Jeremiah Buckley, Portfolio Manager on the Janus Henderson Balanced team, gives insight into how the bonds and equity teams work in tandem as they seek to deliver a balanced, risk-conscious portfolio for investors.
How does the management team work together?
The Janus Henderson Balanced Fund is the collaborative work of two teams: one focused on U.S. equities and the other on bonds. Both follow a bottom-up approach, with a layer of top-down analysis, which comes from the work of 30 analysts across each of the two pillars. In general, the equity investment approach is oriented towards growth, currently represented in the strategy’s exposure to technology and discretionary consumption (as at 30 September 2019), with less presence in industrials and other more economically sensitive (cyclical) areas. Fixed income, on the other hand, follows a more conservative approach, with a focus on seeking to reduce capital loss, reflected in the balance of exposure between government bonds, investment grade bonds and high yield.
What proportion of the strategy is invested in equities?
The strategy typically invests between 35% and 65% of its investable assets in equities. Given our views on the prospects for U.S. equities, exposure has remained close to the higher end of that scale over the past few years. The only exception to this was in the third quarter of 2018, when it was temporarily reduced in favour of some high yield bond issues with an attractive yield to maturity. At that time, the scenario for equities was less favorable, with the U.S. Federal Reserve (Fed) committed to raising interest rates, while we were seeing the outbreak of the U.S.-China trade crisis.
In 2019, however, the scenario has changed: at the beginning of the year the Fed took a more accommodative policy stance, while we see signs of a potential thawing in negotiations between the United States and China. While our expectations for the economy are moderating, we believe the companies we hold in our portfolio can perform much better than the general macro trend.
What growth characteristics do you look for in a potential equity investment?
Among the criteria we require is a track record of growth that is greater than the increase in global gross domestic product (GDP), with an increase in profits that, combined with the dividend yield, can deliver a return of at least 10% over a period of two to five years. Furthermore, we want management, in addition to generating large amounts of free cash flow, to use that cash in a way that is favourable to shareholders. This could be via investing in acquisitions that lead to higher growth, higher dividends, or share repurchases. Finally, we take a careful look at the balance sheet. Ultimately, our approach to equity investment is quality-oriented, which we believe is a strong advantage in today’s uncertain environment.
How would you summarise current market conditions?
The economic slowdown has affected the manufacturing sector at a global level. However, U.S. consumer consumption remains high, so we do not see a recession on the horizon. The trade war has certainly been a negative element, without which the macro picture would probably be much stronger today. This has been noticed by the Fed and the European Central Bank (ECB), both of which have adopted a more relaxed monetary policy strategy in an effort to support their respective economies.
This particular path of monetary policy has compressed bond yields, making the risk premiums on equities look attractive on a relative basis. It has also given those U.S. large cap companies with a strong multinational presence an opportunity to take advantage of low interest rates in Europe to issue debt on enviably low terms. This path is by no means clear, however, given the impact that uncertainty has had on company spending decisions.
Are you seeing any relevant trends in company earnings?
Earnings at a corporate level have tended to follow trends that we see in the broader economy. For example, companies associated with the manufacturing cycle are in a difficult situation, compatible with an almost recessive scenario. On the other hand, those sectors related to consumption in the U.S. have been supported by healthy wage data. Structural growth drivers, such as health care or technology spending, remain on a solid footing. In some areas, such as software services, which operate in high-growth fields (such as the cloud), we are still finding double-digit growth rates.
Given the scarcity of reliable growth, and following a strong period for stock markets in 2019, are you struggling to find attractive investment opportunities?
It is true that we think valuations now look expensive in some areas, such as software or internet services. However, there are still areas of potential interest. Looking at the U.S. market, dividend yields are flat or slightly rising in most sub-sectors. In some cases, this has been driven by an increase in the dividend payout ratio; but in most cases the cause is ultimately higher profits.