CEO Sessions: Equity opportunities in the U.S. and beyond

Ali Dibadj: Hi everybody. It’s Ali. We’re here at the Madrid Investor Summit. Lots of energy in the crowd. Many, many clients. One of the topics we’re talking about is geopolitics. I’m very, very happy to be here with Jeremiah Buckley, who manages U.S. equities, and Luke Newman, who applies an absolute return approach. Guys, lots of discussion, in this world about geopolitics and being equity managers, how does it feel being equity manager in particular in this environment?

Jeremiah Buckley: Yeah. So it’s interesting. I think there continue to be a lot of themes outside of geopolitics that continue to be a lot of themes – exciting investment themes – in the market. So obviously AI’s been a big driver of the market and earnings growth. But what’s exciting to me is there are a lot of areas outside of AI that are continuing to grow. We’ve seen really strong earnings growth. Commercial aerospace, travel companies, capital markets which have been rejuvenated. We’re seeing substantial growth in M&A and IPOs now. There’s lots of innovation in other areas of the economy like healthcare and pharma, biotech. And so to me, there’s lots of secular themes that are really exciting to invest in, even with the geopolitical backdrop.

Ali: That’s great. Luke, what do you see?

Luke Newman: So I’ve got to say this is a great environment to be running, long/short equity funds or for active management in particular. I think the movement we saw away, you know, we’re getting on for the third year now of the cost of money moving away from zero. We understand the reasons why it was there. We understand the why – why it’s been normalized. Well, what it’s meant, in a technical sense of moving that discount rate away from zero has meant much more dispersion for stock pickers. But there’s been real world effects as well. And when we’re talking to listed management teams around the challenges they have now to justify against money having a cost, debt having a cost. We’re seeing more dispersion in a real world sense as well. So for active stock pickers it’s a great environment.

Ali: Now Jeremiah, you mentioned AI, I know it’s not the only thing that’s out there to take advantage of, but what are you seeing in AI?

Jeremiah: Yeah, it’s certainly an important part of the market. Driving substantial earnings growth. To us, our focus has been on the enablers and the adopters. So when I talk about enablers, I’m talking about obviously semiconductors. But all the companies that are providing that networking for cloud services and the companies that are coming out with applications that provide the productivity for those companies. And then secondarily it’s the adopters, so we need companies outside of tech and come to invest in these opportunities, taking advantage of the productivity, getting a good return on that investment for this to keep going. And so for us, we think it’s really important as a U.S. large cap manager to find companies that have the scale, the balance sheets and the cash flows to be able to invest, and then the capabilities, the talent to execute on these exciting productivity tools

Ali: Well, we were talking about cost of capital. And when there is a cost capital, there are winners and losers. And Jeremiah, you try to avoid them. Sometimes you guys try to actually lead into them and find short opportunities. Where are you seeing some interesting opportunities?

Luke: There can be. And what’s interesting and unusual for the last couple of years is that we’re finding a lot of those in U.S. equity markets. Now, that might sound strange when you see the performance of the technology sector, but move away and look at the real American economy. There’s been some challenges, a function of all sorts of, factors normalization, post-Covid, pressure on labor markets, pressure on financing markets. But we found shorts in U.S. consumer goods, snacking areas. Some normalization post-Covid. But actually the work we spent with the pharma companies bringing the obesity drugs to market, actually, for us, on the short side, one of the best ways we can reflect the change that we’ve all seen in society is actually through our short book in some of those, food and snacking companies. So they’ve been really good contributors for us.

Ali: That’s great. That’s great. So take a step back. You’re meeting with tons of investors here today. Tons of clients. What do you think they’re missing perhaps as they think about the world, as they think about investing?

Jeremiah: Yeah. So a couple of common concerns that that I’ve heard, here over the last 24 hours has been, you know, one, the concentration in the U.S. market, but I mentioned a lot of areas outside of AI continue to show really strong growth. And valuations there to us are reasonable. So we think, that can be addressed. Secondarily is the multiple on the overall market. I think it’s important to realize that the earnings growth of the U.S. market, even with some losers, is, within that, is better than it has been historically. Productivity continues to be faster than expected, which is leading to operating margin leverage. And so overall, the earnings growth, has been quite positive. And then the third concern is, you know, with all this talk about AI, is is there a bubble or are we going back to the dotcom, issues that we’ve had in the past? And for us, from a research standpoint, our team needs to be really diligent on making sure that the revenue to support those capex numbers and backlog numbers that we’re seeing, pan out and that there’s an attractive return. And so we do that with our terrific team of analysts are asking their companies as they talk to them on a daily basis, how are you getting returns? How are you taking advantage of AI or, contrary, at some point when they say, you know, we’ve stabilized our investment, then we have to think about that and we have to adjust appropriately. But those have generally been the concerns. But we think overall the environment is still positive for equity markets.

Ali: Right. Luke, what do you think?

Luke: On our side. And a lot of our discussions have centred around the changing use of absolute return or liquid alternatives within our investors’ portfolios. And it’s interesting. We’ve seen ourselves used as a lower risk equity proxy over time. We’re certainly seeing some interesting conversations with fixed income allocations. So given the concerns around governmental debt pressures in particular, we’re seeing some movement into asset classes such as ours. But I think the most interesting conversations around correlations, not in the equity market, but between equity and fixed income. And I think that’s a relatively recent, resumption of a trend. For a long time, you saw that offsetting nature. We’re seeing clients wanting to know how can absolute return, give some level of diversification within their own portfolios. So when you start to see periods like we had in 2022 of equity, of fixed income, correlating unhelpfully, then could absolute return provide some ballast, provide some, cautious return in that environment.

Ali: Right. Thank you guys. So you’re hearing that there’s lots of change in the world, whether it be geopolitics, whether it be cost of capital, lots of opportunities, both on the long side and the short side. And that’s what 350 people do all day long at Janus Henderson is try to find, from an active management perspective, the best opportunities for you. Thanks for joining.