Q&A: FSA Investment Forum Thailand – Investing in a new reality

Alexis: One of the biggest difficulties facing investors is how to remain invested during uncertain markets, since watching markets from the side lines oftentimes ends-up being a bigger opportunity cost than accepting some of the market’s short-term gyrations. The Janus Henderson Balanced strategy aims at enabling investors to participate in some of the market upsides, while reducing the impact of market downsides, by dynamically allocating a multi-asset portfolio of US stocks and bonds managed in a holistic way. Since the inception of the strategy almost 25 years ago, the Janus Henderson Balanced strategy has historically been able to deliver returns comparable to that of US large-cap equities with much less volatility by applying a repeatable and time-tested investment process focused on stringent security selection and deliberate dynamic asset allocation. As such, investors often use this strategy as a “core” allocation in their portfolios, leaving them free to focus on managing the exposures to other themes or asset classes.

Mike: We believe there are three key areas investors should embrace to effectively navigate the current market backdrop. 1) have an investment team that have experience across multiple market cycles, that is sufficiently well resourced but not so large it hinders quick decision making; 2) integrating top-down macroeconomic factors into portfolio construction to effectively allocate research time and aid portfolio construction; and 3) carefully manage strategy capacity in order to remain nimble with the ability to rebalance the portfolio quickly, if required. These elements are embraced across all of TT International’s high-alpha equity strategies.

Alexis: While markets remain uncertain, we do see opportunities both in equities and fixed income. Within equities, we believe that AI and accelerated computing are likely to generate significant opportunities in two ways. First, by offering skilled stock pickers the opportunity to sort through the greater dispersion in stock price returns of technology providers at the forefront of this new frontier, as higher cost of capital has drawn the focus back to fundamental investing. Second, by identifying companies across all sectors which are benefiting from the implementation of AI in their daily operations, leading to improvement in their business efficiency and profitability. We already see such opportunities in sectors that are not always associated with technology, such as agriculture or financials. Within fixed income, we believe that investors should start “leaning into duration”, as both current high levels of yields and the possibility of a slowdown of the economy would warrant to progressively add back duration to portfolios. Furthermore, we believe that high-quality securitised asset – such as agency MBS or AAA-rated CLOs – offer relatively more attractive valuations than corporate bonds.

Mike: We are positive on multiple themes within our Asian equity portfolios despite being cautious of the trajectory for the Chinese economy and stock market. Two high-conviction themes for us currently are the growing spending power of the Indian consumer and also those beneficiaries of the ongoing geopolitical tension between China and the West:

1. Data suggests Indian households with >US$35,000 of annual income will grow at more than +16% per annum for the next decade; this will drive strong and sustainable consumption in the Indian economy and we expect domestic travel and leisure to be two huge winners out of this;
2. Whilst increasing protectionism is unhelpful for global growth, diversification of manufacturing away from China provides multiple opportunities for growth elsewhere. India, Vietnam and Indonesia are clear beneficiaries of rapidly expanding manufacturing from global multinationals

Alexis: With markets evermore cognisant of the likelihood of the economy being in the “late stage” of the cycle and with a hawkish Fed that has resolutely turned the page on a decade of ultra-accommodative monetary policy and quantitative easing, investors have to become extremely selective. With rates at decades high, the cost of capital is now significant, leading investors to carefully assess the “haves and have nots”. Focusing on companies with strong balance sheets and significant earnings growth, while concurrently avoiding companies exhibiting stretched valuations, is likely to be key in delivering returns going forward. We believe that such environment is likely to be well suited to our fundamentally driven asset selection process, which historically has been the main driver of performance in our Janus Henderson Balanced strategy.

Mike: Investment processes should be disciplined and have been tested in multiple market cycles. To make substantial changes to the process because of market volatility is a mistake. Having said that, fund management teams do need some flexibility and humility when economies and markets do not behave as expected. The test of a fund manager is not when things are going well, but when they are not and one of the great arts of fund management is to risk manage the portfolio effectively in differing environments. When the outlook is cautious or conviction levels are low, a fund manager needs to de-risk the portfolio and then build a ‘shelf’ of exciting stock names to be deployed when the environment is more constructive.