their primary care capabilities. So in an emergency, make physician for specialist referrals. Is that sure the ambulance takes you to a level- a good strategy? one hospital. Then, be certain you have It is, but not every primary care doctor someone who can come with you to has spent the time doing what I just ensure the physicians and nurses are all described. It may sound a bit daunting knowledgeable about who you are, what or awkward to do this research, but happened, what allergies you have and once you see the benefits, it will so forth. Emergency rooms are chaotic, so become second nature to you. close and clear communication is essential.

Quarterly Insights Fall 2015 19 FALL 2015 NOTES FROM THE FIELD

Tourism is rising sharply in Japan, boosting the country’s economy and benefiting hotels, luxury-goods retailers and cosmetics makers. Nearly 2 million foreigners visited Japan in July, a 51% jump from the previous year. About one-third of the increase was due to Chinese tourists, who flocked there Demand for web- following the Japanese based financial services is accelerating. The U.S. economic government’s loosening expansion is showing few of visa restrictions. China and India are both of the signs that typically huge markets for providers foreshadow weakness. of so-called FinTech At 75 months and counting, applications, given their the current business-cycle relatively underdeveloped expansion exceeds the retail banking sectors and average 45-month upturn the willingness of those in dating back to 1945. the developing world to be However, recoveries don’t early adopters of e-finance. reverse because they reach a certain age, and many current indicators remain favorable, including China’s fast-growing restrained inflation and on-demand car sharing strong profit margins. The industry may impact longest-ever expansion, vehicle demand. from 1991 to 2001, lasted Ease of use, clean cars 120 months. and cheap pricing are among the reasons a Despite concerns growing number of people about global growth, are opting to postpone the outlook for large car purchases in favor of aerospace manufacturers using Uber and similar remains favorable. transportation services in the country. Extremely strong order backlogs should help leading companies ride out Prospects for the any temporary economic online travel market weakness. Also, half of the remain favorable. current demand is coming from orders to replace The travel sector is growing existing aircraft because of roughly twice as fast as the age or fuel-efficiency issues. overall economy, and online These orders are likely to penetration is gaining remain in place regardless steam around the world of economic conditions as people increasingly in what is projected to book their trips through be a $6 billion industry. various websites and apps.

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