Investment analysis is all about research. And higher quality research can mean better investment performance. Janus Henderson— and its flagship Research Fund—employs a unique approach to equity research. The goal is to identify dominant, growth-focused firms that seeks to outperform the market for the long term. To achieve this objective, the research team’s highly experienced sector experts delve deep and work within a collaborative culture. Janus Henderson Report spoke with Director of Research Carmel Wellso to learn more.
Please describe the specifics of your growth-focused fundamental research in the Janus Henderson Research Fund. What do you look for that can indicate a company has strong growth prospects?
We typically look for companies that will do well beyond this economic cycle. Our focus is on long-term trends, like the move from in-store retail purchases to greater online shopping or from having a server to being on the cloud. These trends will continue regardless of economic ups and downs. And we like to buy stock in companies that seek to improve. Maybe they’ve gone through a merger so they can strip out costs. They might be streamlining their productivity through a software service.
We focus most of our research on understanding a company’s business model and its industry. With a portfolio turnover of 10% to 40%, we look for stocks that we can own for the long term. We look beyond the next quarter or short-term revenue targets. Will the company beat its competition over the long term? Does the management have good governance? What is the regulatory landscape? Who are the competitors? Is it playing into a future trend? Is the company good to its labor force? Is the compensation aligned with key performance indicators and shareholders?
When you check all those boxes and do things right, you tend to get a higher valuation. And companies with a sustainable business model tend to outperform.
You target particularly dominant companies within a given industry with long-term competitive advantages that can lead to strong growth in sales and earnings. How do you do that and what do you look for?
We get deep on every name. We have sector specialists who really know their industry. Many are career analysts, and some have 20 years of experience. We make sure they have the right resources to do their work. We do enormous numbers of surveys. For example, we’ll survey customers, delivery drivers and restaurants associated with a food service company. We want to understand whether the business model benefits all major stakeholders and whether it is competitive. Similarly, we’ll analyze their peers. Is the company better than its peers? Is its industry growing or consolidating? And is the business model sustainable?
How much emphasis do you place on quantitative versus qualitative measures?
We use both measures. We do quantitative screens, often at the sector level. We typically do scenario analysis at the stock level and then probability weight it. We identify risks and then quantify them. Risks can apply to the upside as well as the downside. A company may be unattractive on its own, but what if it was bought out? For an unattractive stock, that potential upside might be our best-case scenario. The worst-case scenario might be how long would it take for this company to go bankrupt if it doesn’t make any changes?
In each case, we look at what could happen and what the impact would be on the share price. Once we have three scenarios—base-case (most likely to occur), best-case and worst-case—we probability weight each one.
We also look at qualitative matters. There’s a plethora of information in social media on sentiment factors, including employee sentiment. If you go to various recruiting sites, you can see if people are happy there. So, we do a mix.
How does fundamental analysis affect the hold or sell decisions you make?
We try to take the emotion out of it, which is why we do the scenario analysis and have debates within teams. We expect teams to review ideas as they get closer to our price targets.
How does Janus Henderson's fundamental research approach differ from competitors within growth-oriented active equity investing?
It’s our people. And the research they do. The average level of experience on my team is 16 years. These analysts know their industries. We also try to create teams with complementary skills. For example, on the health care team we have an immunologist who can evaluate the likelihood of the therapy working and an insurance expert. We also talk to doctors to get their perspective.
In addition, we get even more from our teams by not only combining different skill sets but also by developing a collaborative culture. We align incentives with team performance and welcome the best ideas. We gather consistent modeling data, and then we have a rigorous debate featuring a variety of perspectives.
Our culture is one of our biggest strengths and differentiators. Our people are smart and willing to question. They’re not in direct competition—they trust and support one another. In my 30 years in the industry, I’ve never worked with a more supportive group of people.