The update below is authored by Janus Henderson Investors and reproduced, with permission, by Willis Owen.
Fund performance and activity
The fund returned 0.7% in the third quarter, underperforming its benchmark index, MSCI ACWI, which returned 3.4%. The fund's peer group benchmark, IA Global, returned 2.4%.
From a sector perspective holdings in the consumer staples and health care sectors were notable detractors from performance. There were, however, strong contributions from the fund's holdings in the information technology (IT) sector.
Alphabet was the fund's most significant positive contributor at the individual stock level. The company's second quarter results exceeded market expectations and management commentary was notably upbeat as the company continues to invest in YouTube and as its cloud business' growth gathers pace. Alphabet remains a high conviction position for us as it has the scale, brand and technical leadership to continue to capture the secular growth of internet consumption and the penetration of online advertising. The company has generated significant levels of free cash flow over the past few years and has a formidable net cash balance sheet, giving us confidence in the company's resilience through downturns. Co-founders Larry Page and Sergey Brin remain involved in the business and, helped by their very able lieutenants, have a strong capital allocation track record and of successful expansion into adjacencies. It is this kind of proven leadership that we like to invest alongside.
Estee Lauder's results were also a notable positive over the quarter as the stock contributed positively to performance. The company continues to see strong top line growth in Asia, offsetting a slight slowdown in North America, and management commentary suggested confidence in achieving the upper end of their long-term growth target. Estee Lauder is a high conviction position for the fund with the cosmetics company well positioned to benefit from the emergence of the middle class consumer in developing markets. Beyond its Estee Lauder branded products, the cosmetics company's brands include Clinique, MAC and Origin. The strength of such brands have helped it achieve pricing power and consumer loyalty, and as a result we have seen the company increase its market share. The company is family controlled, and members of the Lauder family remain involved in the management of the company today. We think this helps to preserve the long-term mind-set and alignment of interests between shareholders and management which we look for in companies.
Netflix was the fund's most significant detractor over the quarter. The stock has moved lower since missing expectations in its second quarter results and amid chatter about rival streaming services, most notably Apple TV+ and Disney+. While we note that the competing streaming services have attractive propositions for customers, we continue to believe that Netflix is best placed to benefit from the growth of over-the-top media and the move away from scheduled television given its established market position. Netflix is increasingly becoming an international growth story and has a track record of delivering original, local programming with Indian production 'Sacred Games' a successful example. Netflix may have been a detractor in recent months but we continue have conviction in its ability to execute on the long-term opportunity.
Shoprite also detracted. South African consumer weakness has led to a difficult pricing environment for Shoprite and the company has issued persistently weak results. While the company does have an attractive long-term opportunity due to rising living standards in sub-Saharan Africa, our conviction in the company has been damaged by deteriorating fundamentals. Consequently, we reviewed the holding and decided to sell the position in August. Fellow South African consumer staples company Tiger Brands was also sold over the quarter. Tiger Brands' long-term prospects have, in our view, weakened significantly given ongoing margin pressure while also demonstrating inability to grow operating profit in recent years. As we struggle to see how this might change in the future we decided to exit the position.
We initiated a new position in ThermoFisher in July, a Massachusetts-based company which provides services and equipment to the health care industry and has recently expanded into drug manufacturing. ThermoFisher is the market leader in the supply of tools, systems, consumables and services into end-markets that are benefiting from a confluence of long-term secular trends. The world wants to get healthier, cleaner and safer and ThermoFisher is continually strengthening its ability to be a lead-provider of all of that. These are markets that require innovation and trust, and the scale, breadth and history of the company positions it for all of this. They have developed a best-in-breed merger and acquisition (M&A) function, and a system of operational excellence to make these companies better under its ownership. In such a diverse and fragmented global market the opportunity for capital deployment has many years to run. It has healthy but defendable margins, healthy free cash flow, a robust balance sheet and a valuation which we believe provides a solid path to long-term absolute returns. The purchase of ThermoFisher was funded by the sale of our position in FedEx. While FedEx's management continues to invest in and focus on meeting growing demand in the US package market, this is likely to mean further margin weakness, increasing capital expenditure and weaker free cash flow generation and as a result we decided to exit the stock.
The other stock to enter the portfolio over the quarter was Pernod Ricard, one of the world's leading spirits companies. Growing consumption and increasing brand awareness in developing markets makes premium spirits manufacturing an attractive industry for the long-term. Since the founding of the company via a merger in 1975, Pernod-Ricard has built a strong portfolio of brands across several categories, including whiskey, wine and, of course, pastis. The valuation appears attractive to us with the stock offering a decent free cash flow yield while there is additional potential upside from scope for margin improvement through savings across the group.
|Discrete year performance
||Janus Henderson Global Equity Fund (%)
||MSCI AC World Index (%)
||IA Global (%)
|1 year to 30/09/2019
|1 year to 30/09/2018
|1 year to 30/09/2017
|1 year to 30/09/2016
|1 year to 30/09/2015
* Source: Morningstar, at 30 September 2019, nav-nav, net income reinvested, net of fees, Class I Acc shares, in Sterling. Past performance is not a guide to future performance. Prices can go up and down and you may not get back the amount originally invested. NAV = net asset value.
Index - MSCI All Countries World Index
Index usage - Comparator
The MSCI All Countries World Index is a measure of the combined performance of large and medium sized companies from both developed and emerging stock markets around the world. It provides a useful comparison against which the Fund's performance can be assessed over time
Peer group benchmark - IA Global
Peer group benchmark usage - Comparator
The Investment Association (IA) groups funds with similar geographic and/or investment remit into sectors. The fund's ranking within the sector (as calculated by a number of data providers) can be a useful performance comparison against other funds with similar aims.
As ever, our strategy is to avoid making major macroeconomic calls and to instead focus “bottom-up” on finding companies with underappreciated growth and high barriers to entry at attractive valuations. Through purchasing undervalued securities that are exposed to strong secular tailwinds of growth, we aim to generate attractive returns over the longer term.
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