The Janus Henderson Global Growth strategy has a strong long-term track record that is built upon a distinct approach to identifying attractive companies. Here, Ian Warmerdam and Steve Weeple, Head of and Investor Director on the Edinburgh-based Global Equities Team respectively, outline the key criteria that drive their approach.
‘Fundamental, bottom-up, long term, benchmark agnostic’ are often-heard phrases in the world of equity investing. And like many other managers, we believe they describe an approach that is ever more valuable in a world increasingly dominated by short-term thinking, behaviours and index-driven money flows. But on the Janus Henderson Edinburgh-based Global Equities Team we believe those descriptions only scratch the surface of what it is we do to generate sustainable investment returns for our clients. For those phrases are simply generic descriptions of a method of working and thinking. It tells you little about an investment team’s core beliefs, the rigours and rationale behind the analysis undertaken, the psychological make-up of the team, or the characteristics of the companies that are selected for the portfolio.
Long-term competitive advantages
For us, to be successful long-term stock selectors we believe that we first need to identify the companies that have built competitively advantaged franchises in sustainably growing end markets. However, what we believe is equally important is the commitment to then carry out in-depth research to uncover the potential vulnerabilities that could threaten the success of those companies, and which would consequently put our clients’ money at risk. Growing companies are not difficult to find, the challenge is to find firms, business models and management teams that will minimise the risk of capital loss, while maximising the potential for capital return, over the long term. When we find these we invest with conviction. Equally importantly, when we think we may have found them, but are not quite sure, we believe that having the mental fortitude to walk away is paramount.
Secular growth trends
The first challenge in finding potential stocks for the portfolio is to identify those long-term societal trends that we think will allow certain companies the opportunity to innovate, grow their addressable market, operationally execute and then deliver attractive returns regardless of the economic backdrop. These trends will drive growth regardless of market sentiment or political gyrations. Whether that is through the transformative power of the internet as a business medium; the shift in payment methods from cash to paperless technologies; through the quest for greater energy efficiency; the improving purchasing power of the emerging market consumer, or through the need for innovation in healthcare as our population continues to age, we think these are all trends that will sustain business models for many years to come, rather than being short-term fads and themes.
Not all markets will be ones in which companies can develop long-term competitive advantages. Some, like the solar industry, may be growing fast but are producing commodities for which the barriers to entry and pricing power are low. Some, perhaps like the automotive battery sector, will be in the early stages of development, where growth is stellar but the pace of innovation and obsolescence is just too rapid. But we believe there are others, for instance in the on-line market, where companies such as Rightmove, Priceline.com and MercadoLibre have built strong competitive moats and sustainable franchises.
Cash flow is critical
The other vulnerabilities we seek to avoid are those that can destroy companies even if they have nicely growing sales and a good market opportunity. An inability to generate actual cash rather than paper accounting profits has brought many companies down over time. And a balance sheet that may have looked supportive in the good times, but turned out to be a little too stretched when the inevitable rocky period transpired, has also been the downfall of many businesses. If you are going to invest in a company for the long term, there will be economic or political storms to be weathered. So identifying companies that have the financial resilience and managerial experience to navigate these is crucial. That is where we spend our time.
And the other great risk to our clients’ capital? Valuation. We have to be convinced that we are not overpaying for a company, regardless of how well it is run, how attractive the growth, or how strong the balance sheet. This may mean having the psychological strength to not invest in a seemingly attractive business regardless of the strength of the investment thesis. This is driven by our absolute-return and capital protection mind-set. While our portfolios do not seek to deliver absolute returns or guarantee capital protection, we very much factor in the risk of losing money on an ‘absolute’ rather than ‘relative’ basis from every investment we make.
Building on our track record
Our team has built an investment record we are proud of, and we believe that this has been achieved through a combination of identifying long-term societal growth trends, investing in companies with the requisite high-quality characteristics, and doing so with an absolute return mind-set. Yes, this is ‘fundamental, bottom-up, long term and benchmark agnostic’ investing, but we believe it is also a whole lot more. Note: The stock examples are intended for illustrative purposes only and are not indicative of the historical or future performance of the strategy or the chances of success of any particular strategy. References made to individual securities should not constitute or form part of any offer or solicitation to issue, sell, subscribe or purchase the security.