Finding Opportunity In The World’s Biggest Fixed Income Markets

John Pattullo and Jenna Barnard, CFA, the UK-based portfolio managers of Janus Henderson Developed World Bond Fund, explain how they find investment opportunities in the economies of developed countries, what principles guide their management strategy and how studying the Japanese economic experience has shaped their outlook.

What are the investment objectives of Janus Henderson Developed World Bond Fund?

The Fund seeks current income and capital appreciation by investing globally in developed markets. We invest 40% or more of the Fund's assets outside the U.S., often in Europe, the UK, Canada and Australia. Our returns come primarily from coupons, and secondarily from allocations between sovereign, investment-grade and high-yield bonds. We seek to add value by actively managing duration and investments across developed countries, sectors and credit ratings. We also seek capital appreciation when and where we can around the world. Lastly, all of our positions are hedged to U.S. dollars, so there's no foreign currency exposure.

How do you make investment decisions?

We're guided by three core principles. The first of these is thematic bond investing. In our view, the major themes, or secular drivers, of today's developed economies are demographics, globalization and technology. For example, immigration and an aging population are two demographic factors that have a significant impact on economic productivity and growth in Europe, and to a lesser degree, in the U.S. Globalization and technology are also major themes. The Internet, along with global supply chains, the gig economy and price transparency have more or less conquered inflation, so it's no longer the significant economic force that it used to be.

The second tenet guiding our style is sensible income. We invest in large-cap, mainstream, non-cyclical businesses that produce an income stream without much stress. We don't typically loan money to companies in
cyclical industries such as the automotive, steel, shipping, airline and energy industries.

The third principle involves the pragmatic management of duration, which we carry out with interest rate futures and by investing in sovereign bonds. The duration of the portfolio, a measure of its sensitivity to interest rate changes, typically varies between three and nine years. Recently, our duration has been at the top end of the range, which has provided capital appreciation for shareholders as bond yields have fallen.

How are you positioning the Fund in light of your views on the global economic situation?

The global economy is classically late cycle, and we say that with a bit of bias toward the U.S. The current environment appears good for holding long-duration sovereign debt and quality corporates in the States, Europe and Australia. As a result, we have quite materially increased the Fund's sovereign bond and quality investment-grade exposure over the last couple of years and reduced our high yield exposure.

Our strategy continues to be one of avoiding fast-growing economies and lending to those that have grown too fast and are being forced to cut interest rates such as Australia.

We also want to take advantage of divergent or differing interest rates. Last year, for example, the contrasting interest rate cycles and economies of Australia and the U.S. led to an interesting sovereign bond play that contributed to Fund performance. As Australia’s central bank turned dovish in 2019 and cut rates, this trade performed strongly. Elsewhere, the European Central Bank has announced further rate cuts into deeper negative territory as well as a new open end quantitative easing program utilizing corporate credit as well as sovereign debt. Over the summer the Fund added to Europe investment-grade credit in anticipation of
this announcement.

Looking ahead a bit, Australia and the UK are probably heading into recession and Europe is most certainly heading into one. If this plays out as we expect, we'd look for attractive opportunities in sovereign bonds and quality investment-grade debt in those countries and in a few high-yield bonds. It's possible that the U.S. may have a slowdown rather than a recession. If so, we would look for value in the U.S. in investment-grade, government and high-yield bonds.

What's your economic outlook?

In our opinion, growth and inflation will remain quite low for the foreseeable future. Bond yields will continue to fall in the U.S., UK and Australia until they approach, but remain shy of, Europe's negative rates. As a result, bond prices will rise.

We see many parallels between the Japanese economy and that of Europe and, to a certain degree, the States. Japan has been trapped for decades in what we call the lobster pot – a long cycle of high debt and low growth, low inflation and low bond yields – from which it has tried unsuccessfully to escape. The economies of Europe and the United States may follow Japan into the lobster pot and could find themselves similarly trapped. If so, we'd evaluate opportunities in high-yield and investmentgrade bonds as the sovereign rally will likely have reached its nadir in this cycle and credit will become more appealing. Having that flexibility is one of benefits of
active management.

How does your Fund differ from your peer group?

Our team thinks very independently. We have different views on the sovereign bond market than others in the industry primarily because we're based in Europe and see bond markets through a Japanese lens. Knowing
what happened in Japan, we didn't buy into the investment bank narrative that inflation would emerge as a problem in the U.S. in 2019 and the Federal Reserve would raise rates multiple times. Against consensus, the Fund stayed long duration, and that choice paid off.

In addition to being independent thinkers, we also differ by being especially cautious in how we lend. We have a massive quality bias, whether by country or company.

What role might this Fund play in the portfolio of individual investors?

In our opinion, investors have forgotten that bonds can be good diversifiers, and they don't have enough of them in their portfolios. Our Fund, which holds foreign bonds, provides additional diversification through exposure to different economies and interest rates and can reduce
overall portfolio risk.


Learn more about Janus Henderson Developed World Bond Fund