“If you squint, and I mean really squint, you can see improving economic data,” says Janus Henderson multi-asset portfolio manager Nick Watson. “You can see some of the macro slowdown we’ve been experiencing is stabilising a bit.”
At a time when headlines are dominated by Brexit, the US-China trade war, central bank policy and negative bond yields, Janus Henderson’s multi-asset team is finding reasons to be positive on the future.
Watson (pictured left) describes his positioning across the multi-asset portfolios so far this year as “cautiously constructive”, which he adds is “a nice, ambiguous way of saying we want to keep holding some risk”.
“You’ve got to rummage around a bit in order to get these comforts but there are a few green shoots,” he adds. “That’s not to say we’re expecting a strong economic recovery but there’s enough out there in order to hold off a recession as a 2019, possibly even a 2020, event.”
Watson says markets got ahead of themselves over the summer and there were still issues around trade that markets weren’t paying too much attention to.
“We moved from a neutral stance on our equities down to around 3-4% underweight, partly in US equities, but also through more cyclical regions,” he says. “However, we’ve built those back up towards a small overweight by adding to emerging markets and to the US.”
Europe suffers from ‘beta to trade wars’
The current portfolios are also underweight Europe but the team is identifying opportunities elsewhere, in parts of the UK, Japan, emerging markets and Asia.
“Europe has political challenges. It does have beta to trade wars, so in some instances it could rise if that issue gets alleviated, but Europe is facing some longer-term structural issues. On the back of that, we prefer Asia, emerging markets and Japan.”
The Janus Henderson multi-asset portfolios have tilted the equity exposure over the past two to three years towards quality, using a mixture of internal and external managers. Lindsell Train is used as an external quality manager, alongside Stephanie Butcher, who runs the Invesco Perpetual European Equity Income Fund, which has a value tilt.
“She’s had a tougher time on a relative basis because value has not been the place to be over the past three to five years or so,” says Watson’s fellow multi-asset portfolio manager Dean Cheeseman (pictured right).
“She’s underperformed but we understand why, so we still hold her as a high-conviction allocation. “We have other things alongside that which give us a style, such as Blackrock European Dynamic, run by Alister Hibbert, who is very growth-orientated.
“He’s actually outperformed over a five-year period. Butcher, who’s probably in line or close behind, is blending the two, which hopefully gives us some exposure to long-term alpha generators.”
Gold acts as a double kicker thanks to sterling
Allocating to bonds has been more problematic. While the team has been underweight fixed income “and wrong for quite some time”, it argues this is because parts of the bond market appear asymmetric when it comes to risk profile.
“We have to recognise that the world at the moment is a little bit mental, and there is $16trn worth of negative-yielding bonds in the world,” says Watson.
“There are other sources of long-term return that aren’t as asymmetric as those types of assets. Politics and populism are here to stay, that’s something we just need to get used to. If you try and trade around Twitter, you’re probably going to get more wrong than you get right.
“It doesn’t feel like a very sensible use of risk for our clients,” he explains. “In place of that, we have held a bit more cash and also some alternatives.”
The portfolios have also been in gold for quite some time now. The precious metal had performed poorly up until the start of this year but has been “absolutely phenomenal” since then, Watson explains.
“It’s been the asset class many people have leaned on as a risk-off trade, and because we’re a sterling-based investor, we’ve benefited from gold doing well, and also from sterling weakness. We’ve had a double-kicker there, in terms of that hedge really doing what it should be doing in the portfolios.”
Brexit versus trade wars
While Brexit is something the team is paying attention to, the broader concern is the uncertainty caused by trade wars.
“Businesses are reluctant to invest in research and development,” says Cheeseman. “Factory orders go down. Nobody’s re-investing for future growth. They don’t know what their businesses will be subjected to going forward, and you get this stalemate, this malaise, of lack of productivity.
“And at the end of an economic cycle, where we are today, you’re pushing yourself to the end quicker.”
Some of the trades Janus Henderson has placed in the recent past are to keep them in touch as the economy trundles on, rather than needing to make defensive or aggressive calls on positioning, Cheeseman explains. “Unless we see another material change in the output, those lead economic indicators for fundamental data, then we think we’re positioned reasonably fair.”
Federal Reserve pivot was more seismic than people realise
Cheeseman attributes the Q4 2018 sell-off to the end of quantitative easing (QE). “There was this sudden realisation that central banks were true to their word and were slowing down’,” he says. He explains that the team held up on a relative basis to peers and that things were fine at the start of 2019, but the Federal Reserve pivot changed things.
“I don’t think there’s been a real appreciation as to how seismic the Fed pivot was. There was a policy change whereby you are looking at lead indicators in order to anticipate where you think inflation will be in the next two years.
“To take interest-rate corrective action today and then turn around and say, ‘Actually, we’re not very good at estimating inflation, we’re going to wait for hard evidence and then we’ll take corrective action’, is a game changer. And inflation is staying stubbornly low.
“We’ve gone from an interest-rate rising cycle, albeit modest, to one where the US Fed is cutting. What is fascinating in that is looking at what the market is currently pricing in. As we move forward, we’re looking at the lead economic indicators,” says Cheeseman.
Free ride for passives won’t last forever
QE has been instrumental in fuelling returns but with that tap being turned off by the Federal Reserve and the Bank of England, the free ride for passive strategies looks set to end.
“Active management has taken a lot of flak in the press, rightly so, and it was correct to expose client portfolios to passive, which caught the full upside during the QE-fuelled market rally,” says Cheeseman. “That rally’s gone on for the best part of a decade.”
But the team is not expecting the market to continue to be fuelled by QE. “We’re expecting more normalised returns,” he says. “In fact, not even so much normalised but lower returns, to compensate for the abnormal returns we’ve all enjoyed for the previous decade.
“In that environment, active management, which can eke out that return, is the place to be.”
