Key takeaways:
- As equity and bond correlations rise, liquid diversifiers may help rebuild portfolio resilience, offering an alternative source of returns during market disruption.
- Europe’s large companies have become more global and resilient, while strong earnings momentum and discounted valuations may offer diversification beyond US equities.
- Active stock selection can distinguish businesses challenged by technological disruption from those positioned to benefit from structural investment, including spending on artificial intelligence.
Definitions
Absolute return investing: A type of investment strategy that seeks to generate a positive return over time, regardless of market conditions or the direction of financial markets, typically with a low level of volatility.
Active investing: An investment management approach where a fund manager actively aims to outperform or beat a specific index or benchmark through research, analysis and the investment choices they make. The opposite of passive investing.
Beta: The measure of the relationship that a portfolio or security has with the overall market. The beta of a market is always 1. A beta above 1 indicates that a security or portfolio is likely to move more than the market average, while a beta below 1 indicates that it is theoretically less volatile than the market.
Capital expenditure: Money invested to acquire or upgrade fixed assets such as buildings, machinery, equipment or vehicles in order to maintain or improve operations and foster future growth.
Correlation: How far the price movements of two variables, such as equity or fund returns, move in relation to each other. A correlation of +1.0 means both variables move in the same direction, while –1.0 means they move in opposite directions. A figure near zero suggests a weak or non-existent relationship.
Discount rate: The process of determining the present value of future earnings, which allows an investor to have a better idea of the value of a business at the present time.
Diversification: A way of spreading risk by mixing different types of assets or asset classes in a portfolio, on the assumption that these assets will behave differently in any given scenario. Assets with low correlation should provide the most diversification.
Drawdown: A measure of historic risk that looks at the difference between the highest and lowest price of a portfolio or security during a specific period. It is used to evaluate the possible risk and reward of an investment.
Exposure: The amount invested in an asset or market that could potentially be lost should an investment fail. It is another way of describing financial risk.
Inflation: The rate at which the prices of goods and services are rising in an economy.
Large-cap stocks: Well-established companies with a valuation, or market capitalisation, at the larger end of the market scale.
Long position: A security bought with the intention of holding it in the expectation that it will rise in value.
Short position: A technique through which fund managers borrow and then sell assets they believe are overvalued, intending to buy them back for less if the price falls. The position profits if the security falls in value.
Volatility: The rate and extent at which the price of a portfolio, security or index moves up and down. Larger price movements indicate higher volatility and investment risk.
View transcript
Tom Ross: Welcome to the Janus Henderson Investment Summit in Rome. I’m welcomed to be joined today by Luke Newman, who manages our global absolute return equity strategies, and Robert Schramm-Fuchs, our European equities expert. Thank you both for joining me. We’ve been speaking with clients today and there’s been much discussions about the changing world order and opportunities beyond the US. So what have been some of the key messages that have been speaking with clients about?
Luke Newman: Well, it feels like we’ve lurched from one crisis to another geopolitically, politically, and we could list off the various flashpoints we’ve had to manage investment strategies through, and our clients have had to manage through as well. We think there’s a persistency to that. We can’t see obvious solutions on many of the various fronts at the moment. And I think underlying that is that that shift back to cost of money and discount rates having a positive value, the stickiness of inflation, obviously not helped again, by the energy shock we’ve had this year.
So I think the challenges we’ve had in the last three or four years probably persist. And so, you know, where we’ve got strategies that have the ability to be able to distil and thrive actually in that volatility. Then we’re very keen to talk to clients about them.
Ross: Robert.
Robert Schramm-Fuchs: Yeah, I think for us very similar take to Luke’s that our investment universe Europe large cap has felt in the eyes of the clients to go from one crisis to the other. Right. Financial crisis, eurozone crisis, Covid, tariffs, you name it. We’ve had it in Europe. But I think the important thing is our large cap universe has become more resilient as a result of that, has become more global, more diversified as a result of that.
And now we achieve over 55% of revenue on average in our universe from outside of Europe. So even though it’s called European large cap, it’s not really European large cap. It’s global large cap with a touch of Europe to it. And I think that’s an important point and makes investing what was very challenging in Europe much more robust.
Ross: Yeah. Very good. So look you’ve just described today’s environment as the new world disorder. So what does that make, why does that make absolute return strategies particularly useful within that?
Newman: We would say an absolute return strategy run appropriately is one that can display persistent and consistent levels of targeted positive return, can deliver that return in a manner that has low beta and correlation with not just equity markets, but other asset classes as well, and then has a firm eye on eliminating or reducing drawdowns. So I think the ability to be able to fulfil those criteria are important.
And when we look at this year, I think the flexibility of having a stock specific short book offsetting a long book for us, take the AI issue, which we could talk about for hours, but having the ability to be able to take short positions in those businesses that we felt are challenged by new technology being deployed, that are seeing their pricing or their content strategies, you know, starting to unwind some of their their pricing proposition gives us ability to protect, even in these more difficult environments.
And then the long book where we can find those businesses that are underpriced because of the exposure to, let’s say, AI CapEx going forward, that provides a real opportunity that, you know, we can we can exploit for our investors.
Ross: We’ve seen today as well, because we’ve seen some charts that show like negative beta of some stocks as well, which obviously fits into that obviously clearly.
Robert, in terms of like most investors are heavily weighted towards the US and the US market. So what’s changing in Europe now that might be a little bit overlooked by some of those investors focusing on the US?
Schramm-Fuchs: I think what’s definitely overlooked that feels is the strength of the earnings momentum in European stocks. So we’ve had a European stock market that’s when you chart it against the earnings revisions, has hardly been able to keep up with the pace of revisions upwards. And so the earnings momentum is very strong. And the multiple hasn’t expanded. And I think that is being overlooked when compared to European large cap valuation multiple versus rest of the world. It still trades at a very meaningful discount.
Ross: And finally, if you could leave investors with just one key message, what would it be Luke?
Newman: I think some of the most interesting conversations we’ve had over the last few days are around asset allocation. And given the correlation which you referenced as well this morning, picking up between equity and fixed income, the value that liquid uncorrelated diversifies can do, such as absolute return within our clients’ portfolios, both from a risk perspective, but also in terms of the ability to generate positive returns in, as we’ve discussed, what is a challenging environment.
Ross: Robert.
Schramm-Fuchs: I think for myself, I think the key message would be don’t ignore Europe because it has become very different from investing in Europe in the past. It is much more global. It is much more resilient, more robust. And it comes at a significant valuation discount because being listed in the wrong post code and it has very strong earnings momentum, and it offers a great source of diversification.
Ross: Excellent. Luke Robert, thank you so much. And thanks very much, everyone for listening.
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