Fund in focus: Janus Henderson Strategic Bond

Posted by Liz Rees in Fund and industry updates category on 28 Feb 20

The proposition

Janus Henderson Strategic Bond fund aims to deliver a steady income, along with some capital growth. The yield is currently around 2.8% but this will vary depending on a number of factors, including economic conditions and interest rate expectations.

The managers, John Pattullo and Jenna Barnard, invest in government, investment grade and high yield bonds. The fund is at least 80% hedged back to sterling.

Investment philosophy & process

Pattullo and Barnard believe that different fixed income assets perform well at different stages of the economic cycle and they can add value by moving between asset classes as conditions change.

The managers carefully assess the economic and market outlook, to determine asset allocation. They then conduct detailed analysis on individual bonds, paying attention to valuations and momentum indicators. Most holdings reflect a medium to long-term view, but shorter-term tactical investments may be made if they deem appropriate.

Over time the most significant risks are likely to be interest rate movements and borrowers defaulting. Interest rate positioning may generate significant returns but can increase volatility if not managed carefully.

The managers carry out detailed credit research to assess the risk of a default. The fund is well diversified to reduce the impact of any possible bond defaults, although it has not experienced one since 2009.

Current positioning

There is a bias to large-cap non-cyclical businesses with high returns on capital and strong cash flow. At present over half the fund is invested in the US with around a fifth in the UK. Higher risk areas such as emerging market debt, distressed debt and energy are avoided, as are sectors in structural decline.

In the last 2 years, they have increased exposure to global investment grade, at the expense of high yield, and it currently accounts for around 60% of the portfolio.

Performance & Costs

Since launch on 27th October 1999, with Pattullo at the helm, the fund has returned 198% compared with 160% for the IA Sterling Strategic Bond sector*. It has also comfortably outperformed its peer group over 1 and 3 and 5 years, delivering 10%, 15% and 19% respectively*.

The ongoing charge figure (OCF) is 0.68% and Janus Henderson absorbs research costs.

Current outlook and risks

Pattullo believes that interest rates are likely to remain low, with central banks prepared to cut further.     

The team believe real returns can be achieved without reliance on high-risk bonds, which could suffer when an economic downturn arrives. Nevertheless, in their view, safe 5%+ yields are a thing of the past.

In their view, the economic cycle is long in the tooth, which makes the bond market more challenging since bond yields are affected by growth and inflation expectations. A selective approach to bond quality will be key to protecting capital as we approach the end of the economic cycle.

In particular, there are concerns about the increasing size of the BBB-rated corporate bond market, the riskiest tier of investment grade debt. Some companies could be downgraded to high yield.

Our view

Bonds are a good diversifier in a portfolio and this fund has demonstrated that skilled managers can add value by successfully navigating the economic cycle and positioning their portfolio appropriately.

The collaborative approach lets the managers play off each other's strengths and combine their expertise to good effect. We like their cautious style of only taking on risk where they believe it sufficiently rewarding to do so.

*Total return local currency, 31st January 2020