Opportunities in absolute return income - topical themes

12/10/2018

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Dan Siluk, co-manager of the Janus Henderson Absolute Return Income Fund, covers a number of topics on fixed income markets, including questions about Australia, BBB and curve positioning.
 
What would you describe as the biggest threat and biggest opportunity for fixed income?
One of the biggest threats that we are seeing today in fixed income is the swelling of deficits in the US. So the strong fiscal policy of the current US administration is resulting in the Treasury having to issue more debt. More debt comes with higher yields. Also you have the European Central Bank (ECB) winding down quantitative easing towards the end of this year and looking to raise rates into 2019. The Bank of Japan has also for the last two years has been decreasing the size of its QE programme. So we are looking at rising rates acting as a potential threat to fixed income markets.
 
The opportunity for us is that we are an absolute return income focused manager that is benchmark agnostic, which means we do not need to own duration. In fact, we can take duration risk or interest rate risk from other jurisdictions around the globe.
 
So we look at places like Australia and New Zealand as opportunities, where central banks are dovish. They may not be cutting rates necessarily but they are certainly on hold for an extended period of time. So we prefer to have exposure in those sorts of nations.

Australia: Why are you favouring Australian duration (interest rate sensitivity) relative to the US?
Today we are favouring Australian duration over US duration for a number of reasons. Economic growth in Australia is quite slow. Household debt to income is at high levels. The banks are facing increased funding costs.
 
So what we have seen is a couple of the Australian banks have actually increased their mortgage rates. And that precludes the Reserve Bank of Australia (RBA) from having to cut rates aggressively. They are happy to keep rates on hold, the RBA is dovish as opposed to the US where the US Federal Reserve is raising rates and unwinding its balance sheet. We see Australia as a place to hide in terms of interest rate risk and duration exposure.

BBB: Should we be worried by a growing BBB market?
We are not generally worried about the size of the BBB market and the fact that it is growing. In fact there are some good reasons for the growth in BBB rated assets.
 
One of those is the fact that one sector, in particular – US autos – has seen upgrades this cycle. So the likes of Ford, General Motors, over the last five to six years, have been upgraded from high yield to investment grade status.
 
Another reason we are not too concerned is that the rating agencies post-crisis have applied more conservatism in terms of the way that they rate the banks. So a single A rated bank pre-crisis is now rated BBB. We do not believe that that results in increased risk. In fact, a BBB rated bank today post-crisis is probably safer than a single A rated bank pre-crisis.
 
Another reason that you have seen an explosion in BBB rated assets is due to merger and acquisition (M&A) related activity. That M&A activity tends to be focused in three main sectors in recent years: being oil and gas, telecom and healthcare.

Curve: Which area of the yield curve are you currently favouring? 
The part of the yield curve that we are favouring today is actually the front end in the US. We like the 2-year part of the curve for the steepness and the roll down that it provides.
 
The front end of the curve today in the US is quite steep from the 2 year to the one year point. It is worth about 20 basis points in roll down. If you compare that to the 2-year and 10-year part of the curve the steepness is also worth just over 20 basis points so you are not getting paid to take that additional duration risk.
 
We like the front end of the curve despite the fact that the Fed is raising rates. We believe there is a significant cushion or buffer. So you need to see a significant unexpected rise in rates of about 130 or 140 basis points in order for your coupon on a 2-year Treasury to be wiped out, as opposed to only 20 to 30 basis points on the 10-year Treasury. So we like the 2-year part of the curve.
 
Video fimed on 20 September 2018

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All content in this document is for information or general use only and is not specific to any individual client requirements. The information contained in this document is referential and may not be construed as an offer, invitation or recommendation or investment advice, nor should be taken as a basis to take (or stop taking) any decision.

Janus Henderson Capital Funds Plc is a UCITS established under Irish law, with segregated liability between funds. Investors are warned that they should only make their investments based on the most recent Prospectus which contains information about fees, expenses and risks, which is available from all distributors and paying agents, it should be read carefully. An investment in the fund may not be suitable for all investors and is not available to all investors in all jurisdictions; it is not available to US persons.  Past performance is not indicative of future results. The rate of return may vary and the principal value of an investment will fluctuate due to market and foreign exchange movements.  Shares, if redeemed, may be worth more or less than their original cost.

Janus Henderson Group plc and its subsidiaries are not responsible for any unlawful distribution of this document to any third parties, in whole or in part, or for information reconstructed from this document and do not guarantee that the information supplied is accurate, complete, or timely, or make any warranties with regards to the results obtained from its use. As with all investments, there are inherent risks that each individual should address.

The distribution of this document or the information contained in it may be restricted by law and may not be used in any jurisdiction or any circumstances in which its use would be unlawful.

Issued in Europe by Janus Capital International Limited (“JCIL”), authorised and regulated by the U.K. Financial Conduct Authority. Janus Capital International Limited (“JCIL”) is an entity registered and operating under the laws of the United Kingdom and Janus Capital Funds plc. is registered under the legislation of Ireland.

The extract prospectus (edition for Switzerland), the articles of incorporation, the extract annual and semi-annual report, in German, can be obtained free of charge from the representative in Switzerland: First Independent Fund Services Ltd (“FIFS”), Klausstrasse 33, CH-8008 Zurich, Switzerland, tel: +41 44 206 16 40, fax: +41 44 206 16 41, web: http://www.fifs.ch. The Swiss paying agent is: Banque Cantonale de Genève, 17, quai de l’Ile, CH-1204 Geneva. The last share prices can be found on www.fundinfo.com. For Qualified investors, institutional, wholesale client use only. Outside of Switzerland, this document is for professional use only. Not for onward distribution.

This material is strictly private and confidential and may not be reproduced or used for any purpose other than evaluation of a potential investment in Janus Capital International Limited’s products or the procurement of its services by the recipient of this presentation or provided to any person or entity other than the recipient of this presentation.

We may record telephone calls for our mutual protection, to improve customer service and for regulatory record keeping purposes.

Janus Capital Management LLC serves as investment adviser. Janus, Intech and Perkins are registered trademarks of Janus International Holding LLC. © Janus International Holding LLC. For more information or to locate your country’s Janus representative contact information, please visit www.janushenderson.com.

Specific risks

  • This fund is designed to be used only as one component of several in a diversified investment portfolio. Investors should consider carefully the proportion of their portfolio invested into this fund.
  • An issuer of a bond (or money market instrument) may become unable or unwilling to pay interest or repay capital to the Fund. If this happens or the market perceives this may happen, the value of the bond will fall.
  • The Fund may use derivatives towards the aim of achieving its investment objective. This can result in 'leverage', which can magnify an investment outcome and gains or losses to the Fund may be greater than the cost of the derivative. Derivatives also introduce other risks, in particular, that a derivative counterparty may not meet its contractual obligations.
  • If the Fund holds assets in currencies other than the base currency of the Fund or you invest in a share class of a different currency to the Fund (unless 'hedged'), the value of your investment may be impacted by changes in exchange rates.
  • When interest rates rise (or fall), the prices of different securities will be affected differently. In particular, bond values generally fall when interest rates rise. This risk is generally greater the longer the maturity of a bond investment.
  • Securities within the Fund could become hard to value or to sell at a desired time and price, especially in extreme market conditions when asset prices may be falling, increasing the risk of investment losses.

Risk rating

Janus Henderson Absolute Return Income Fund (EUR)

For institutional/ sophisticated investors / accredited investors qualified distributors use only.

All content in this document is for information or general use only and is not specific to any individual client requirements. The information contained in this document is referential and may not be construed as an offer, invitation or recommendation or investment advice, nor should be taken as a basis to take (or stop taking) any decision.

Janus Henderson Capital Funds Plc is a UCITS established under Irish law, with segregated liability between funds. Investors are warned that they should only make their investments based on the most recent Prospectus which contains information about fees, expenses and risks, which is available from all distributors and paying agents, it should be read carefully. An investment in the fund may not be suitable for all investors and is not available to all investors in all jurisdictions; it is not available to US persons.  Past performance is not indicative of future results. The rate of return may vary and the principal value of an investment will fluctuate due to market and foreign exchange movements.  Shares, if redeemed, may be worth more or less than their original cost.

Janus Henderson Group plc and its subsidiaries are not responsible for any unlawful distribution of this document to any third parties, in whole or in part, or for information reconstructed from this document and do not guarantee that the information supplied is accurate, complete, or timely, or make any warranties with regards to the results obtained from its use. As with all investments, there are inherent risks that each individual should address.

The distribution of this document or the information contained in it may be restricted by law and may not be used in any jurisdiction or any circumstances in which its use would be unlawful.

Issued in Europe by Janus Capital International Limited (“JCIL”), authorised and regulated by the U.K. Financial Conduct Authority. Janus Capital International Limited (“JCIL”) is an entity registered and operating under the laws of the United Kingdom and Janus Capital Funds plc. is registered under the legislation of Ireland.

The extract prospectus (edition for Switzerland), the articles of incorporation, the extract annual and semi-annual report, in German, can be obtained free of charge from the representative in Switzerland: First Independent Fund Services Ltd (“FIFS”), Klausstrasse 33, CH-8008 Zurich, Switzerland, tel: +41 44 206 16 40, fax: +41 44 206 16 41, web: http://www.fifs.ch. The Swiss paying agent is: Banque Cantonale de Genève, 17, quai de l’Ile, CH-1204 Geneva. The last share prices can be found on www.fundinfo.com. For Qualified investors, institutional, wholesale client use only. Outside of Switzerland, this document is for professional use only. Not for onward distribution.

This material is strictly private and confidential and may not be reproduced or used for any purpose other than evaluation of a potential investment in Janus Capital International Limited’s products or the procurement of its services by the recipient of this presentation or provided to any person or entity other than the recipient of this presentation.

We may record telephone calls for our mutual protection, to improve customer service and for regulatory record keeping purposes.

Janus Capital Management LLC serves as investment adviser. Janus, Intech and Perkins are registered trademarks of Janus International Holding LLC. © Janus International Holding LLC. For more information or to locate your country’s Janus representative contact information, please visit www.janushenderson.com.

Specific risks

  • An issuer of a bond (or money market instrument) may become unable or unwilling to pay interest or repay capital to the Fund. If this happens or the market perceives this may happen, the value of the bond will fall.
  • The Fund may use derivatives towards the aim of achieving its investment objective. This can result in 'leverage', which can magnify an investment outcome and gains or losses to the Fund may be greater than the cost of the derivative. Derivatives also introduce other risks, in particular, that a derivative counterparty may not meet its contractual obligations.
  • If the Fund holds assets in currencies other than the base currency of the Fund or you invest in a share class of a different currency to the Fund (unless 'hedged'), the value of your investment may be impacted by changes in exchange rates.
  • When interest rates rise (or fall), the prices of different securities will be affected differently. In particular, bond values generally fall when interest rates rise. This risk is generally greater the longer the maturity of a bond investment.
  • Securities within the Fund could become hard to value or to sell at a desired time and price, especially in extreme market conditions when asset prices may be falling, increasing the risk of investment losses.

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