The portfolio management team of the Janus Henderson Value Plus Income Fund discusses how the unique portfolio construction of the Fund is designed to provide capital appreciation and current income while minimizing downside risk.
What is your approach to asset allocation?
Janus Henderson Value Plus Income (VPI) is a defensive, income-oriented asset allocation fund intended to be a core portfolio position managing exposure across equities and fixed income. We consider a multitude of factors when making allocation decisions between stocks and bonds, but it all starts with our bottom-up process of looking for the best risk reward opportunities. The Fund will allocate between 40% and 50% to equities, with the remainder in fixed income. In general, a 45% equity allocation would represent a “neutral” or “balanced” outlook on equities. The risks are essentially in line with the rewards when our process indicates an overall risk reward ratio close to 1:1. We would expect to increase equity closer to 50% when the overall equity risk reward ratio for the portfolio increases, indicating that equities are more attractive, and conversely, we would expect to decrease equity closer to 40% when the risk reward ratio is less favorable.
Our allocation decisions year-to-date provide a good example of our allocation approach. We began the year with the equity allocation near the very low end of the range at 40% given our concerns about high valuations in the market, and more importantly, the low risk reward ratios we were seeing among our equity holdings. Although we had no way to predict what has become a global pandemic, we nonetheless used the pull-back in equities in March 2020 to increase the allocation to the high end of 50%. As the market subsequently moved higher, we trimmed back equities as risk reward ratios became less attractive. The Fund currently has an equity allocation of approximately 48%, indicating a still-optimistic view on U.S. equities.
How does the fund provide income in a low interest rate environment?
Optionality is critical to generating income in a low interest rate environment. VPI provides optionality in the way it allocates across asset classes, and within the individual positions owned across stocks and bonds. These tools allow the portfolio managers to navigate markets in their search for attractive yields with the appropriate amount of risk exposure for the Fund.
The equity portion of the Fund is composed of dividend-yielding stocks as a requirement for inclusion. We attempt to reduce the increased risk inherent in stocks with our defensive approach to equity investing, seeking companies trading at attractive valuations across the market-cap spectrum, with strong balance sheets, good management teams, and durable competitive advantages. The fixed income allocation also serves to offset some of the risk generated by the equity allocation.
We believe that through portfolio construction targeting income, one can create a diverse basket of security-specific risks that can generate the yields of those riskier markets with less risk. The fixed income side of the Fund is managed between two main buckets: core sectors and plus sectors. Core sectors include investment-grade corporate bonds (generally longer duration and more conservative), Treasuries and mortgage-backed securities (MBS) and tend to provide stability in the Fund, albeit at lower yields. Plus sectors include high-yield corporate bonds, commercial mortgage-backed securities (CMBS), asset-backed securities (ABS) and bank loans, which tend to have more attractive yields relative to core sectors. The core serves to dampen volatility, since we’re inherently adding volatility (and risk) every time we buy something in the plus bucket. With the yield of the Bloomberg Barclays U.S. Aggregate Bond Index at record lows and global central banks expected to keep rates at or near zero for the foreseeable future, a government-heavy fixed income allocation may not meet your income needs alone. The fixed income side of VPI is a true multi-sector portfolio.
What is your approach to finding dividend yield in equities?
Our approach to finding solid dividend yields begins the same way we approach any investment at Perkins – we first identify what we believe are attractive risk reward opportunities. We believe the process lends itself well to finding attractive dividends insofar as we identify companies that have the strong, longer-term competitive positions and the financial flexibility to sustain and grow dividends over time. Importantly, the process helps us avoid potential “value traps”, where the current absolute dividend yields may look attractive, but may be at risk of being cut or suspended, and perhaps worse- are more at risk for capital losses. Our main goal is to find the right balance of attractive dividend yields combined with strong long-term fundamentals. We believe this combination will ultimately provide investors with steady income along with capital appreciation over a full market cycle.
Why should I be active and look beyond Treasuries in fixed income?
Passive investing means accepting what you are given, regardless of the market environment, interest rate movements, central bank policies, regulatory decisions, etc. Active managers have the flexibility to pick and choose the best opportunities for risk-adjusted returns in the market and often tend to do better than indices in periods after crises. This occurs because they can overweight overlooked and mispriced bonds and use the power of their diversity to take what they deem to be appropriate liquidity risk, knowing that the risk is contained. Managing an active Fund means seeking the optimal balance to risk and reward, while index funds only get a mix based on the market-cap of the issuers.
Additionally, plus sectors generally have grown substantially, offering more liquidity, opportunities for fundamental analysis at the individual security level and greater sector diversification. Plus sectors have historically offered greater returns, albeit at a higher level of risk than core sectors as mentioned above. Recent market volatility has created dislocations in the market that can be exploited by an active manager and can potentially lead to a higher income stream. By being active and investing beyond traditional fixed income sectors, we find more opportunities, which should lead to more efficient portfolios, and a greater potential to outperform in the long run. The flexibility afforded by being active allows us to invest in our best ideas across the fixed income spectrum in pursuit of income.