Janus Henderson: Focused on stocks with sustainable competitive advantages
In this Q&A, Nick Schommer, Co-Portfolio Manager for the Concentrated Growth Strategy, introduces his approach to investment. Together with Doug Rao, Nick manages the Janus Henderson US Forty Fund as part of the strategy. The fund contains a small number of stocks that the managers aim to hold for a relatively long time.19.03.2018 | 12:09 Uhr
The portfolios focus on the competitive advantages of secular growth companies. That defines our thinking. Looking at 2018, we have a positive view on the global economy, which began to accelerate in 2017 and looks to be on a sound footing. Although secular growth companies tend to do well in periods when the economy is not strong, we also expect them to do well in a firmer economic environment.
We are looking largely at secular growth themes in the economy. At the margin, we have increased our exposure to financials slightly because we believe they are likely to benefit from this improving economy and from any interest rate increases in 2018.
Q. Do your concentrated portfolios focus on any particular themes?
Yes. One is the transition to a digital economy. In retail, it would be the shift to e-commerce. In payments, it is the move to digital electronic payments. In media, we are seeing a transition from traditional TV and print advertising towards the internet and mobile advertising. Another theme is the transition from on-premises software to cloud computing. That includes software providers as well as firms specialising in hardware, including Google, Microsoft, and Amazon Web Services. They provide the infrastructure to enable cloud computing. More generally, we see opportunities in the shift to greater connectivity and firms that are facilitating that connectivity.
Q. What characteristics do you look for in a company?
We begin with the business model before we look at valuation or growth opportunities. We seek to identify the competitive advantages around the business that could enable a company to earn excess returns and enjoy their period of above-market growth for a long time. These competitive advantages could include network effects, cost structure, distribution, brand, technology or intellectual property.
Q. What makes the Janus Henderson concentrated growth strategy unique?
The strategy operates concentrated portfolios, and focuses on secular growth opportunities in the economy. The idiosyncratic nature of our holdings can allow us to find growth in non-traditional growth areas. We know our businesses really well, and at roughly 40 holdings*, we believe we are seeing the benefits of diversification without getting “deworsification” from owning ideas that are not our top ideas. It is not watered down.
Q. How do you manage volatility and risk in your portfolio?
We do not view them as the same. It is true that concentrated portfolios can have greater volatility, but we think of risk as the permanent loss of capital. That is why we begin with the business model. When business models unwind and the terminal value disappears people are likely to experience loss of capital. And that loss of capital is how we think about risk. We are cognisant of volatility, but we do not manage to it. We are much more focused on that business model risk.
* as at the time of publication in February 2018. Number of stocks is for illustrative purposes; please note that exact number of holdings may vary over time.