Henderson: Buy Europe, Sell US

Janus Henderson UK Absolute Return fund manager Luke Newman explains why he is shorting US equities and buying European companies

Emma Wall 21 June, 2017 | 2:47PM
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Emma Wall: Hello and welcome to the Morningstar Series "Why Should I Invest With You." I am Emma Wall and I am joined today by Luke Newman, Manager of the Janus Henderson UK Absolute Return Fund.

Hi, Luke.

Luke Newman: Hi there.

Wall: So you've got UK in the title.

Newman: Yes.

Wall: But increasingly you are adding European and global assets to this fund, aren't you. Why is that?

Newman: We are and in terms of the areas that we've been investing within the mandate itself is a flexible one. Flexibility in terms of not being fixed to investing on the long side. We find the short book as interesting as longs and we've certainly generated a lot of returns from shorting companies we think are overvalued or imperiled going forward.

And we've also taken a very flexible approach to geographic locations of companies where their revenues originate from, where their profits are and why should we really be tide to the U.K. economy.

And so over the last three years, in particular, we've started to identify more opportunities outside of the U.K. listing and of course that's very different to a U.K. economy. If you look at the FTSE, around 80% of revenues actually originate from outside the U.K. anyway. So, what sounds like a very big shift is actually a very small one.

Wall: And where then, say, you've now got the globe to play with. Which, in particular, stock markets are compelling at the moment for you?

Newman: So, if we look at the long and the short side of the fund, I would say, on the long side we are finding increasing opportunities within Continental Europe. And I think on a global scale, we've seen capital be withdrawn from Europe you go back in there few months and the political landscape looked a lot more uncertain than maybe it does today.

And we are certainly seeing evidence of an economic recovery, particularly in domestic European markets kicking through. So, within domestic we're going to take the sectors such as banks. We found very interesting and profitable long positions in banks such as Danske and ING, for example. And given its characteristics, we haven't been able to achieve in the U.K. market.

On the short side of the fund, there are a lot of sectors and companies around the world that do look pretty fully valued at the moment. One area that really strikes me is being a good opportunity on the short side would be in the U.S. And in particular, some of those bond proxy oriented sectors consumer staples which look very full in terms of valuation. Fundamentally, we're seeing the prioritization of cash flow over the last few years manifesting itself in a lack of investment and volume growth declining for a number of those consumer staples.

And really in the space of the last few days, Amazon's approach for Whole Foods certainly has interesting consequences for food retail, but actually what about the second derivative. If you look for evidence in Amazon's engagement with their own supplier base in the other sectors that they are active in it's not necessarily good news for companies that are generating high margin using their brand as a defense. So, I can see that sector U.S. staples coming under a lot of pressure.

Wall: You mentioned valuations a couple of times there in that explanation. Is that a real driver for you and the team as to say what you're going to short or you are going to make it better going down and profiting from and indeed what you are going to buy and hope the share price comes up?

Newman: It is. I don't think you can invest in a serious way without a keen eye on valuation. Running an absolute return fund I think we have to be pragmatic and we can't run around buying every cheap share and shorting every expensive one, that's a sure way to losing your investors money. We need to be aware of trigger points and catalysts.

So, we spend a lot of time meeting companies, doing fundamental work and then waiting for the appropriate time to put that trade on. We can't hide behind relative performance. I can't go my clients and say I am sorry we lost your money, but the equity market was down. We have a pledge and a commitment to try and minimize capital drawdowns and then aim to deliver a constant, consistent, stable series of absolute returns regardless of whether equity markets are up or down 10%, 20%, 30%.

Wall: Luke, thank you very much.

Newman: Thank you.

Wall: This is Emma Wall for Morningstar. Thank you for watching.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Janus Henderson Absolute Return A Acc182.20 GBP-0.11

About Author

Emma Wall  is former Senior International Editor for Morningstar

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