Steve Johnstone, portfolio manager of the Global Equity Market Neutral strategy, explains why he is ambivalent about market direction in 2019 but would like to see a healthy degree of rationality.
What would you like to see more of in 2019?
As market neutral investors, we are unphased by market direction. Our contributing teams seek to profit from share mispricings through a ‘pair trading’ approach, which aims to be agnostic to moves in the wider market. However, in order to profit from these mispricings, they need to see rational markets focused on underlying fundamentals, rather than being driven purely by the vagaries of dislocations in currency, or fixed income markets, or by geopolitics. Therefore, in 2019, we do not mind if it’s an up or down year in terms of equity market performance but we would like to see a healthy degree of rationality.
Where do you see the most important opportunities and risks within your asset class?
Equity markets continue to face a number of challenges, including high valuations, tightening monetary policy, trade tensions and a rise in populism at a political level. During this prolonged period of uncertainty, we believe our pair trade, market neutral approach continues to provide us with the potential to generate absolute returns, even during periods of market correction. Despite the potential for stock-to-stock correlations to increase intermittently as volatility rises in markets – which is not conducive to our stock picking approach – we believe we can continue to deliver positive returns over the long term through stock-specific events, such as corporate earnings and news flow. Irrational market behaviour is usually temporary and having a diversified portfolio of pair trades, sourced from a range of teams with different investment styles across a variety of regions, in our opinion increases the potential to help position investors away from the effects of a broad market downturn. As such, we remain positive on our conviction and our approach.
Would a change in market conditions in 2019 shift your approach?
No, we would not shift our approach. The strategy employs a systematic approach which targets a constant level of volatility through shifting market conditions. The underlying ideas coming into the portfolio from the contributing managers may change as a result of market conditions affecting their investment thesis. Our tried-and-tested approach to portfolio construction and risk management, however, removes the emotion from investing.
Which themes have the potential to redirect markets in 2019? Download our Infographic to find out
These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. Any securities, funds, sectors and indices mentioned within this article do not constitute or form part of any offer or solicitation to buy or sell them.
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