Quarterly fund manager comment

30/09/2018

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Macro backdrop

Global stock markets were strong in the third quarter with the MSCI World Index providing a total return of close to 5% in US dollar terms. This strength was not broad-based however, with the US and Japan the only major positive regions. Investors experienced negative returns in the UK and emerging markets. Within fixed income, global bond yields rose (meaning global bond prices fell) as the US Federal Reserve (Fed) continued with its tightening of monetary policy and as some signs of inflation started to emerge in other markets. The JP Morgan Global Government Bond Index fell by 0.5% in sterling terms and the Iboxx Euro Corporate All Maturities Bond Index returned 0.0% (also in sterling terms). In the UK, surprisingly strong UK inflation data and expectations of future rate hikes by the Bank of England (BoE) pushed 10-year gilt yields up to their highest level since February. The US economy grew by more than 4% in second quarter, some of its strongest performance in years. The job market is tight with the jobless rate falling to 3.7%, its lowest level since 1969. Notably Amazon has just announced a 50% increase of its minimum wage to $15 per hour. While the aggregate statistics show inflation is still low, the Fed is pursuing its course of tightening with another raise in interest rates to 2.25%. The tightening in US monetary policy is in stark contrast to many other countries around the world and it is starting to cause problems. Turkey and Argentina have been the two most visible casualties over the last three months but other emerging markets have also underperformed due to fears of contagion. Meanwhile, European markets have remained under pressure thanks to the ongoing political strife around Brexit and the populist budget from the new Italian government. European banking stocks recorded some of the worst performance in developed markets. Beyond monetary policy the relative strength of the US economy is contributing to global problems in other ways. A strong economy is emboldening the US government’s nationalist agenda. In the third quarter there was escalation in trade tensions between the US and China as President Trump announced 10% tariffs on a further $200 billion worth of Chinese goods, with a potential increase to 25% in January 2019. In response China has imposed its own tariffs on $60 billion worth of US goods. The rising frequency of extreme weather events is arguably more concerning than tightening monetary policy, trade tensions and populism. Thus far 2018 has borne witness to a continuous stream of record breaking events, such as the number of forest fires in the Arctic Circle, heatwaves in Europe and Japan, and more devastating storms and floods all across the world. The effects of climate change are no longer a future risk. They are playing out in real time and they are having a negative impact on global economic prosperity.

Fund performance and activity

Over the period the fund returned 3.6% in sterling terms, underperforming the MSCI World Index by 2.8%. The best performing sectors were information technology (IT), health care and industrials and so the underperformance is disappointing given these are significant sector weights in the fund. Therefore, stock specific factors were the main reason behind the lagging returns. In IT, several of the fund’s holdings were caught up in the trade war escalation. In September there were some early signs this is causing some slowdown in the pace of investment in companies operating in the industrial, technology and automotive end markets, and there was weak performance in our investments in factory automation, semiconductor and advanced manufacturing companies such as IPG Photonics, Microchip, Omron, AMS and Aptiv. In the health care sector the strongest performance came from pharmaceutical and biotechnology companies, where the fund has no investments. This was another drag to relative performance, notwithstanding the fact that two of the fund’s major health care investments performed strongly: Humana and Encompass Health. Finally the fund’s underweight position to Apple and Amazon negatively impacted performance by 0.6%. Portfolio turnover has declined over the last six months. It was 4.9% over the third quarter and 26.8% over the past 12 months. This is line with our long-term average of 20%-30% per annum, and follows an elevated period in the latter part of 2017 and early 2018 (reflective of our collaboration with the Denver office following the completion of the Janus Henderson merger in 2017). We would expect portfolio turnover to continue in line with our long-term average now that we have successfully integrated with the Denver-based investment teams. Fund positioning remains skewed towards our Knowledge & Technology and Efficiency themes, resulting in our continued overweight position 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 new positions in Nintendo and MasterCard while we sold the positions in Analog Devices and Tetra Tech.

Outlook/strategy

In the first week of October bond yields around the world have moved up sharply. This has coincided with a sharp rotation of the type of positively performing shares in global equity markets. On 4 October the MSCI World Value Index outperformed the MSCI World Growth Index by 1.3%, which is the largest one day outperformance since May 2009. Stocks in the information technology sector have been hit particularly hard, while the best performing sectors have been energy, financials, consumer staples and utilities, where the fund has an underweight position. This is a challenging environment for the fund given its growth style tilt and overweight position towards the information technology sector. We would encourage our investors to regard this as a potential opportunity. Mean reversionary events are inevitable over shorter time periods in our view. When they do happen it is important to remind ourselves of the difference between value and valuation. Many factors can cause fluctuations in near-term share price valuations, with one of the most important being the level of interest rates. Valuation (share price) is not the same thing as value (worth) however, and over the long term growth will always generate the most value for investors. A strong feature of our strategy is our investment framework which is based on sustainability with reference to environmental and social trends. This provides us with incredible clarity and consistency in the way we go about identifying attractive investment opportunities exposed to strong thematic growth drivers. The low carbon energy transition and the fourth industrial revolution, characterised by rising penetration of technology into all sectors of the global economy, are two investment trends that are so powerful that we regard them as generational in nature. The fund is positioned to take advantage of these two trends, both of which are inextricably linked to harmonising the many conflicts between environmental and social sustainability. We think that oil prices will start to decline again. In fact a high oil price is self-defeating since it only serves to accelerate innovation and substitution. In ten years’ time there will be more renewable energy, there will be many more electric cars, and there will be billions more connected devices with semi-conductors and microchips capturing and generating vast amounts of data - all of which will be stored in the cloud, requiring memory and then analysed and made useful by software, in order to create efficiencies, increase productivity and generate value for our societies. As well as holdings in many leading companies related to these areas, the fund is also positioned towards consumer companies leading the way in the circular economy (the opposite to the more traditional linear disposable economy whereby resources are kept in use for as long as possible and then regenerated to extract more value), to companies in health and life insurance, healthcare services, water technology, electrical safety, architectural design, education and entertainment. When we think about sustainability we see a world of opportunity, and there is great diversity in the fund holdings, as well as a clear focus.


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

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Janus Henderson Global Sustainable Equity Fund

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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.
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  • 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.
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  • 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.
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