Macro signals — early signs often come from the ground

07/02/2019

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​John Pattullo, Co‑Head of Strategic Fixed Income, explains how the team arrive at a decision to include a particular bond in their portfolios.

Investing in bonds is a fairly complex process; bonds tend to be bought and sold in a closed world of experienced insiders and experts, but as with any good investment, extensive research is needed before the decision to purchase.

Gathering information about the entity issuing a bond is a lot easier for government bonds than for corporate bonds, as the former market is much more liquid and transparent, with issuer information more easily available for analysis.

Buying a corporate bond is analogous to buying into the business

In order to invest in a corporate bond, detailed scrutiny of the issuer’s business is vital to get a better understanding of how it functions, who its competitors are and its position within the industry and the economy as a whole. As investors, we need to be sure that the company can produce free cash flows regularly, giving it the ability to meet interest payments (coupons on the bonds) and to repay the debt at maturity.

This involves the examination of the issuer’s business through many avenues, which can include company filings (if it is a public company), research material, broker analysis reports, news and, at times, meetings and calls with the company itself.

As strategic bond investors, we are actively on the lookout for opportunities to invest across developed economies in both government and corporate bonds. Our macro asset allocation decisions determine the tilt of the portfolio towards the fixed income asset class most likely to benefit given where we are in the prevailing economic cycle. Government bond purchases are made based on our views of their economies, central bank policies and where inflation and interest rates are heading. Overarching industry views further help the asset allocation to corporate bonds. Individual corporate bond purchases are made after we complete our bottom-up company and security analysis.

Evaluating corporates – the information sources

While information on any one business is not always easily available to the general public, as fund managers we can draw on valuable sources to get the necessary input for our analyses:

  • Equity meetings: companies can raise capital via stocks or bonds. If they have issued public equity there will be a plethora of reports and analysis on their business. Our equity analysts have many meetings each year with both companies and industry analysts. The latter group visit companies on a regular basis, and share their information with other market participants, including us. This information is then shared internally with all investment professionals.
  • Conferences: each year, numerous conferences are held covering macroeconomics, fixed income (eg, high yield), industries and sectors (eg, technology) and equity-related subjects. As fund managers we have a long list of invitations to attend these, which we do selectively. The forums can be very informative on current issues as well as on future trends. 
  • Roadshows: investment banks bringing new bond issues into what is known as the ‘primary market’ often organise ‘roadshows’ to invite prospective buyers, including us, to meet the company and its management and provide up-to-date information on its business. The roadshow helps gauge interest in the bond, and our response (and those of other investors) can help to determine the bond price. 
  • Third-party brokers: through meetings and conference calls they disseminate current information about corporations (and governments) as well as bonds in the ‘secondary market’ where they are traded after issue, via regular reports and analyst meetings.  
  • Credit rating agencies: if a company has a credit rating in place or has issued bonds, the agencies will continue to monitor it, providing regular reports on the entity with whom they meet to gain an informed view of the company (they also cover governments).

An ear to the ground

While not strictly necessary for any single bond purchase, we selectively meet with a diverse number of companies over the course of the year, whether we hold their bonds or not. This can unearth information and often confirms macro signals at the ground level. For example, with regard to where inflation might be heading, what are companies saying about raising prices? Will they raise them? If not, what is stopping them? Hard facts such as these can paint a clear picture of the economy. Furthermore, optimism or pessimism is typically betrayed by companies when we meet them face to face making this type of direct engagement potentially helpful in our active management of the portfolios. In fact, some of our top-down asset allocation decisions can come from directly meeting with companies.

Once a bond is issued, a further resource for our continued monitoring is the issuer’s quarterly investment calls, where investors get to hear about the current state of the business alongside the official reports that it has to file for the regulators. The live Q&A session is often the most revealing part of the call.

Continuous monitoring is vital

As active fund managers, we continuously monitor the markets and the holdings within our portfolios using the resources mentioned. After we buy a bond, it can stay in the portfolios while it is performing, unless a better opportunity presents. However, if the issuer’s credit story changes or there is a material deterioration to the business, then we act swiftly to sell. We continue to analyse the companies 'long-distance' and prefer not to get emotionally attached to any one name.

We said at the start that macro considerations define our asset allocation decisions. Currently, we believe that markets and economies are definitively in their late-cycle stage and that growth and inflation have peaked; quantitative easing has faded and the short-term cyclical impulse to propel growth over the last two years (such as ill-conceived tax cuts in the US) is also disappearing.

Hence, we continue to be highly selective when adding bonds to the portfolios, looking for defensive, non-cyclical businesses with longevity — or a reason to exist, as we like to call it.

Where to look now?

Given where we are in the cycle, it is becoming increasingly challenging to find credit positive stories, but new pockets of opportunity are always emerging and we spend our time using our resources to seek them out.

As examples, currently we like tower companies and data centres. Why? Towers are critical communication infrastructures, with great revenue visibility. Mobile companies need to lease space on towers to build their networks, which means that tower companies can lock in long-term customer contracts.

Data centres are like a modern day utility. Once again, there is strong demand to lease space in data centres. The demand initially came from connectivity providers, such as BT or AT&T, and then from platforms, such as Amazon. In the future, more demand should come from companies across multiple sectors looking to transition their IT infrastructure from in-house to the cloud in order to save costs, giving data centres a stable base of contracted, recurring revenues.

Portfolio positions are correct at 31 December 2018 and may be subject to change.

 

These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. Any securities, funds, sectors and indices mentioned within this article do not constitute or form part of any offer or solicitation to buy or sell them.

Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.

The information in this article does not qualify as an investment recommendation.

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Important information

Please read the following important information regarding funds related to this article.

Janus Henderson Horizon Strategic Bond Fund

This document is intended solely for the use of professionals and is not for general public distribution.

The Janus Henderson Horizon Fund (the “Fund”) is a Luxembourg SICAV incorporated on 30 May 1985, managed by Henderson Management S.A. Any investment application will be made solely on the basis of the information contained in the Fund’s prospectus (including all relevant covering documents), which will contain investment restrictions. This document is intended as a summary only and potential investors must read the Fund’s prospectus and key investor information document before investing. A copy of the Fund’s prospectus and key investor information document can be obtained from Henderson Global Investors Limited in its capacity as Investment Manager and Distributor.

Issued in Europe by Janus Henderson Investors. Janus Henderson Investors is the name under which investment products and services are provided by Janus Capital International Limited (reg no. 3594615), Henderson Global Investors Limited (reg. no. 906355), Henderson Investment Funds Limited (reg. no. 2678531), AlphaGen Capital Limited (reg. no. 962757), Henderson Equity Partners Limited (reg. no.2606646), (each registered in England and Wales at 201 Bishopsgate, London EC2M 3AE and regulated by the Financial Conduct Authority) and Henderson Management S.A. (reg no. B22848 at 2 Rue de Bitbourg, L-1273, Luxembourg and regulated by the Commission de Surveillance du Secteur Financier). We may record telephone calls for our mutual protection, to improve customer service and for regulatory record keeping purposes.

Past performance is not a guide to future performance. The performance data does not take into account the commissions and costs incurred on the issue and redemption of units. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. Tax assumptions and reliefs depend upon an investor’s particular circumstances and may change if those circumstances or the law change. If you invest through a third party provider you are advised to consult them directly as charges, performance and terms and conditions may differ materially.

Nothing in this document is intended to or should be construed as advice. This document is not a recommendation to sell or purchase any investment. It does not form part of any contract for the sale or purchase of any investment.

The Fund is a recognised collective investment scheme for the purpose of promotion into the United Kingdom. Potential investors in the United Kingdom are advised that all, or most, of the protections afforded by the United Kingdom regulatory system will not apply to an investment in the Fund and that compensation will not be available under the United Kingdom Financial Services Compensation Scheme.

Copies of the Fund’s prospectus and key investor information document are available in English, French, German, and Italian. Articles of incorporation, annual and semi-annual reports are available in English. Key Investor document is also available in Spanish. All of these documents can be obtained free of cost from the local offices of Janus Henderson Investors: 201 Bishopsgate, London, EC2M 3AE for UK, Swedish and Scandinavian investors; Via Dante 14, 20121 Milan, Italy, for Italian investors and Roemer Visscherstraat 43-45, 1054 EW Amsterdam, the Netherlands. for Dutch investors; and the Fund’s: Austrian Paying Agent Raiffeisen Bank International AG, Am Stadtpark 9, A-1030 Vienna; French Paying Agent BNP Paribas Securities Services, 3, rue d’Antin, F-75002 Paris; German Information Agent Marcard, Stein & Co, Ballindamm 36, 20095 Hamburg; Belgian Financial Service Provider CACEIS Belgium S.A., Avenue du Port 86 C b320, B-1000 Brussels; Spanish Representative Allfunds Bank S.A. Estafeta, 6 Complejo Plaza de la Fuente, La Moraleja, Alcobendas 28109 Madrid; Singapore Representative Janus Henderson Investors (Singapore) Limited, 138 Market Street, #34-03 / 04 CapitaGreen 048946; or Swiss Representative BNP Paribas Securities Services, Paris, succursale de Zurich, Selnaustrasse 16, 8002 Zurich who are also the Swiss Paying Agent. RBC Investor Services Trust Hong Kong Limited, a subsidiary of the joint venture UK holding company RBC Investor Services Limited, 51/F Central Plaza, 18 Harbour Road, Wanchai, Hong Kong, Tel: +852 2978 5656 is the Fund’s Representative in Hong Kong.

Information on this document is on Janus Henderson Investors’ best endeavours.

Specific risks

  • This fund is designed to be used only as one component in several in a diversified investment portfolio. Investors should consider carefully the proportion of their portfolio invested into this fund.
  • The Fund could lose money if a counterparty with which it trades becomes unwilling or unable to meet its obligations to the Fund.
  • The value of a bond or money market instrument may fall if the financial health of the issuer weakens, or the market believes it may weaken. This risk is greater the lower the credit quality of the bond.
  • Changes in currency exchange rates may cause the value of your investment and any income from it to rise or fall.
  • If the Fund or a specific share class of the Fund seeks to reduce risks (such as exchange rate movements), the measures designed to do so may be ineffective, unavailable or detrimental.
  • When interest rates rise (or fall), the prices of different securities will be affected differently. In particular, bond values generally fall when interest rates rise. This risk is generally greater the longer the maturity of a bond investment.
  • Any security could become hard to value or to sell at a desired time and price, increasing the risk of investment losses.

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