A mature bull market calls for diversification in 2018

22/11/2017

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​What lessons have you learned from 2017?

Trends can continue for a long time, therefore go slowly with any buy/sell decisions: We have been surprised by the ratings that some of our holdings have reached this year, as companies that have good management teams and positive earnings momentum have continued to perform well almost independent of their valuation level. Our inclination as moderate value investors is to reduce companies that look highly rated relative to their own history, but that would have been the wrong decision. We need to stick with our valuation disciplines, but do so slowly.

Be wary of companies that look cheap on valuation metrics: We are currently eight years into a market upturn, therefore any companies that look cheap on metrics such as the price/earnings (P/E) ratio are likely to have question marks around them.  We need to be wary at this point in the cycle not to enter into value traps.

What are the key themes likely to shape the markets in which you invest in 2018, and how is this likely to impact portfolio positioning?

The level of global economic growth, particularly in the US and China: 2017 has been a year in which global economic growth has, on the whole, surpassed expectations and this has meant the best performing sectors have tended to be cyclically exposed, such as materials, industrials and technology. As we move into 2018, the valuations of these companies are higher, and therefore whether they can sustain these ratings will be dependent on whether the current momentum in economic growth can continue. We have been modestly reducing our holdings in more expensive cyclical stocks, as we have concerns that some areas of the market are trading on elevated multiples on top of what are high operating margins relative to history.

The gradual unwinding of quantitative easing and the effect this has on equity and bond markets: Quantitative easing (QE) programs have been a huge experiment in monetary policy since the financial crisis. It is very difficult to know how much of a distortive effect this has had on equity and bond market valuations. What we do know is that within the bond market there has been some very low recent issuance; for example, Land Securities recently issued a 40-year bond at 2.75%. In this context the equity market looks better value (Land Securities has a 4% dividend yield), however it will also have been distorted and therefore the disruptive effect as QE unwinds is unknown.

The progression of Brexit and UK politics more broadly, and how this impacts the level of sterling, consumer confidence (and spending), and business investment: While the companies we hold are often highly international (with ~60% of sales deriving from overseas), the UK economic backdrop is still material for how the companies in the portfolio perform. For example even if a company is selling predominantly overseas, if they are buying overseas inputs in sterling and the value of sterling falls, they will need to pass on these higher input costs to the end consumer. If they cannot fully manage to pass on the higher costs, their margins will fall.

Where do you currently see the most compelling opportunities within your asset class?

Our strategy does not follow a high conviction style – we maintain what we consider a long (~100) and diverse list of stocks and avoid being overly exposed to any one theme or sector. What we are trying to do is pick a broad range companies that we think, on balance, look cheap. This diversity in the portfolio is particularly important at a late stage in the cycle when pockets of the market look modestly expensive, and companies that miss on earnings forecasts are being marked down harshly.

 

These are the managers’ views at the time of writing. References made to sectors or asset classes do not constitute or form part of any offer or solicitation to issue, sell, subscribe or purchase them.

 

Glossary:

Ratings / valuation: The price of shares in a company.

Value investors: Value investors search for companies that they believe are undervalued by the market, and therefore expect their share price to increase.

Price/earnings (PE) ratio: A popular ratio used to value a company’s shares. It is calculated by dividing the current share price by its earnings per share. In general, a high P/E ratio indicates that investors expect strong earnings growth in the future, although a (temporary) collapse in earnings can also lead to a high P/E ratio (also known as a ‘high or elevated multiple’).

Cyclical: Companies that sell discretionary consumer items, such as cars, or industries highly sensitive to changes in the economy, such as miners. The prices of equities and bonds issued by cyclical companies tend to be strongly affected by ups and downs in the overall economy, when compared to non-cyclical companies.

Value trap: An equity that appears to be cheap due to an attractive valuation metric (such as a low P/E ratio) may attract investors who are looking for a bargain. However, this may turn out to be a ‘trap’ if the share price does not improve or falls, which may happen if the company or its sector is in trouble, or if there is strong competition, lack of earnings growth or ineffective management.

Operating margins: The proportion of a company’s earnings that remain after paying for all costs of production, such as wages, utility bills, transportation costs and raw materials. Commonly used to understand a company’s pricing strategy or operating efficiency.

Quantitative easing: A measure whereby a central bank creates large sums of money to purchase government bonds or other securities, in order to stimulate the economy.

Monetary policy: The policies of a central bank, aimed at influencing the level of inflation and growth in an economy. It includes controlling interest rates and the supply of money.

Low recent issuance: Meaning bonds where the coupon (or interest rate) is low relative to history.

Dividend yield:  A payment made by a company to its shareholders. The amount is variable, and is paid as a portion of the company’s profits. 

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.


Important information

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

Janus Henderson UK Equity Income & Growth 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.

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.

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.

Information on this document is on Henderson's best endeavours.

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.
  • The Fund could lose money if a counterparty with which it trades becomes unwilling or unable to meet its obligations to the 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.
  • Measures designed to reduce the impact of certain risks may not be available or may be ineffective.
  • Any security could become hard to value or to sell at a desired time and price, increasing the risk of investment losses.
  • Shares of small and mid-size companies can be more volatile than shares of larger companies. Market conditions, such as a decrease in market liquidity, may mean that it is not easy to value or to sell a share at a desired time and price, increasing the risk of investment losses.

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Investment outlooks 2018

Janus Henderson's investment teams outline the lessons learned from 2017, their expectations for 2018 and where they see the most compelling opportunities.



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Fund name changes

Please note that from the 15 December 2017 funds previously named Janus or Henderson have been renamed Janus Henderson. This change aligns our product names with our name, Janus Henderson Investors, following the merger of Janus Capital and Henderson Global Investors in May 2017.

This name change does not impact on the management of the underlying funds and investors and advisers are not required to take any action.