Please ensure Javascript is enabled for purposes of website accessibility Greater market rationality favours absolute return strategies in 2025 - Janus Henderson Investors - corporate
Find your local site

Greater market rationality favours absolute return strategies in 2025

Portfolio Manager Luke Newman provides some insight into the prospects for absolute return strategies in 2025, addressing some of the key themes, opportunities and risks he sees for investors to consider.

Video Player is loading.
Current Time 0:00
Duration 3:32
Loaded: 0.00%
Stream Type LIVE
Remaining Time 3:32
 
1x
  • Chapters
  • descriptions off, selected
  • en (Main), selected
Luke Newman

Luke Newman

Portfolio Manager


Dec 17, 2024
4 minute watch

Key takeaways:

  • The outlook for absolute return in 2025 is cautiously optimistic, driven by strategic investment opportunities in a changing interest rate environment, with potential risks stemming from new policies enacted in the US and Europe.
  • In our view, this illustrates the importance of strategic stock selection, and highlighting the need for more flexible strategies to help mitigate unforeseen market shifts.
  • We see promise in areas poised to capitalise on emerging themes, including technology and health sector innovations, through a balanced approach to long and short investments.

What themes do you expect to most influence absolute return strategies in 2025?

Looking ahead to 2025, thematically, we think the biggest impact will continue to be the new market regime we have been in for the last couple of years. Greater dispersion, the importance of valuation as a factor again, all stem from the movement away from interest rates at historically low (zero or near-zero) levels. When we look at the policy implications of political events in the US, UK, France and Germany in particular, there is greater evidence that sticky inflation will remain, and means that central banks will not be able to reinstate ultra-loose monetary policy.

This is great news for stock pickers, particularly within absolute return or equity long-short strategies, because we have rationality on both the long and the short side, to be able to reflect our investment views.

Where do you see the most compelling opportunities?

Over recent weeks and months, most of our focus has been on the US, within the long book, looking to take advantage of some of the strong share price moves we have seen. But notwithstanding that, it is very easy to deploy capital in the UK and Europe on the long side. This again stems back to the greater rationality, greater valuation awareness we have seen, and we expect it to continue to be a strong contributor to performance looking out to 2025.

On the short book, financial leverage as a thematic should remain, and distressed balance sheets, and those businesses with high requirements for future capital should again receive our focus. In addition, we are spending a lot of time looking at second-order effects – thematics like AI deployment, and also the obesity GLP-1 drugs, to understand where the pressure points will be, and where we may see some disappointment, in terms of future profitability and cash flows.

What are the most underappreciated risks?

One of the advantages of running an absolute return, or equity long-short strategy is that we generally have the toolkit to be able to adjust, distil and protect against most macroeconomic risks that we foresee.  But from an equity market perspective, one area we are spending a lot of time on at the moment is the potential for bond markets, and in particular US bond markets, to start demanding more question from the administration around the financing and spending of tax cut plans.

If we do start to see some concerns creeping in to the Treasuries market, with potential for yields to head higher again, we would expect to see the US dollar come under pressure, and potentially puncturing this equity bull run that we have been seeing at the moment.  So that is an area that we think needs a lot of attention and is certainly a big area of focus for us at the moment.

What is the most important takeaway for an investor allocating to absolute return in 2025?

For our investors we think the reappraisal of absolute return or liquid alternatives, or equity long/short within their own portfolios, is front of mind. We have entered the best environment for a decade for equity long/short, again stemming from this return to rationality we have seen, with normalisation of financing rates.

Past performance does not predict future returns.

Absolute return investing: A type of investment strategy that seeks to generate a positive return over time, regardless of market conditions or the direction of financial markets, typically with a low level of volatility.

Bonds/bond markets: A bond is a debt security issued by a company or a government, where the investor buying the bond is effectively lending money to the issuer of the bond. Bonds offer a return in the form of fixed periodic payments (a ‘coupon’), and the eventual return at maturity of the original amount invested – the par value. There is a large market for bonds in their varying forms.

Bull market/bull run: A market where stocks are rising in value, encouraging investors to buy into the market, potentially leading to further market gains.

Cash flow: The movement of cash in and out of a business from its activities and expenditure.

Dispersion/stock dispersion: The range of returns for a group of stocks. Higher dispersion is generally considered to be a better environment for investors focused on stock selection, given the greater potential to differentiate performance from any particular benchmark.

Distressed balance sheets: The balance sheet is the financial statement that summarises a company’s assets, liabilities and shareholders’ equity at a particular point in time. Each segment gives investors an idea as to what the company owns and owes, as well as the amount invested by shareholders. A distressed balance sheet is one where income or revenues are not sufficient to cover costs or debts.

Equity long/short: An equity portfolio that can invest in both long and short positions. The intention is to profit from combining long positions in assets in the expectation that they will rise in value, with short positions in assets expected to fall in value. This type of investment strategy has the potential to generate returns regardless of moves in the wider market, although returns are not guaranteed.

Financing rates: The cost of borrowing money.

Inflation: The rate at which the prices of goods and services are rising in an economy. The Consumer Price Index (CPI) and Retail Price Index (RPI) are two common measures.

Leverage: The use of borrowing to increase exposure to an asset/market. This can be done by borrowing cash and using it to buy an asset, or by using financial instruments such as derivatives to simulate the effect of borrowing for further investment in assets.

Liquid alternatives: Alternatives are investments that are not included among the traditional asset classes of equities, bonds or cash, such as property or infrastructure, hedge funds, commodities, private equity, art, derivatives, or cryptocurrencies. Liquid assets are those that can be easily traded in the market in high volumes, without causing a major price move.

Long book: The part of a long/short investment strategy that deals with assets that are bought with the intention of holding over a long period, in the expectation they will rise in value.

Long investing (long position): A security that is bought with the intention of holding over a long period, in the expectation that it will rise in value.

Macroeconomic risk: Large-scale political or economic hazards that can adversely or favourably affect the performance of investments.

Monetary policy: The policies of a central bank, aimed at influencing the level of inflation and growth in an economy. Monetary policy tools include setting interest rates and controlling the supply of money. Monetary stimulus refers to a central bank increasing the supply of money and lowering borrowing costs. Monetary tightening refers to central bank activity aimed at curbing inflation and slowing down growth in the economy by raising interest rates and reducing the supply of money.

Share price: The price to purchase (or sell) one share in a company, not including fees or taxes.

Short book: The part of a long/short investment strategy that deals with assets that are bought in the expectation that they will fall in value, with the intention of buying them back for less when the price falls.

Short investing (short position/shorting): Fund managers use this technique to borrow then sell what they believe are overvalued assets, with the intention of buying them back for less when the price falls. The position profits if the security falls in value. Within UCITS funds, derivatives – such as CFDs – can be used to simulate a short position.

Treasuries/US Treasury securities: Debt obligations issued by the US government. With government bonds, the investor is a creditor of the government. Treasury Bills and US Government Bonds are guaranteed by the full faith and credit of the United States government. They are generally considered to be free of credit risk and typically carry lower yields than other securities.

Yield: The level of income on a security over a set period, typically expressed as a percentage rate. For equities, a common measure is the dividend yield, which divides recent dividend payments for each share by the share price. For a bond, this is calculated as the coupon payment divided by the current bond price.

Luke Newman

Luke Newman

Portfolio Manager


Dec 17, 2024
4 minute watch

Key takeaways:

  • The outlook for absolute return in 2025 is cautiously optimistic, driven by strategic investment opportunities in a changing interest rate environment, with potential risks stemming from new policies enacted in the US and Europe.
  • In our view, this illustrates the importance of strategic stock selection, and highlighting the need for more flexible strategies to help mitigate unforeseen market shifts.
  • We see promise in areas poised to capitalise on emerging themes, including technology and health sector innovations, through a balanced approach to long and short investments.