Global Perspectives: A research-based approach to investing in transformational growth themes

Lara Castleton: Hello and thank you for joining this episode of Global Perspectives, a Janus Henderson podcast created to share insights from our investment professionals and the implications they have for investors. I’m your host for the day, Lara Castleton, and today I want to talk about how to invest in transformational growth, which is part of the backbone of Janus Henderson’s equity franchise.

In today’s market, AI, Big Tech, Mag 7 are clearly dominant growth trends. But transformational growth isn’t just about following trends; it’s about truly understanding and doing the work behind themes that are shaping our world today and for years to come.

To break out of the narrative and explore what’s really driving change, I’m thrilled to be here with Brian Recht, Research Analyst and Co-Portfolio Manager on several U.S. growth strategies at Janus Henderson.

Brian, welcome to the show.

Brian Recht: Thank you. It’s great to be here.

Castleton: Very excited to have you. You’re coming up on your 10-year anniversary at Janus Henderson. So maybe just to start here, can you give me a little background of your history, why growth investing, and maybe why Janus Henderson was a fit for you?

Recht: I think being a growth investor at Janus Henderson is just the best job that somebody could have. So, my background is a little bit different than a lot of the folks here. I came from law school, so a bit more legal training. And to me, a lot of what you learn in law school sets you up to be a good investor, because law school and investing, a lot of what you’re doing is reading and researching and almost issue spotting. You’re triangulating different pieces of evidence to build a thesis, to build an investment memo, about why a company could be a great long-term investment.

At the same time you’re doing this, you’re anticipating what could go wrong, what could the other side, what could the other bear case, if you will, be. And it’s this thinking that you learn in law school that translates very well to being a good investor. And for me, being a growth investor fits my personality very well because I’m an optimistic person by nature. And what a growth investor does is, what we’re doing is, we’re giving capital to, and partnering with, some of the most transformational companies in the economy today. So, when we’re able to invest over a multi-year three-, five-, 10-year time horizon and provide these companies with capital, we’re able to use that capital to make the world a better place over time.

And lastly, we think a lot of the growth in the economy going forward is going to come from investing against what we call our transformational themes. Some of the largest themes we think about internally are AI, the move to the cloud, digitization, deglobalization, and finally healthcare innovation.

Castleton: Even today with these big tech names, the themes you mentioned I do think can kind of cut through some of that noise. So why is that such an important part of your investment process, finding out these themes, and how do they really get incorporated?

Recht: We think that the market has a tendency to underestimate the durability of long-term secular themes that are driving growth in the economy. And it’s these transformational themes that are driving the growth right now. It’s not government expenditures; it’s the idea of domestic capital expenditure, for example, driven by nearshoring and onshoring. CapEx in 2024 was about $8.1 trillion.¹ In 2025, we think it could approach $9 trillion. If I go back just five years, this number was sub-$6 trillion. So, we’ve seen a close to 10% CAGR [compound annual growth rate] over five years on domestic CapEx, and it’s these transformational trends that we think are going to be durable and continue into the future.

Castleton: I think what’s so exciting about the way that you think about growth investing is that, for our clients that we work with, it helps them take that longer-term approach and be not so caught up on where valuations are, where the economy is near term, because we are looking for investing in portfolios that are resilient over a long time.

So, I love that theme background, thematic background. You mentioned the five already, but I want to just kind of dive into cloud computing. So, that’s a theme that we’ve been hearing about for a long time, but I’m just curious on what you think about where we are today in the transition to the cloud and then just how you see that facing growth in the near future?

Recht: Cloud computing definitely a theme we spend a lot of time thinking about, researching and investing against, and we still think we’re in the relatively early innings here. So, when I think about the three largest cloud computing hyperscalers, they would be Amazon’s web services, AWS; you have Microsoft Azure; and then you have Google, GCP. And if I go back just about seven years now to 2018, the run rate, the annualized run rate revenue from these three companies was about $29 billion. Granted, cloud computing started a little bit before this, but 2018’s about the earliest we got reported numbers to get revenue estimates. So, 2018, about $29 billion.²

If I look at estimates for fourth quarter 2024, and these companies are reporting, we think the run rate revenue is going to be about $250 billion. So, in just seven years we’ve gone from $29 billion to $250 billion. And what’s even more exciting is that, despite this growth, estimates suggest that we’re still only about anywhere from 10% to 20% penetrated from on-premises to the cloud.³ So, what this means is we still have significant … many years of significant growth moving to cloud computing, and we still think … we’re still very excited about the investment opportunities we see.

Castleton: Wow. So, there’s still only 10% to 15% penetration seven years in, that’s an exciting opportunity set for the for the future. But then talk me through cloud transition. Obviously, those three companies, big major hardware providers of cloud … are there other areas of cloud, in the transition of cloud, that gets you excited on this theme over the long term?

Recht: Cloud’s an area where we think there’s many different ways to invest successfully. So, a few themes that we are excited about, obviously you have the hyperscalers, who we just discussed, but in addition to this, you have the chip companies like NVIDIA, who makes the GPUs that often go into these data centers. But in addition to NVIDIA, you also need to produce these chips. So, you have Taiwan Semiconductor, the company, the foundry, that manufacturers these chips.

And also exciting is, as these data centers continue to grow, and perhaps you go from what we call training to inference, and larger language models to perhaps smaller, more focused language models, we think you could evolve from a GPU, which is produced by NVIDIA, to what we call an ASIC [Application-Specific Integrated Circuits] chip, or a smaller-focus chip. And then we get to the, you know, in the data centers you need cooling, so you have a company like Vertiv, and you need power production, and Eaton. So there really is a full ecosystem supporting the cloud, the growth and movement to the cloud. It’s not just one or two different companies that you can invest against.

Castleton: So that brings up a good question then. There’s a lot of companies within the space. How do you go about choosing the right ones, particularly for this theme?

Recht: We start every investment conversation and every investment committee meeting with [the question], what is the competitive advantage of this company? Why is this company competitively advantaged? And more importantly, why is this competitive advantage going to grow and why is it durable today? So, when we’re thinking across the ecosystem – and you’re right, there is a lot of a buzz or hype about AI – we’re constantly having conversations with the management teams, we’re constantly going to conferences, we’re constantly going to trade shows, to understand what companies are going to be able to kind of maintain and increase their place in the ecosystem.

For example, Amazon, they have what is called their Trainium chip. This is the chip that is a custom chip that goes often into their data centers. And a lot of these components for the data centers are made by Marvell. And we had the opportunity to visit Amazon this past summer, and during the conversation with Amazon management teams, they talked significantly about their next generation Trainium chip, how excited they were for it, how much of an improvement it would be from the last generation, and how good of a partner Marvel was. So, it’s conversations like these that allow us to be confident in different players across the ecosystem as we continue this move to the cloud and the durability of this growth.

Castleton: That’s great. So, it’s looking at the competitive advantage, but not just do they have a competitive advantage today, what is the ability for that competitive advantage to maintain itself for the next coming years, if not even grow. It sounds like that’s how you’re framing this.

Recht: Absolutely. And when we think about that, obviously our investment process is quite disciplined. So, we always say we don’t start an investment with valuation, but you can end an investment process with valuation. So, we look at the company today, and then based on all our research, we model out every company on a five- to 10-year time frame to see what the free cash flow generation is going to look like over these five to 10 years. And we’re able to discount those cash flows back to hit our hurdle rate, which we talk about internally. So, for a company like Marvell, they had very little AI or ASIC revenue if we look historically. But based on our research, we’re able to gain confidence in the significant acceleration from this revenue from their custom silicon, and we’re starting to see that come through, which is really exciting.

Castleton: That’s great, thank you. So, as we wrap up here on the cloud computing theme, are there any non-consensus views that you and the team hold as it pertains to cloud?

Recht: So, I don’t know if it’s non-consensus per se, but I think we’re still confident in the durability of the growth of this theme. You know, we, we talked about earlier that the cloud has, you know, that the three largest hyperscalers have about $250 billion in run rate revenue, which is only … even if you think that’s 20% penetrated, that assumes there’s another, you know, $1.5 trillion dollars of spend that could ultimately move to the cloud going forward.

And on top of that, there’s been a lot of conversation amongst investors about the return that folks are seeing on this AI spend or spend in the cloud. And we’re confident we’re starting to see the return on this, the spend from the move to the cloud and AI chips, be it across the board, from software applications to advertising algorithms from some of the largest digital players to cost efficiencies we’re seeing across the companies. We think this return is going to come through, and when you combine this with accelerating innovation from companies like NVIDIA, we are still confident in the durability of this theme.

Castleton: So, where do you see digitization today and then why is it a transformational growth theme even for the next coming five years?

Recht: What’s so exciting to us about digitization is, is the combination of the fact that we are still in what we believe is the relatively early innings, combined with the diversity of theme. Because we think of digitization as everything from the digitization of commerce from traditional brick and mortar commerce to online e-commerce to the digitization of payments from traditional cash payments to more carded payments.

So, when I think about, you know, starting with the digitization of commerce, when I think about e-commerce, 15 years ago in 2010, e-commerce was about $175 billion of annual spend in the US a year, or 6.5% of total retail spend. Today, while it’s grown significantly, it’s still only between 22% and 23% of online spend.⁴

If we look to other countries as a benchmark, often Asian countries, we see e-commerce significantly more penetrated there than it is in the U.S. So, while we’re at about 22% to 23% of spend today, or about $1.2 trillion in annual ecommerce spend, we still think there’s significant room for this to grow kind of over the next five, 10, 20 years.

Castleton: That’s amazing that we’re still so low in that penetration cycle with e-commerce. And is that the similar story within the payments realm as well?

Recht: Card payments is a bit more penetrated than e-commerce, but it’s surprisingly less penetrated than some folks may think. If we look at total card spend, if we think of total tender spend, ex China, there’s about $44 trillion – big number, $44 trillion, of potential of potential spend that could be on a card. But if I look at the actual amount of dollars that’s spent on a card, it’s only between $20 and $25 trillion. So, call it $23 trillion out of $44 to $45 trillion.⁵ So, the amount of spend on cash, on debit card, on check is still a lot more than some people would think.

Castleton: Wow, yeah, I do think I may admittedly be the only one in my generation left that knows how to actually write a check, but it sounds like there’s still a lot more room to go even in that.

So back again to how do you pick the right companies within this theme … it’s a wide, growing theme and it touches a lot of areas within economy. How do you guys go about picking the right ones?

Recht: So, I think what jumps out to us with the theme of digitization is just how global it is in nature. So, while the U.S. is 22% to 23% penetrated on e-commerce, if we look to some developing countries, we see penetration still significantly lower. So, for example, Latin America penetration of online commerce is still in the low- to mid-teens, and with e-commerce penetration still so low, we see a significant runway for growth there.

Castleton: It seems that looking at the penetration of this theme is the starting point, and then also, again, maintaining – where is the competitive advantage within several companies and how much will that grow going forward.

So, last thing I want to ask you as it pertains to digitization, anything that investors should really be thinking about particular to this theme?

Recht: The global nature of this theme really means that you have to closely monitor consumer health both in the U.S. and consumer health globally. You have to look at global supply change, because … for shipping. You have to look at everything. You know, you have to look at tariffs, you have to look at local tax rates, just a lot of data points we continue to monitor as we think about global consumer health and the health of e-commerce and payments in general.

Castleton: Great. Well, thank you so much, Brian.

As every facet of our lives increasingly transitions to digital, I think I speak for our listeners by expressing how much this theme hits home. We hope this provided you a framework to think about these growth companies in an age dominated by AI, Mag 7, and Big Tech.

For more insights from Janus Henderson, you can download other episodes of Global Perspectives wherever you get your podcasts, or visit our Insights page at janushenderson.com. I’ve been your host for the day, Laura Castleton. Thanks. See you next time.

¹ Board of Governors of the Federal Reserve System (US) via FRED^®, as of 12 December 2024.

² Company reports, Janus Henderson Investors. As of February 2024.

³ Company reports, Janus Henderson Investors analysis. As of January 2024.

⁴ U.S Department of Commerce, U.S. Census Bureau, as 19 November 2024.

⁵ Mastercard Investment Community Meeting, 13 November 2024.