Absolute return: In a less forgiving world, where do returns come from?

Over the past year, the gap between global events and market outcomes has narrowed. The news cycle has started to feel more relevant to investors’ portfolios, not because everyone has become a geopolitical expert, but because fast-changing politics and policy are increasingly feeding through to company earnings, valuations, and returns.

In this kind of environment, where it can be almost impossible to predict the next twist in rhetoric or policy, can equity long/short ‘absolute return’ strategies help investors to potentially exploit market efficiencies?

The world feels less predictable

A big shift has been the steady move away from ‘just in time’ globalisation towards something more cautious. Companies have been rethinking where they make things, where they store inventory, and who they partner with for critical components. Terms like repatriation, onshoring and near‑shoring have moved from boardroom jargon to practical decisions in response to concerns over tariffs and supply chain risks. Companies have sought to reduce dependency on a single region or supplier, leading to higher capital spending demands, potentially more complex logistics, and tougher trade-offs between resilience and efficiency.

At the same time, uncertainty has also broadened (Exhibit 1). Not as a single risk to monitor, but rather a patchwork of concerns over elections, international alliances and treaties, regional conflicts and populist policy responses.

Exhibit 1: Today’s uncertainty seems broader and more persistent than before

Source: World Uncertainty Index, GDP-weighted average, 1 January 2010 to 31 March 2026.
Note: The WUI is computed by counting the percent of word “uncertain” (or its variants) in the Economist Intelligence Unit country reports, spanning 143 countries, before multiplying by 1,000,000. A higher number indicates higher uncertainty and vice versa. For example, an index of 200 corresponds to the word uncertainty accounting for 0.02 percent of all words.

This has aligned with a renewed focus from governments spanning from security and defence to technology and energy independence, which is changing the economics of whole industries. Artificial intelligence (AI) has arrived as a tangible force across industries, raising questions about its potential impact, and driving both opportunity and disruption.

A wider gap in market outcomes

Alongside the rise in geopolitical uncertainty, there has been a more structural shift in how markets behave. One of the most important changes has been the move away from the era of near-zero interest rates. For years, cheap and abundant capital lifted valuations across markets and gave many businesses room to breathe, without immediate pressure to optimise spending, or to generate sustainable profits. That environment has now changed.

Today, valuations have become more grounded in reality (with exceptions), and investors have become more selective in where they allocate money, reflected in higher stock price dispersion than we have seen since 2009[1]. Companies are under greater pressure to demonstrate real earnings and cash flow. The result is a more disciplined and rational backdrop, where analysis of underlying fundamentals becomes more important.

What this means is that company-specific factors are once again shaping outcomes. Businesses with strong competitive positions, sensible balance sheets, and reliable cash generation seem well positioned to gain traction. Meanwhile, companies with weaker fundamentals or overly optimistic growth assumptions are likely to face greater scrutiny. This environment prioritises the importance of good stock selection, while it augments the value of real diversification.

A consistent way of investing through the noise

While the world has changed, one practical factor has stayed consistent for absolute return investing utilising a long/short approach. Focus on companies, stay flexible, and avoid being forced into a single market outcome.

At its heart is a straightforward idea: rather than relying on markets going up, the objective is to build a portfolio that can find opportunities on both the long and short sides. That typically involves two complementary mindsets working together:

• A fundamental core book, on the long side looking for businesses that can stand up over time, characterised by resilient models, sensible balance sheets, and dependable cash flows. Similarly, on the short side, companies where the outlook is already priced in, where there are structural weaknesses or poor management.
• A tactical overlay, designed to respond when the environment changes, adopting a more trading-oriented mindset to deal with volatility, market anomalies, or fast-moving shifts in market environments, allocating to both long and short positions as suitable.

We believe that this flexibility is extended for those strategies that can adjust net or gross exposure. When visibility is better, investors can lean in, expanding gross exposure to increase market sensitivity. When uncertainty spikes, exposure can be reduced to help mitigate the risk of potential losses, without stepping entirely out of markets.

Absolute return strategies with this kind of built-in adaptability, constructed around a disciplined stock-level process, can help investors to stay engaged without feeling they must make an all-or-nothing call. With the added benefit of low sensitivity to both equities and bonds that characterises a well-managed absolute return strategy.

A long/short, absolute return mindset is designed for a world where outcomes are uneven and surprises are common.

 

Luke Newman, Portfolio Manager

Riding uncertainty through the cycle

If the past year has taught investors anything, it is that uncertainty does not arrive in neat packages. One month the risks are focused on geopolitics; the next it might be domestic policy, then supply chains, energy prices, or shifting trade relationships. A year ago, we were discussing the risks of trade protectionism (led by US tariffs), and an increasingly fractured international order. Today, a central topic is the consequences to the global economy of the conflict in the Middle East and the winners/losers of AI.

The details change, but the experience is familiar: markets move quickly, narratives swing, and it can feel uncomfortable to stay invested.

That is why consistency of process matters. A long/short, absolute return mindset is designed for a world where outcomes are uneven and surprises are common. It does not depend on a single forecast being right. Instead, it tries to do something more practical: keep decisions anchored in company fundamentals, keep risk adjustable, and keep options open, seeking to exploit market inefficiencies to try and generate positive absolute returns.

No approach removes uncertainty, but a flexible, fundamentals-led, long/short approach aims to make uncertainty more manageable, identifying opportunities on both sides of the market and adjusting exposure when risks rise. The world has changed quickly. The discipline required to navigate it is, if anything, more timeless.

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[1] Source: Bloomberg, Janus Henderson Investors, as at 28 November 2025. Dispersion calculated by taking the annual returns of each stock in the MSCI Europe Index and then measuring the standard deviation across all the individual stock returns. Past performance does not predict future returns. There is no guarantee that past trends will continue, or forecasts will be realised.