Short Duration Bond Composite

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2Q18 Portfolio Commentary

Short Duration Bond Composite Investment Environment The Bloomberg Barclays 1-3 Year U.S. Government/Credit Index returned 0.28% in the second quarter. Within the Index, corporate credit outperformed government bonds. Front-end Treasury yields generally sold off in expectation of an interest rate hike by the Federal Reserve (Fed). Late in the period, the Fed delivered, raising its benchmark rate for the second time this year and reflecting near-term confidence in the U.S. economy. However, while the Fed upwardly revised its short-term economic projections, it did not lift its long-term expectations for the terminal rate or economic growth. The Treasury curve flattened, with the yield on the 2-year note ending June at 2.53%, up from 2.27% in March. Despite periods of volatility, driven by rising trade tensions and the formation of a eurosceptic coalition government in Italy, spreads on shorter-dated corporate credit finished the period near where they began.

Darrell Watters Portfolio Manager

Performance Discussion The Portfolio outperformed its benchmark, the Bloomberg Barclays 1-3 Year U.S. Government/Credit Index, for the three months ending June 30, 2018. Corporate valuations remain rich, rates are rising and risk is asymmetrically skewed to the downside at this late stage of the economic and credit cycles. We are concerned with debtfunded merger-and-acquisition (M&A) activity in the investment-grade space. Additionally, hedging costs for foreign buyers in the U.S. fixed income market increase as the Fed hikes, depleting return potential and weighing on demand. In light of this landscape, we reduced our corporate credit exposure and increased our emphasis on issues with shorter-dated maturities than the benchmark. We diversified our credit portfolio by adding to commercial paper as well as front-end and floating-rate securitized products, which we believe offer more attractive riskadjusted carry opportunities at this juncture. Our ability to out-carry, or generate more income than the benchmark, benefited relative results. This was particularly accretive in our out-of-index high-yield positions and our investment-grade corporate credit allocation. Our duration positioning, which was substantially shorter than that of the benchmark, also proved beneficial. On a corporate industry basis, our positioning in pharmaceuticals was a relative contributor. This was largely due to our out-of-index exposure to Teva Pharmaceutical Industries. The company is performing in line with our expectations, with recently appointed Chief Executive Officer Kåre Schultz driving significant operational improvements and delivering strong quarterly results. We continue to like the high-yield issuer, believing valuations are compelling given the company’s

Highlights • The Portfolio outperformed its benchmark during the quarter. • Our corporate credit positioning drove relative outperformance. • We remain concerned with rising rates, rich valuations and debt-funded consolidation activity. We believe it is prudent to limit credit risk at this point in the credit cycle, but we remain opportunistic. Page 1 of 3

Mayur Saigal Portfolio Manager

2Q18 Portfolio Commentary solid pipeline of generic and specialty drugs and strong management team. Additionally, we appreciate management’s commitment to paying down debt over the next few years.

No asset class, industry or individual issuer materially detracted from relative performance.

For detailed performance information, please contact a Janus Henderson Institutional team representative.

Outlook The Fed is delivering on rate hikes, and Fed officials forecast two additional increases this year. We expect that to come to fruition, with additional hikes in 2019. Supply/demand dynamics should also push U.S. rates higher with hedging costs deterring foreign buyers, while Treasury issuance compensates for unfinanced corporate and individual income tax cuts. We are incrementally positive on the economy, but we question the sustainability of growth long term, particularly once the impact of tax reform recedes. We also anticipate that long-term secular trends, such as demographics and the pervasiveness of technology, will ultimately keep inflation in check. That said, we expect yields to rise and the Treasury curve to flatten. We are, however, mindful that volatility has returned and that there are a number of geopolitical risks, including trade policy and the new eurosceptic coalition government in Italy, that could put rate hikes on pause and steer investors toward more defensive assets. We acknowledge that corporate fundamentals are strong, tax reform is beneficial and economic growth is decent, all of which can extend the economic and credit cycles, but we are definitely in the later stages of

both. Rates are rising and valuations are rich. Leverage is creeping higher as investment-grade issuers seek to buy growth to combat industry disruption. We expect debt-funded consolidation activity to continue to weigh on valuations. Demand is also tapering, due to a combination of new repatriation policies and higher hedging costs. Investment-grade corporates are struggling in the face of these technical challenges. In contrast, shrinking high-yield supply is supporting valuations, and we anticipate this credit market divergence to continue. We believe it is prudent to limit credit risk at this point in the cycle, but we remain opportunistic. We will continue to emphasize favorable riskadjusted carry opportunities in shorter-dated and floating rate spread products with minimal interest rate risk. Our analysts are also seeking issuers with fundamental improvement stories and the potential to generate outperformance as they progress through an upgrade cycle. We are monitoring the widening in investment-grade spreads for attractive reentry points. Given the asymmetric risk at this point of the cycle, we believe security avoidance is as important as security selection. This approach aligns with our core tenets of capital preservation and delivering strong risk-adjusted returns.

Representative Account Top Relative Contributors and Detractors Held for the Quarter Ended 6/30/18 Top Contributors

Average Weight (%)

Relative Top Detractors Contribution (%)

Average Weight (%)

Relative Contribution (%)

U.S. Treasury Notes/Bonds



Intesa Sanpaolo



Teva Pharmaceutical Industries Ltd



Huntington Ingalls Industries






JPMorgan & Co Inc



General Motors Financial



DPABS 2017-1A A2II



Citizens Bank NA/Providence



U.S. Treasury Bills



The holdings identified in this table, in compliance with Janus Henderson policy, do not represent all of the securities purchased, held or sold during the period. To obtain a list showing every holding as a percentage of the portfolio at the end of the most recently available disclosure period contact a Janus Henderson institutional team representative. Relative contribution is the difference between the contribution by ticker to the portfolio's performance versus that ticker's contribution to the benchmark's performance. It reflects how the portfolio's holdings impacted return relative to the benchmark. Cash and tickers not held in the portfolio are excluded.

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2Q18 Portfolio Commentary

For more information, please visit Past performance is no guarantee of future results. Discussion is based on performance gross of fees. Information relating to portfolio holdings is based on the representative account in the composite and may vary for other accounts in the strategy due to asset size, client guidelines and other factors. The representative account is believed to most closely reflect the current portfolio management style. As of 6/30/18 the top ten portfolio holdings of the Representative Account are: United States Treasury Note/Bond (3.96%), United States Treasury Note/Bond (2.18%), Charter Communications Operating LLC (1.94%), Kinder Morgan Inc/DE (1.77%), Citigroup Inc (1.72%), General Motors Co (1.71%), HCA Inc (1.59%), United States Treasury Note/Bond (1.58%), United States Treasury Bill (1.58%) and Ball Corp (1.56%). There are no assurances that any portfolio currently holds these securities or other securities mentioned. Portfolio holdings are as of the date indicated, and are subject to change. This material should not be construed as a recommendation to buy or sell any security. The opinions are as of 6/30/18 and are subject to change without notice. Janus Henderson may have a business relationship with certain entities discussed. The comments should not be construed as a recommendation of individual holdings or market sectors, but as an illustration of broader themes. For fixed income portfolios, relative contribution is calculated by rolling up securities by C-0618-17925 10-30-18

ticker and comparing the daily returns for securities in the portfolio relative to those in the index. Relative contribution is based on returns gross of advisory fees, and may differ from actual performance. Investing involves risk, including the possible loss of principal and fluctuation of value. Short Duration Bond portfolios, benchmarked to the Bloomberg Barclays US 1-3 Yr Government/Credit Index, seek as high a level of current income as is consistent with preservation of capital. The portfolios will maintain an average-weighted effective maturity of three years or less under normal circumstances and may invest in high yield/high risk bonds up to 35%. Effective January 1, 2005 the composite definition was changed to include only proprietary mutual funds and exclude sub-advised pooled funds. Effective January 1, 2009 the composite definition was expanded to also include subadvised pooled funds and separately managed institutional accounts. The composite was created in January 2003. Janus Henderson is a trademark of Janus Henderson Investors. © Janus Henderson Investors. The name Janus Henderson Investors includes HGI Group Limited, Henderson Global Investors (Brand Management) Sarl and Janus International Holding LLC. Janus Capital Management LLC serves as investment adviser. FOR INSTITUTIONAL INVESTOR USE ONLY / NOT FOR PUBLIC VIEWING OR DISTRIBUTION 388-42-29110 07/18

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