Nick Watson, fund manager for the UK-based multi-asset team, concludes his ‘match report’ for the performance of Janus Henderson’s Multi-Asset Core Income range in 2018.

So how did we perform?

The Janus Henderson Multi-Asset Core Income range delivered very competitive total returns and peer group-leading risk adjusted returns through 2018, but were still down in negative territory in absolute terms. So overall, a reasonable picture of performance.

 

Chart 1: Core funds dampen volatility

Source: Bloomberg as at 01 January 2019

 

The core range dampened the volatility and drawdowns of wider markets, with the cautious and active outlook established at the start of 2018 playing out overall.

Our focus on well run businesses with stable income streams saw our funds lag in the first half of the year, which generated performance questions. However the more markets rallied and more unfashionable high quality income paying stocks became, the greater our confidence solidified in the view that a more volatile market dynamic was getting ever closer.

Favouring active managers within Investment Grade and High Yield Bonds hurt as spreads tightened to historically expensive levels in the first half, however these managers more than made back their modest upside capture by protecting capital in the sharp sell off that bonds experienced in November and December.

 

Chart 2: Active managers protecting in volatile markets

Source: Bloomberg as at 01 January 2019

 

Alternatives did ‘what they said on the tin’ and remain an important element of the Core Income funds for their uncorrelated income streams, differentiated return profiles and risk diversification benefits. Infrastructure and Renewables exposures gradually delivered performance over the course of the year, enabling us to take some profits by selling the top performers.

 

Chart 3: As advertised – alternatives deliver diversification benefits

Source: Bloomberg as at 01 January 2019

 

What are we looking for in 2019?

Unsurprisingly our 2019 outlook is not dramatically different from our views this time last year, however the negative performance from 2018 suggests that 2019 should offer a more positive total return. Volatility will likely remain at similar levels, which feels painful but is actually only at long term averages.

More volatility generated opportunities for the active manager, both in terms of stock selection and asset allocation, to seek out returns by adding risk in dips but also to protect capital by selling into rallies. Therefore we retain our deliberate stance to be active.

As we have seen in the first three weeks of the year, one such rally has already started with excellent performance from US equities and US High Yield. It almost looks like December didn’t happen! This is one such rally that we are nervous about chasing and a good example of a chance for capital to be rotated into other assets that have not rallied +10% in one month.

 

Chart 4: Mind the rally – but opportunities abound for active managers

Source: Bloomberg as at  01 January 2019

 

Alongside this volatility and lower but positive return outlook, we retain our bias to high quality income paying stocks. These areas remain unpopular, their generally low beta will be important for risk adjusted returns and a starting yield of anywhere from 4% to 7% is going to be a major contributor to returns in 2019.

So the message for 2019 is not exciting. It is about the Core Income funds sticking to their established and tested approach with a focus on active management and quality income generating assets, in a year that is expected to be challenging but potentially modestly positive for markets.