A Discussion with Asset TV: Finding Balance in a Disruptive Market
A Discussion with Asset TV: Finding Balance in a Disruptive MarketFixed Income
A Discussion with Asset TV: Finding Balance in a Disruptive Market
With a largely strong year for U.S. equity markets recently jolted by mixed macro signals, uncertainty remains as we approach 2019. Portfolio Manager Marc Pinto discusses his outlook for the coming year and highlights the risks and opportunities ahead.
- Not only should investors consider companies that are spearheading change within their industries, but they should also watch out for companies that are sinking, rather than swimming, in the disruptive currents.
- Disruption isn’t confined to a particular industry – we continue to see opportunities in a variety of industries, such as retail, technology and the payments space.
- Given rising geopolitical concerns and the potential for a trade war, we continue to seek opportunities in domestic companies with a global footprint as well as multinational companies that are doing a large amount of business within the U.S.
Laura Keller: Good morning, welcome to Asset TV, I'm Laura Keller. I'm here this morning with Marc Pinto, he's the balanced strategy portfolio manager Janus Henderson, and his fund is five star rated by Morning Star, so we're very excited to have his insights here on the market this morning. Thank you for joining us Marc.
Marc Pinto: Thank you for having me.
Keller: Of course. Now, the recent market sell off has happened in October, can you comment a little bit on that and also how the strategy has been performing?
Pinto: Yes, it's been an interesting October no doubt. The backdrop of a very strong market, the market sold off in October, as market got concerned that the fed was gonna be more aggressive in taking interest rates higher. I think also the market was just looking for a pause after a really strong run. Sometimes people just use an excuse to take profits and that can drive stocks lower in the meantime. The portfolio actually performed quite well, we outperformed both the S&P 500 and our primary index, the balance index. We're very happy with that, we had positioned the portfolio for the potential for a bit of sell off. We were pleased to see the way it performed.
Keller: Given where rates are, there has still been a dominance in the US market, can you see that continuing at all?
Pinto: I can, I think the US market still has a number of great underpinnings behind it that are gonna help drive it higher. We still have a strong economy, the consumer continues to be very active and remember the consumer is 70% of the US economy. As goes the consumer in a lot of ways, as goes the economy. Consumers are still spending at the store on a number of experiences, this is the experiential generation, so we're seeing a lot of activity and travel and leisure. I think the consumer is feeling pretty good. Remember, Unemployment is at an absolute low rate of 3.7%, so we do think equities can go higher. In particular, we think the US market is a very good place to be right now.
Keller: So you're mentioning Marc some positive factors, some negative factors that's led to a little bit of uncertainty on investors parts, what can we expect on the macro picture going forward?
Pinto: We think the macro picture is still pretty good, as I mentioned we have a growing economy, we've got historically low interest rates, and we're seeing amazing improvements in productivity in US corporates, in terms of ability to run businesses more efficiently, expand margins, increase cash flow per dollar of revenue, has just led to a really good backdrop for equities. At the end of the day, equities are valued based on the stream of earnings and cash flows that they generate. We see the future for that as being quite bright.
Keller: Given that backdrop that you've mentioned then, how is the strategy positioned at this point in time?
Pinto: The strategy as you know is in the mixed asset category. It has the ability to go back and forth between equities and fixed income. We traditionally have favored equities in the strategy, and today we are positioned at about 60% equities, 40% fixed income. As we look forward and we look at what our
investors are looking for in terms of meeting their particular goals, whether it's retirement, paying for their kids’ education, paying for their increase in healthcare expenses, we think equities are going to be the better vehicle to deliver those returns to meet their needs, and for that reason, we tend to favor equities. Having said that, in more difficult times, such as 2008, we have used the fixed income portion of the fund to play a little more defense when we think the equity markets are at risk.
Keller: Okay, thinking about this environment, navigating that, how are companies facing disruption from digitization?
Pinto: There is obviously a lot going on in that space and we certainly hear a lot about what Amazon is doing to retail, we hear a lot about what the cloud and hosted based services on the cloud are doing to traditional technology companies. We are obviously very careful in terms of looking at who are the disruptors and who is being disrupted. Our strategy, we have some exposure to what we call the disruptors, should be names that you would expect like Microsoft I would argue. We look at areas where companies are being disrupted. Those typically are not areas where we want to invest for a couple of reasons. The risk to their business going forward from the disruption, and also the fact that they tend not to be growth companies.
Keller: Because they're being disrupted?
Pinto: Because they're being disrupted, exactly. A lot of the companies that fall into the value category are the ones that are being disrupted, which makes it a pretty good time to be a growth investor. We also look a lot at what the forces of disruption, how they can help our companies run more efficiently and deliver more with less if that makes sense. The cloud has been an amazing tool that companies can use to reduce their IT costs, digitization has been a great tool that companies use to engage with their customers.
Keller: You mentioned retail, that has been hard hit by disruption but there are companies it sounds like that have been benefiting from it.
Pinto: There are, so as you can imagine we've been extremely careful in where we go in retail because it is a tough place as a whole to invest, but there are companies that we think are actually navigating it quite well. Another example is home depot. Home depot has some benefit in terms of the goods that they sell, some of those are not easily shippable by UPS, but a lot of their products could be disrupted, have the potential to be disrupted, if they weren't careful. What Home Depot has done, it has created a great mixture between their E-Commerce business and their traditional retail business. They have made it easy for the customer to order online, pick up at the store, go to the store, order online. They don't care. They've made the shopping experience so good for their customer that I think they're navigating the disruption in retail as well as anybody. It's amazing the amount of money they've invested in technology, and what that affords the customer.
Pinto: With my phone I can find that hammer in less than two minutes. They tell me what aisle it’s in, and what bay it’s in, and boom I'm in and out of the store. It's a great experience.
Keller: A lot of opportunities there that they've capitalized on from that disruption.
Pinto: The good retailers do more than just start a website, they really think about integrating their existing stores, which they've got a lot of money invested in, with their E-Commerce platform. If they don't bring the two together, it's generally not gonna work.
Keller: So a lot of investing opportunities for you there then.
Keller: So how about in terms of other opportunities, thinking about the broader picture, equities versus fixed income. Are there still opportunities in equities?
Pinto: There are, we continue to see opportunities in a variety of industries. A couple of the key themes that we're invested in might be helpful to frame our positioning. One that we haven't talked about is the payment space. We see a huge opportunity in the overall payments category whether it be credit cards or non-traditional forms of payment, i.e. non-cash, non-check. The payment space by our calculation is growing two to three times faster than the overall economy. That's a good place to start. One example I'd highlight there is MasterCard which is obviously very big in the payment space, a lot of exposure to overseas. Overseas is now a bigger part of their business than domestically, and has really navigated the changing landscape and payments extremely well.
Pinto: I think there have always been concerns that they would be disrupted. They've really evolved their business model and adapted it to the current environment where they're the go to place to do financial transactions both in the US, overseas, and cross border, which by the way is a big part of their business.
Keller: You mentioned that MasterCard are playing International markets, do you invest outside the US?
Pinto: We do. We do, we're typically more US-centric, but at the end of the day we’re looking for strong companies that have dominant market positions, and because we're investing in large cap companies, we're generally looking at companies that do business all over the world. For us, we think sometimes it's a little arbitrary to say that a company based on the US which does more than 50% of its business overseas like MasterCard, is that a US company, is that an international company? Hard to say.
Pinto: When we look overseas we're typically looking at multinational companies that are not headquartered in the US but are doing a lot of business in the US. We look at them with the same lens we'd look at a US company. When there are opportunities over there as there were a number of years ago, we had a lot of non-US exposure, owning large European multinational companies, it was a great opportunity. Today we're not finding as many opportunities, so while we have the ability to go overseas, we're more focused on US companies right now.
Keller: Right now, and pulling it back a little bit, what's your thought on the deterioration of current markets, especially in China, Marc?
Pinto: Well, the number one issue that we're all looking at today is the potential, or the ongoing dispute with China, and the potential for it to worsen dramatically on January 1st when the tariffs will go up to 25%. I think it's pretty clear that the dispute is having a big impact on China. We've seen economic statistics coming out of that country that are somewhat concerning. Auto sales being down 80%, business confidence down. It's clearly impacting the Chinese economy. I think clearly if the Chinese had their way, we would find a way to have a deal.
Pinto: This is something that I think could be a potential risk for all markets. If the dispute were to continue and the tariffs were to go up, it could potentially have an impact on our economy, on the European economy, obviously the Chinese economy. It's the number one issue we're watching, we're hopeful there will be a resolution.
Keller: Of course, what about valuations, are they too high?
Pinto: I think valuations are pretty much where they were a year ago, obviously it depends on the category, it depends on the sector and the company. People always tend to focus on the valuations of the highest performing stocks and tend to look less at some of the other companies in the market that make up the index, and it really depends on sectors, but I'd say overall they're pretty much where they were a year ago. Again, we've seen tremendous growth and earnings from profits, and so based on the new projections that people are looking at, the valuations are pretty much alike.
Pinto: We also have cases where there are valuations at historically lows, those are obviously opportunities we look at, if those companies meet our criteria for investment, we'll look at those very closely. I don't think valuations is a key concern at this point.
Keller: So looking ahead we are getting to the end of the year, what are you most fearful about? What are you encouraged by? Those two things I'm interested in.
Pinto: I continue to be encouraged by the increases in productivity and efficiency that we're seeing from large cap companies that we invest in. We see constant improvement in margins and cash flow, and companies just running their businesses so much more efficiently. I don't think that's gonna go away, largely because of the technological forces we have and just the fact the companies do more with less.
Pinto: I still think the interest rate picture is very good, and so I'm not worried that we're gonna see a dramatic increase in inflation, therefore in interest rates. I think the interest rate picture is still benign, yes rates are higher than they were, which you have to remember we are coming from such a low point that everybody knew is not sustainable, and frankly was indicative of a very sick economy. For me a little increase in interest rates actually means the economy is on better footing. I think that's a good thing. What I'm fearful of course about is the potential for an extension of the trade dispute, that's probably front and center of our concerns. Then there's always the unknowns, in terms of geo-politics and unknowns that you don't know about until they happen. Those are always cause for concern but there's not much we can do about that.
Pinto: Generally I'm feeling pretty good about things, and if we can get through this dispute with China and we can allow the free markets to work and potentially get some concessions from the Chinese, that would be great. One thing I should mention with the Chinese trade dispute, is we have a number of companies in our portfolio that are driven by intellectual property, software companies being an example. If any resolution that involved recognition on the part of the Chinese of intellectual property rights could be hugely beneficial. There's a lot to be hopeful there, but there's obviously a lot of concern if things don't get better.
Keller: We'll keep watching that Marc because that's all very encouraging, definitely. Thanks for your time in joining us here today.
Pinto: Well great, thanks for having me.
Keller: Thank you, and thanks for watching here at Asset TV, we've been talking with Marc Pinto, balanced strategy portfolio manager at Janus Henderson.
Please consider the charges, risks, expenses and investment objectives carefully before investing. For a prospectus or, if available, a summary prospectus containing this and other information, please call Janus Henderson at 800.668.0464 (or 800.525.3713 if you hold shares directly with Janus Henderson). You can also visit janushenderson.com/info (or janushenderson.com/reports if you hold shares directly with Janus Henderson). Read it carefully before you invest or send money.
The opinions and views expressed are as of 11/12/18 and are subject to change without notice. They are for information purposes only and should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation to buy, sell or hold any security, investment strategy or market sector. No forecasts can be guaranteed. Opinions and examples are meant as an illustration of broader themes and are not an indication of trading intent. It is not intended to indicate or imply that any illustration/example mentioned is now or was ever held in any portfolio. Janus Henderson Group plc through its subsidiaries may manage investment products with a financial interest in securities mentioned herein and any comments should not be construed as a reflection on the past or future profitability. There is no guarantee that the information supplied is accurate, complete, or timely, nor are there any warranties with regards to the results obtained from its use.
Past performance is no guarantee of future results. Investing involves risk, including the possible loss of principal and fluctuation of value.
Performance may be affected by risks that include those associated with non-diversification, portfolio turnover, short sales, potential conflicts of interest, foreign and emerging markets, initial public offerings (IPOs), high-yield and high-risk securities, undervalued, overlooked and smaller capitalization companies, real estate related securities including Real Estate Investment Trusts (REITs), derivatives, and commodity-linked investments. Each product has different risks. Please see the prospectus for more information about risks, holdings and other details.
Foreign securities are subject to additional risks including currency fluctuations, political and economic uncertainty, increased volatility, lower liquidity and differing financial and information reporting standards, all of which are magnified in emerging markets.
Fixed income securities are subject to interest rate, inflation, credit and default risk. The bond market is volatile. As interest rates rise, bond prices usually fall, and vice versa. The return of principal is not guaranteed, and prices may decline if an issuer fails to make timely payments or its credit strength weakens
There is no assurance that the investment process will consistently lead to successful investing.
As of 9/30/18, annualized returns, including reinvestment of dividends and capital gains, for Janus Henderson Balanced Fund I Shares were: 14.18%, 9.39% and 9.63% for the 1-, 5- and 10-year periods, respectively.
Returns quoted are past performance and do not guarantee future results; current may be lower or higher. Investment returns and principal value will vary; there may be a gain or loss when shares are sold. For the most recent month-end performance call 800.668.0434 or visit janushenderson.com/performance.
As of 9/30/18 the top ten portfolio holdings of Janus Henderson Balanced Fund are: Microsoft Corp (3.45%), Mastercard Inc (2.80%), United States Treasury Note/Bond (2.37%), Alphabet Inc. (2.36%), Boeing Co (2.20%), Apple Inc (2.15%), US Bancorp (1.87%), Altria Group Inc (1.86%), United States Treasury Note/Bond (1.84%) and Home Depot Inc (1.73%). There are no assurances that any portfolio currently holds these securities or other securities mentioned.
Ratings and/or rankings may be based, in part, on the performance of a predecessor fund or share class and are calculated by Morningstar using a methodology that differs from that used by Janus Henderson. Methodology differences may have a material effect on the return and therefore the rating/ranking.
As of 9/30/18, Janus Henderson Balanced Fund Class I Shares Morningstar RatingsTM in the Allocation –50% to 70% Equity category: 5 stars out of 702 funds, 5 stars out of 620 funds and 5 stars out of 450 funds, for the 3-, 5-, and 10-year periods, respectively.
The Overall Morningstar RatingTM for a fund is derived from a weighted average of the performance figures associated with its three-, five- and ten-year (if applicable) Morningstar RatingTM metrics.
Ratings based on risk-adjusted returns.
The Morningstar RatingTM for funds, or "star rating", is calculated for funds with at least a three-year history. Exchange-traded funds and open-ended mutual funds are considered a single population for comparative purposes. It is calculated based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a fund's monthly excess performance, placing more emphasis on downward variations and rewarding consistent performance. The Morningstar Rating does not include any adjustment for sales loads. The top 10% of funds in each category receive 5 stars, the next 22.5% receive
4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star. The Overall Morningstar Rating for a fund is derived from a weighted average of the performance figures associated with its three-, five-, and 10-year (if applicable) Morningstar Rating metrics. Ratings may vary by share class.
© 2018 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information
Janus Henderson Distributors