Monthly fund manager comment



Macro backdrop

November was a pivotal month for bond markets. The scenario we have been patiently positioned for is starting to come good and we feel vindicated in our late-cycle views - although we accept that it has begun later in the year than we had envisaged. In some ways, the fall of 2018 was the perfect storm for credit markets. Investment grade and high yield bonds underperformed while developed world sovereign bonds rallied hard. High yield and investment grade bonds have both fallen significantly for the last two months. The concoction of the late-cycle factors that we have highlighted has caused a tightening in financial conditions which has really affected risk assets. Further corroboration of this late-cycle view was taken from a false rise in Treasury yields (and fall in prices), as they once again tested a double-top of 3.25% in 10-year Treasury bond yields in early November (having hit 3.26% in early October). In our recent video we highlighted the inherent contradiction between bond and equity markets. If this represents a shift towards higher growth and inflation, we would expect cyclical equities to start outperforming. This did not happen and in fact defensive equity sectors such as utilities, and healthcare “bond proxies” started performing well. Moreover, the rise in bond yields was entirely in real yields, arguably driven up by tighter real rates (and not higher sustainable growth). Meanwhile, inflation expectations barely moved, which was not the narrative doing the rounds on social media. Furthermore, the extraordinary fall in the oil price since early October gave us further confirmation that global activity was waning. The significant fall in the oil price had a dramatic effect on US high yield spreads as roughly 15% of the US high yield market relates to the shale oil industry. US high yield spreads have risen from a tight of 326 basis points (bps) in early October to 436 bps at the end of November, having been reasonably resilient prior to the oil price fall. Elsewhere, economic data coming out of Europe and China has been concerning. Put simply, global money supply is growing slower than potential output while liquidity has dried up in many credit markets as market-makers pair down their risk.

Fund performance and activity

We performed well against our peer group in November. We are somewhat surprised how much credit risk some competitors are running given how late in the cycle we are. We are positioned long developed world sovereign bond risk and we still hold a reasonable allocation to credit (corporate bonds) given the fund's objective of producing a monthly income. In terms of activity, we have been trimming credit risk selectively over the last two years. Very much against consensus, we added extra sovereign interest rate risk using interest rate futures over 3.2% at the 10-year level. We also added risk at the five year level and expect 3.26% will be the top for 10-year Treasuries during this cycle. Elsewhere, we added some quality credit investment grade holdings around the 5-year and 7-year levels as in our view the all in yields are attractive in issuers such as Lockheed Martin, Adobe, McDonalds, Mastercard and Alphabet. We trimmed a few longer-dated credits and the odd high yield bond holding.


The slowing global economy has certainly got the attention of the markets and the US Federal Reserve and we feel that the market is now more accepting of our view of the world. The circularity of tightening credit conditions will most likely continue. A lot of damage has been done in equity and credit valuations. The liquidity of credit markets is now disappearing. We remain long sovereign interest rate risk, diversified across a number of countries (not least Australia). Australian housing data and economic news flow continues to deteriorate, justifying our positioning. We feel the 2-year reflation trade we have spoken about is definitely fading, while some of the longer-term secular factors of low growth and inflation are reasserting themselves. We continue to focus on delivering a reliable monthly income stream for our investors. Our long sovereign duration position has significantly offset some of the repricing of corporate bonds to the benefit of our shareholders.

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.

Any stock examples are 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. Janus Henderson Investors, one of its affiliated advisors, or its employees, may have a position in the securities mentioned in the report. References made to sectors and stocks do not constitute or form part of any offer or solicitation to issue, sell, subscribe, or purchase them.

These are the fund manager’s views at the time of writing and should not be construed as investment advice.

Source: Janus Henderson Investors. Based on published NAV, net of fees, costs and other charges, but does not include initial charge if applicable.

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Janus Henderson Fixed Interest Monthly Income Fund

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  • Investment management techniques that have worked well in normal market conditions could prove ineffective or detrimental at other times.
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