Quarterly fund manager comment

30/06/2018

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Macro backdrop

Global stock markets stuttered in the second quarter and the MSCI World Index returned 1.9% in US dollar terms. The US dollar strengthened against most major currencies however, which drove more favourable returns for non-US dollar-denominated investors. Leading economic indicators are pointing towards slowing growth but in general the data remains positive. However, it is important to remember that aggregate data conceals a more complex reality where some parts of the economy are growing strongly while others are experiencing disruption. The volatile global political environment also continues to weigh on investor sentiment. Trade tensions between the US and the rest of the world escalated in the second quarter and towards the end of the quarter several Asian currencies and stock markets saw sharp declines. Energy was the best performing sector over the quarter as crude oil prices rose above $70 per barrel for the first time in three years. While stronger economic growth has been an important factor behind market tightness, supply concerns arguably have played a greater role with US moves to reinstate sanctions on Iran and unstable production situations in Nigeria, Venezuela and Libya. We are sceptical of the sustainability of oil prices at these levels. We believe higher fossil fuel prices will accelerate investment in clean technologies which, after five years of price declines, are now economically competitive without the need for subsidies. Indeed, global investment in renewables represented more than 70% of all power generation investment in 2017 and investment in solar alone was greater than the total investment in coal, gas and nuclear plants combined. These are not healthy market conditions if one of your main businesses is providing turbines for large scale fossil and nuclear power plants. This has been a contributing factor to the nearly 60% decline in General Electric’s share price over the last two years. The transition to the low carbon economy is one of the two generational investment trends that we focus on and we foresee many years of disruption within fossil related industries. It is notable that China is now leading the way in clean technology investments, accounting for over 50% of both renewable investments and global electric car sales in 2017. Last year Chinese President Xi Jingping affirmed China’s commitment to sustainable development with the goal of creating a clean, green and beautiful China with higher living standards and healthy ecosystems. We think China’s determination, and the pace of change, will catch people by surprise. There is still a long way to go however. In 2017 renewables only accounted for 12.1% of electricity generation worldwide and electric car sales of 1.1 million represented less than 2% of total car sales. Meanwhile the atmospheric concentration of carbon dioxide marches steadily upwards, increasing by 2.3ppm to reach 406.5ppm last year. 2017 was the second warmest on record, behind only 2016’s record 0.99 degrees Celsius above the 1951-80 average. Large market capitalisation internet stocks also had a strong quarter. In fact, almost two thirds of the total market weighted return of the MSCI World Index was attributable to just five stocks: Facebook, Amazon, Apple, Alphabet and Netflix (the FAAANs). With the exception of Apple, these companies continue to record strong growth. None of them are owned in the fund and this has represented a headwind to relative performance. A core tenet of our investment philosophy is a belief that the most sustainable long-term investment returns will be generated by companies which are providing goods and services that are of benefit to the environment and society. While there are many aspects to these companies which we admire, we also think there are some underappreciated negative externalities associated with them. Regulation remains a significant risk and there are also risks around their supply chains and potentially changing consumer attitudes towards privacy concerns.

Fund performance and activity

Over the period the fund rose by 8.1% in sterling terms, underperforming the MSCI World benchmark by 0.2%. The fund’s underweight stance towards the FAAAN stocks (which in aggregate constitute more than 7% of the benchmark), and the strongly performing energy sector, represented a headwind to performance. Aside from the energy and FAAAN underweight position, stock specific factors were the other main detractors from performance. Positive contribution came from several of the fund’s technology positions, with software a particular bright spot. We see technology as a key enabler of sustainability and this is reflected in the portfolio with Knowledge & Technology being the fund’s largest theme. Portfolio turnover was 3.9% over the quarter (versus 12.5% in the first quarter) and 38.1% over the past 12 months. The higher turnover is partly reflective of our collaboration with the Denver office following the completion of the Janus Henderson merger last year. The merger has had a positive impact on the investment resource available to the Global Sustainable Equity strategy and many of the new positions in the fund over the last 12 months have come about as a result of working with the portfolio managers and research analysts based there. Aaron Scully, our new team member, has been of great help to us in building good working relationships with our Denver based colleagues. We typically target portfolio turnover of below 30% on a 12-month basis and expect turnover to be lower over the coming quarters. Fund positioning remains skewed towards our Knowledge & Technology and Efficiency themes which accounts for the large allocation towards the information technology and industrial sectors versus the index. The fund remains underweight the energy, consumer staple and financial sectors and regional weighting remains in line with the MSCI World benchmark. The fund is managed to keep regional weightings in line with the MSCI World benchmark while sector weightings are an outcome of where we are able to find the most compelling bottom-up stock ideas while maintaining a balanced risk profile. During the quarter, we initiated a new position in Intact Financial, the leading property and casualty insurer in Canada. RELX was the only divestment. We also made some modest adjustments to existing holdings, using share price weakness to add to some positions (Hubbell, Schneider, Evoqua Water Technology and ING) and trimming some positions where share price strength had resulted in near-term share price rises (Nike, Kingspan, Xylem).

Outlook/strategy

Although leading economic indicators are suggestive of a slowdown we would view any market weakness as a compelling opportunity to add to holdings. It has been nearly five years now that growth and high valuation style factors have been outperforming. While periods of mean reversion will occur we believe there are some very powerful secular trends that provide a multi-year growth outlook for companies with relevant goods and services. Two investment trends in particular stand out, and they are so powerful that we view them as generational in nature. The first is the energy transition to a low carbon economy. This is something on which we have been focusing for a while now, but we are still only in the early stages. Energy transitions do not happen often in human history, but when they do they tend to be extremely disruptive. The second generational investment trend is the fourth wave of computing, where the industrial and technological economies combine. The CEO of Microsoft describes this as the ‘world becoming a computer’. If the transition to a low carbon economy is the ‘digitalisation of energy’ then the fourth wave of computing is the ‘digitalisation of everything’. Thanks to further declines in the cost of computing we are on the cusp of a multi-year trend where the power of computing is applied to a much broader range of industries, machines and consumer goods. This will lead to the creation of new economic models, and we view this digitalisation as a powerful agent towards creating a more sustainable world. We have confidence that our investment approach, which is focused on sustainability, will generate attractive long-term returns. Sustainability is closely linked to innovation and we believe our framework leads us to invest in companies which are transforming the world, while at the same time helping us to avoid disruption. We would urge investors to be mindful that high level economic data conceals a much more complex reality. With both of these generational investment trends occurring in tandem we are living in a period of unprecedented disruption. Some companies will continue to grow, creating value and creating jobs, but many others will experience recession or depression like conditions as they struggle to adapt. When we look at the broader market, it is ever more apparent that the fastest growth subsectors are increasingly aligned with sustainability. We are finding exciting investment opportunities in areas such as cloud computing & artificial intelligence, electrification of transport, energy efficiency, smart cities, industry 4.0, sustainable infrastructure, financial services, education & research and healthcare. Recognising that markets are often turbulent, however, we also have investments in more defensive industries such as water utilities, telecoms, healthcare REITs, insurance and everyday goods such as herbs & spice and clothing. Our objective is to create a balanced and well diversified portfolio of the best sustainability ideas from around the world.


Glossary of financial terms

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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Important information

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

Janus Henderson Global Sustainable Equity Fund

Please read all scheme documents before investing. Before entering into an investment agreement in respect of an investment referred to in this document, you should consult your own professional and/or investment adviser.

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. Tax assumptions and reliefs depend upon an investor’s particular circumstances and may change if those circumstances or the law change.

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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.

Any investment application will be made solely on the basis of the information contained in the 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 prospectus, and where relevant, the key investor information document before investing. 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. All of these documents can be obtained free of cost from Janus Henderson Investors registered office: 201 Bishopsgate, London EC2M 3AE.

Issued by Janus Henderson Investors. Janus Henderson Investors is the name under which 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 incorporated and registered in England and Wales with registered office at 201 Bishopsgate, London EC2M 3AE) are authorised and regulated by the Financial Conduct Authority to provide investment products and services. We may record telephone calls for our mutual protection, to improve customer service and for regulatory record keeping purposes.

Copies of the Fund’s prospectus are available in English, French, Spanish German and Dutch. Key investor information documents are available in English, Danish, German, Finnish, French, Italian, Norwegian, Spanish, Swedish and Dutch. Articles of incorporation, annual and semi-annual reports are available in English. 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 Henderson Global Investors (Singapore) Limited, 138 Market Street, #34-03/04 CapitaGreen, Singapore 048946; or Swiss Representative BNP Paribas Securities Services, Paris, succursale de Zurich, Selnaustrasse 16, 8002 Zurich who are also the Swiss Paying Agent.

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Specific risks

  • Investment management techniques that have worked well in normal market conditions could prove ineffective or detrimental at other times.
  • Shares can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
  • 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.
  • Derivatives use exposes the Fund to risks different from, and potentially greater than, the risks associated with investing directly in securities and may therefore result in additional loss, which could be significantly greater than the cost of the derivative.
  • 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.
  • 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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