Buy investment grade, wear diamonds

​A few months ago I remarked to Jenna, my co-manager, how boring credit (corporate bond) markets were. Be wary of what you wish for I hear you say. US credit markets were displaying late cycle behaviour and we were cognizant of this. Merger and acquisition (M&A) activity was high and it was not an environment in which credit investors were getting well rewarded.

We had, however, a growing niggle, that global bond yields may keep falling against all the mainstream consensual thinking (yields move inversely to prices). Our main concern was, and indeed still is, the appalling global growth we have experienced post the Global Financial Crisis. Hands up, we like many, did not call the Brexit* result, but we keep coming back to the same conclusion – for the best risk adjusted returns in credit markets ‘buy quality industrial, large-cap, non-cyclical investment grade bonds’. We do not think this rather simple strategy will let you down. Let me explain.

In 2010 we went short duration in our funds, in other words reduced interest rate sensitivity, partly due to overconfidence after a rather successful credit crisis, but also due to our orthodox university training in the dismal science of economics. Sterling fell very heavily in 2008, and yes we did import a lot of temporary inflation (consumer price index, CPI, growth reached 5.3%). The Bank of England saw through this and fortunately did not raise interest rates, as neither companies, nor individuals, had the power to pass these imported costs on, in higher prices or wages. I would suggest a not dissimilar outcome will happen again. Although the threat that a Brexit brings is very concerning for short term growth prospects, an advantageous major fall in sterling has been forced, which is the traditional escape valve in a flexible economy.

It was after reading Richard Koo’s book, The Holy Grail of Macroeconomics, in 2011, that we completed a volte-face in our duration thinking. Koo predicted that Europe would turn ‘Japanese’ nearly six years ago, and frankly he has nailed it. Our Japanese equity managers also warned us about this scenario many years ago.

Koo coined the phrase “balance sheet recession” – whereby individuals or companies, experiencing negative equity post a financial crisis, only want to pay off debt and de-lever (reduce debt). Thus, lowering interest rates is a completely ineffective policy tool. Koo is highly critical of the economics profession as it completely ignores ‘behavioural’ responses to traumatic events.

Many commentators have likened Brexit to bereavement – something I felt myself. Our macro outlook remains realistic, but fairly dismal regarding growth and inflation. Aside from Brexit, we have serious concerns about falling Japanese bond yields, the strength of the yen and the almost inevitable threat of a Chinese devaluation, which will bring yet another wave of deflation.

We have long been big fans of Larry Summers’ ‘secular stagnation’ theme. Brexit has exaggerated this view. In his most recent speech, the Bank of England Governor, Mark Carney, spoke about “economic post traumatic stress disorder” – whereby he expects individual agents and corporations to change behaviour due to the uncertainty of Brexit. In his words “EU exit would bring about major regime change”. Further, “The economic outlook has deteriorated and some monetary policy easing will likely be required over the summer.” So, Mr Carney seems to agree that major events result in behavioural changes.

We expect interest rates to fall by 0.5% very soon. We also expect a corporate bond buying programme and cheap funding schemes for the banks. On July 1, some of the bank capital requirements for UK banks were loosened. Carney also talks about ruthless truth telling, implying that monetary policy alone can only have limited effects.

Thus, we expect a major fiscal response to the UK’s predicament, and only wish our European counterparts would follow a similar route, but they are unfortunately constrained by the ridiculous Maastricht Treaty**. Fiscal expansion has been tried in Japan of course, but with limited success – they did not undertake the necessary structural reforms – which Koo estimated could account for 80% of the heavy lifting – alongside economic reforms.

Throughout last year, we suggested investors should not be tempted to ski off piste in the afternoon sun. That is, getting hoodwinked into such things as overly levered structured products, peer to peer lending, Chinese property investments, small cap lending, aircraft leasing and private placement to name a few. In addition, we materially reduced our high yield (but short duration) book in favour of long dated (high duration) US investment grade credit.

We continue to favour the refreshingly simple; reasonable to high credit quality names, but with the long duration attributes of investment grade credit. We have focused entirely on large cap, non-cyclical, consumer facing, ‘reason to exist’ credits such as Kraft Heinz, Boots Walgreen, Philip Morris and Verizon.

Why? Because in 30 years’ time these companies will still be paying reliable, dependable coupons to their bondholders. If anything, we may pursue this global titans/nifty fifty*** strategy even further. We continue to avoid the heavy cyclicals such as shipping, mining, autos and chemicals.

Bonds returns will be all about ‘income’ in the future. We want to lock this in as long as possible. We expect bond yields in the high yielding countries of the UK and the US to fall further, and believe their yield curves will flatten even more as European, Japanese and Asian investors seek out yield. We expect investment grade bonds to party on as the global grab for yield continues. We generally favour going along the corporate bond curve to better quality credit rather than going down the credit curve to lower quality.

To put it another way, at the margin we continue to prefer duration risk over default (credit) risk. It’s as simple as that.

*Brexit: UK’s decision to leave the European Union.
**Maastricht Treaty: also known as the Treaty on European Union, signed in February 1992.
***Nifty Fifty: here refers to large-cap corporations that are regarded as solid and stable over long periods of time.

 

Important information

Please read the following important information regarding funds related to this article.

Janus Henderson Cautious Managed Fund Expand

This document is intended solely for the use of professionals and is not for general public distribution.

Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. Tax assumptions and reliefs depend upon an investor’s particular circumstances and may change if those circumstances or the law change.

If you invest through a third party provider you are advised to consult them directly as charges, performance and terms and conditions may differ materially.

Nothing in this document is intended to or should be construed as advice. This document is not a recommendation to sell or purchase any investment. It does not form part of any contract for the sale or purchase of any investment.

Any investment application will be made solely on the basis of the information contained in the Prospectus (including all relevant covering documents), which will contain investment restrictions. This document is intended as a summary only and potential investors must read the prospectus, and where relevant, the key investor information document before investing. Copies of the Fund’s prospectus and key investor information document are available in English, French, German, and Italian. Articles of incorporation, annual and semi-annual reports are available in English. All of these documents can be obtained free of cost from Janus Henderson Investors registered office: 201 Bishopsgate, London EC2M 3AE.

Issued in the UK by Janus Henderson Investors. Janus Henderson Investors is the name under which Henderson Global Investors Limited (reg. no. 906355), AlphaGen Capital Limited (reg. no. 962757), Henderson Equity Partners Limited (reg. no.2606646), (each incorporated and registered in England and Wales with registered office at 201 Bishopsgate, London EC2M 3AE) are authorised and regulated by the Financial Conduct Authority to provide investment products and services. We may record telephone calls for our mutual protection, to improve customer service and for regulatory record keeping purposes.

Copies of the Fund’s prospectus are available in English, French, Spanish German and Dutch. Key investor information documents are available in English, Danish, German, Finnish, French, Italian, Norwegian, Spanish, Swedish and Dutch. Articles of incorporation, annual and semi-annual reports are available in English. All of these documents can be obtained free of cost from the local offices of Janus Henderson Investors: 201 Bishopsgate, London, EC2M 3AE for UK, Swedish and Scandinavian investors; Via Dante 14, 20121 Milan, Italy, for Italian investors and Roemer Visscherstraat 43-45, 1054 EW Amsterdam, the Netherlands. for Dutch investors; and the Fund’s: Austrian Paying Agent Raiffeisen Bank International AG, Am Stadtpark 9, A-1030 Vienna; French Paying Agent BNP Paribas Securities Services, 3, rue d’Antin, F-75002 Paris; German Information Agent Marcard, Stein & Co, Ballindamm 36, 20095 Hamburg; Belgian Financial Service Provider CACEIS Belgium S.A., Avenue du Port 86 C b320, B-1000 Brussels; Spanish Representative Allfunds Bank S.A. Estafeta, 6 Complejo Plaza de la Fuente, La Moraleja, Alcobendas 28109 Madrid; Singapore Representative Henderson Global Investors (Singapore) Limited, 138 Market Street #34-03/04 CapitaGreen, Singapore 048946; or Swiss Representative BNP Paribas Securities Services, Paris, succursale de Zurich, Selnaustrasse 16, 8002 Zurich who are also the Swiss Paying Agent.

Specific risks

• Investment management techniques that have worked well in normal market conditions could prove ineffective or detrimental at other times.
• Shares can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
• Some or all of the annual management charge is taken from capital. This may constrain potential for capital growth.
• The Fund could lose money if a counterparty with which it trades becomes unwilling or unable to meet its obligations to the Fund.
• If a Fund has a high exposure to a particular country or geographical region it carries a higher level of risk than a Fund which is more broadly diversified.
• The value of a bond or money market instrument may fall if the financial health of the issuer weakens, or the market believes it may weaken. This risk is greater the lower the credit quality of the bond.
• Derivatives use exposes the Fund to risks different from, and potentially greater than, the risks associated with investing directly in securities and may therefore result in additional loss, which could be significantly greater than the cost of the derivative.
• Changes in currency exchange rates may cause the value of your investment and any income from it to rise or fall.
• If the Fund or a specific share class of the Fund seeks to reduce risks (such as exchange rate movements), the measures designed to do so may be ineffective, unavailable or detrimental.
• 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.
• Any security could become hard to value or to sell at a desired time and price, increasing the risk of investment losses.

Janus Henderson Fixed Interest Monthly Income Fund Expand

This document is intended solely for the use of professionals and is not for general public distribution.

Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. Tax assumptions and reliefs depend upon an investor’s particular circumstances and may change if those circumstances or the law change.

If you invest through a third party provider you are advised to consult them directly as charges, performance and terms and conditions may differ materially.

Nothing in this document is intended to or should be construed as advice. This document is not a recommendation to sell or purchase any investment. It does not form part of any contract for the sale or purchase of any investment.

Any investment application will be made solely on the basis of the information contained in the Prospectus (including all relevant covering documents), which will contain investment restrictions. This document is intended as a summary only and potential investors must read the prospectus, and where relevant, the key investor information document before investing. Copies of the Fund’s prospectus and key investor information document are available in English, French, German, and Italian. Articles of incorporation, annual and semi-annual reports are available in English. All of these documents can be obtained free of cost from Janus Henderson Investors registered office: 201 Bishopsgate, London EC2M 3AE.

Issued in the UK by Janus Henderson Investors. Janus Henderson Investors is the name under which Henderson Global Investors Limited (reg. no. 906355), AlphaGen Capital Limited (reg. no. 962757), Henderson Equity Partners Limited (reg. no.2606646), (each incorporated and registered in England and Wales with registered office at 201 Bishopsgate, London EC2M 3AE) are authorised and regulated by the Financial Conduct Authority to provide investment products and services. We may record telephone calls for our mutual protection, to improve customer service and for regulatory record keeping purposes.

Copies of the Fund’s prospectus are available in English, French, Spanish German and Dutch. Key investor information documents are available in English, Danish, German, Finnish, French, Italian, Norwegian, Spanish, Swedish and Dutch. Articles of incorporation, annual and semi-annual reports are available in English. All of these documents can be obtained free of cost from the local offices of Janus Henderson Investors: 201 Bishopsgate, London, EC2M 3AE for UK, Swedish and Scandinavian investors; Via Dante 14, 20121 Milan, Italy, for Italian investors and Roemer Visscherstraat 43-45, 1054 EW Amsterdam, the Netherlands. for Dutch investors; and the Fund’s: Austrian Paying Agent Raiffeisen Bank International AG, Am Stadtpark 9, A-1030 Vienna; French Paying Agent BNP Paribas Securities Services, 3, rue d’Antin, F-75002 Paris; German Information Agent Marcard, Stein & Co, Ballindamm 36, 20095 Hamburg; Belgian Financial Service Provider CACEIS Belgium S.A., Avenue du Port 86 C b320, B-1000 Brussels; Spanish Representative Allfunds Bank S.A. Estafeta, 6 Complejo Plaza de la Fuente, La Moraleja, Alcobendas 28109 Madrid; Singapore Representative Henderson Global Investors (Singapore) Limited, 138 Market Street #34-03/04 CapitaGreen, Singapore 048946; or Swiss Representative BNP Paribas Securities Services, Paris, succursale de Zurich, Selnaustrasse 16, 8002 Zurich who are also the Swiss Paying Agent.

Specific risks

• Investment management techniques that have worked well in normal market conditions could prove ineffective or detrimental at other times.
• Some or all of the annual management charge is taken from capital. This may constrain potential for capital growth.
• This fund is designed to be used only as one component in several in a diversified investment portfolio. Investors should consider carefully the proportion of their portfolio invested into this fund.
• The Fund could lose money if a counterparty with which it trades becomes unwilling or unable to meet its obligations to the Fund.
• The value of a bond or money market instrument may fall if the financial health of the issuer weakens, or the market believes it may weaken. This risk is greater the lower the credit quality of the bond.
• Derivatives use exposes the Fund to risks different from, and potentially greater than, the risks associated with investing directly in securities and may therefore result in additional loss, which could be significantly greater than the cost of the derivative.
• Changes in currency exchange rates may cause the value of your investment and any income from it to rise or fall.
• If the Fund or a specific share class of the Fund seeks to reduce risks (such as exchange rate movements), the measures designed to do so may be ineffective, unavailable or detrimental.
• 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.
• Leverage arises from entering into contracts or derivatives whose terms have the effect of magnifying an outcome, meaning profits and losses from investment can be greater.
• Any security could become hard to value or to sell at a desired time and price, increasing the risk of investment losses.

Janus Henderson Preference & Bond Fund Expand

This document is intended solely for the use of professionals and is not for general public distribution.

Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. Tax assumptions and reliefs depend upon an investor’s particular circumstances and may change if those circumstances or the law change.

If you invest through a third party provider you are advised to consult them directly as charges, performance and terms and conditions may differ materially.

Nothing in this document is intended to or should be construed as advice. This document is not a recommendation to sell or purchase any investment. It does not form part of any contract for the sale or purchase of any investment.

Any investment application will be made solely on the basis of the information contained in the Prospectus (including all relevant covering documents), which will contain investment restrictions. This document is intended as a summary only and potential investors must read the prospectus, and where relevant, the key investor information document before investing. Copies of the Fund’s prospectus and key investor information document are available in English, French, German, and Italian. Articles of incorporation, annual and semi-annual reports are available in English. All of these documents can be obtained free of cost from Janus Henderson Investors registered office: 201 Bishopsgate, London EC2M 3AE.

Issued in the UK by Janus Henderson Investors. Janus Henderson Investors is the name under which Henderson Global Investors Limited (reg. no. 906355), AlphaGen Capital Limited (reg. no. 962757), Henderson Equity Partners Limited (reg. no.2606646), (each incorporated and registered in England and Wales with registered office at 201 Bishopsgate, London EC2M 3AE) are authorised and regulated by the Financial Conduct Authority to provide investment products and services. We may record telephone calls for our mutual protection, to improve customer service and for regulatory record keeping purposes.

Copies of the Fund’s prospectus are available in English, French, Spanish German and Dutch. Key investor information documents are available in English, Danish, German, Finnish, French, Italian, Norwegian, Spanish, Swedish and Dutch. Articles of incorporation, annual and semi-annual reports are available in English. All of these documents can be obtained free of cost from the local offices of Janus Henderson Investors: 201 Bishopsgate, London, EC2M 3AE for UK, Swedish and Scandinavian investors; Via Dante 14, 20121 Milan, Italy, for Italian investors and Roemer Visscherstraat 43-45, 1054 EW Amsterdam, the Netherlands. for Dutch investors; and the Fund’s: Austrian Paying Agent Raiffeisen Bank International AG, Am Stadtpark 9, A-1030 Vienna; French Paying Agent BNP Paribas Securities Services, 3, rue d’Antin, F-75002 Paris; German Information Agent Marcard, Stein & Co, Ballindamm 36, 20095 Hamburg; Belgian Financial Service Provider CACEIS Belgium S.A., Avenue du Port 86 C b320, B-1000 Brussels; Spanish Representative Allfunds Bank S.A. Estafeta, 6 Complejo Plaza de la Fuente, La Moraleja, Alcobendas 28109 Madrid; Singapore Representative Henderson Global Investors (Singapore) Limited, 138 Market Street #34-03/04 CapitaGreen, Singapore 048946; or Swiss Representative BNP Paribas Securities Services, Paris, succursale de Zurich, Selnaustrasse 16, 8002 Zurich who are also the Swiss Paying Agent.

Specific risks

• Investment management techniques that have worked well in normal market conditions could prove ineffective or detrimental at other times.
• Some or all of the annual management charge is taken from capital. This may constrain potential for capital growth.
• This fund is designed to be used only as one component in several in a diversified investment portfolio. Investors should consider carefully the proportion of their portfolio invested into this fund.
• The Fund could lose money if a counterparty with which it trades becomes unwilling or unable to meet its obligations to the Fund.
• The value of a bond or money market instrument may fall if the financial health of the issuer weakens, or the market believes it may weaken. This risk is greater the lower the credit quality of the bond.
• Derivatives use exposes the Fund to risks different from, and potentially greater than, the risks associated with investing directly in securities and may therefore result in additional loss, which could be significantly greater than the cost of the derivative.
• Changes in currency exchange rates may cause the value of your investment and any income from it to rise or fall.
• If the Fund or a specific share class of the Fund seeks to reduce risks (such as exchange rate movements), the measures designed to do so may be ineffective, unavailable or detrimental.
• 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.
• Leverage arises from entering into contracts or derivatives whose terms have the effect of magnifying an outcome, meaning profits and losses from investment can be greater.
• Any security could become hard to value or to sell at a desired time and price, increasing the risk of investment losses.

Janus Henderson Strategic Bond Fund Expand

This document is intended solely for the use of professionals and is not for general public distribution.

Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. Tax assumptions and reliefs depend upon an investor’s particular circumstances and may change if those circumstances or the law change.

If you invest through a third party provider you are advised to consult them directly as charges, performance and terms and conditions may differ materially.

Nothing in this document is intended to or should be construed as advice. This document is not a recommendation to sell or purchase any investment. It does not form part of any contract for the sale or purchase of any investment.

Any investment application will be made solely on the basis of the information contained in the Prospectus (including all relevant covering documents), which will contain investment restrictions. This document is intended as a summary only and potential investors must read the prospectus, and where relevant, the key investor information document before investing. Copies of the Fund’s prospectus and key investor information document are available in English, French, German, and Italian. Articles of incorporation, annual and semi-annual reports are available in English. All of these documents can be obtained free of cost from Janus Henderson Investors registered office: 201 Bishopsgate, London EC2M 3AE.

Issued in the UK by Janus Henderson Investors. Janus Henderson Investors is the name under which Henderson Global Investors Limited (reg. no. 906355), AlphaGen Capital Limited (reg. no. 962757), Henderson Equity Partners Limited (reg. no.2606646), (each incorporated and registered in England and Wales with registered office at 201 Bishopsgate, London EC2M 3AE) are authorised and regulated by the Financial Conduct Authority to provide investment products and services. We may record telephone calls for our mutual protection, to improve customer service and for regulatory record keeping purposes.

Copies of the Fund’s prospectus are available in English, French, Spanish German and Dutch. Key investor information documents are available in English, Danish, German, Finnish, French, Italian, Norwegian, Spanish, Swedish and Dutch. Articles of incorporation, annual and semi-annual reports are available in English. All of these documents can be obtained free of cost from the local offices of Janus Henderson Investors: 201 Bishopsgate, London, EC2M 3AE for UK, Swedish and Scandinavian investors; Via Dante 14, 20121 Milan, Italy, for Italian investors and Roemer Visscherstraat 43-45, 1054 EW Amsterdam, the Netherlands. for Dutch investors; and the Fund’s: Austrian Paying Agent Raiffeisen Bank International AG, Am Stadtpark 9, A-1030 Vienna; French Paying Agent BNP Paribas Securities Services, 3, rue d’Antin, F-75002 Paris; German Information Agent Marcard, Stein & Co, Ballindamm 36, 20095 Hamburg; Belgian Financial Service Provider CACEIS Belgium S.A., Avenue du Port 86 C b320, B-1000 Brussels; Spanish Representative Allfunds Bank S.A. Estafeta, 6 Complejo Plaza de la Fuente, La Moraleja, Alcobendas 28109 Madrid; Singapore Representative Henderson Global Investors (Singapore) Limited, 138 Market Street #34-03/04 CapitaGreen, Singapore 048946; or Swiss Representative BNP Paribas Securities Services, Paris, succursale de Zurich, Selnaustrasse 16, 8002 Zurich who are also the Swiss Paying Agent.

Specific risks

• Investment management techniques that have worked well in normal market conditions could prove ineffective or detrimental at other times.
• Some or all of the annual management charge is taken from capital. This may constrain potential for capital growth.
• This fund is designed to be used only as one component in several in a diversified investment portfolio. Investors should consider carefully the proportion of their portfolio invested into this fund.
• The Fund could lose money if a counterparty with which it trades becomes unwilling or unable to meet its obligations to the Fund.
• The value of a bond or money market instrument may fall if the financial health of the issuer weakens, or the market believes it may weaken. This risk is greater the lower the credit quality of the bond.
• Derivatives use exposes the Fund to risks different from, and potentially greater than, the risks associated with investing directly in securities and may therefore result in additional loss, which could be significantly greater than the cost of the derivative.
• If the Fund or a specific share class of the Fund seeks to reduce risks (such as exchange rate movements), the measures designed to do so may be ineffective, unavailable or detrimental.
• 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.
• Leverage arises from entering into contracts or derivatives whose terms have the effect of magnifying an outcome, meaning profits and losses from investment can be greater.
• Any security could become hard to value or to sell at a desired time and price, increasing the risk of investment losses.