Nick Schommer, Portfolio Manager on the Janus Henderson Contrarian Fund, grew up in Colorado, home of Janus Henderson’s U.S. headquarters. A graduate of West Point and a decorated veteran who received a Bronze Star Medal for exceptionally distinguished service during Operation Iraqi Freedom, Nick has certainly taken the road less traveled over the course of his personal and professional life. In this Q&A, he discusses how his background has influenced his investment approach – particularly as it relates to identifying misunderstood and underappreciated investment opportunities.

What does it mean to be a contrarian investor?

I have this Peter Thiel quote sitting on my desk: “The most contrarian thing of all is not to oppose a crowd, but to think for yourself.” I think that’s really how we’ve managed the strategy successfully for a number of years now and generated positive returns over time. It’s not just opposing the market, because there is a lot of value in market sentiment, but rather using independent, unconstrained thinking to identify differentiated opportunities.

What about your background has influenced the way that you invest?

I think my background has helped me tremendously because it is a different road than many of my peers have followed and it has encouraged independent thought and a global perspective. I didn’t grow up anywhere near Wall Street; I grew up in a town of 70,000 in northern Colorado. I went to a military academy where my fellow students came from all 50 states, then I served in the Army for five years alongside people from all around the country with a wide range of backgrounds. It’s all too easy to become very insular in terms of who we surround ourselves with these days, so I think having that global perspective is increasingly important.

Discipline is something that was instilled in you in the military and has become part of your personality. To me, that’s your greatest strength as an investor. What would you say your greatest strength is?

I think discipline also speaks to temperament. I’m a pretty calm person: the highs aren’t too high and the lows aren’t too low. I think being able to keep your emotions in check while investing is important, particularly during challenging times. March, April and May of last year were difficult periods for all of us, and certainly for the markets, but being able to keep that calm perspective, and having the temerity and willingness to invest amid the volatility, has been beneficial.

I think that’s especially true when you run a more eclectic portfolio like the Contrarian Fund. Why should an investor consider having exposure to a portfolio like Contrarian in their portfolio, and how does it complement other holdings that they may have today?

The Contrarian Fund is not going to look like your traditional large-cap stock fund or S&P 500™ Index fund. In fact, the portfolio will look much different than most funds available to investors. As I stated earlier, we’re not just opposing the crowd to oppose the crowd; we’re being very thoughtful in our portfolio construction to find ideas that others may overlook. Those independent ideas can drive performance over time and create diversification that can complement an investor’s portfolio.

What kind of companies are you looking for in your portfolio?

On an individual stock basis, we’re looking to invest in durable businesses that trade at a significant discount to what we believe they’re worth. These are businesses that have the potential to grow over time and, hopefully, management teams that are aligned with us as shareholders. The reason we’re looking to invest in durable businesses is we want to capture compounding growth that pairs with the growth of the company over time.

We seek value through three different opportunities in the portfolio. The first is what we call the misunderstood business models, which consists of companies that we think the market, in general, does not comprehend the quality of the business model and the company’s potential profitability. This category is really the core of our strategy and the execution of our management teams that drive value over time.

The second value source in the portfolio is what we call undervalued assets. These are more traditional value stocks where the market reevaluates the company or stock, driving capital appreciation over time.

The last category, which represents about 10 to 15% of the portfolio, is comprised of what we call underappreciated growth companies. These are companies where it’s the duration of the growth and the long-term free cash flow per share of the company that we believe is undervalued by the market.

The nice thing about this approach is that it helps create an eclectic, value-oriented portfolio where the different sources of risk and return can dampen volatility.

Can you give us an example of a company that Wall Street, as a whole, perhaps misunderstands?

I can give you a real-life example: I just took a sip of water from an aluminum can. Five years ago, I probably would have been holding a plastic water bottle. And that plastic bottle may have been recycled once, but hopefully not thrown into a landfill or an ocean somewhere. This is all to say that, as society has become more focused on sustainability, our largest holding in the portfolio is a company called Crown Holdings, and they make aluminum cans.

There are two benefits of Crown’s business model that we were early to identify ahead of the market. One is that an aluminum can is a better package for holding substrates because light doesn’t pass through it, which means the integrity of the product inside is maintained. The other benefit is the growing trend around sustainability. Aluminum is infinitely recyclable, which means it can continue to be reused because the quality of the package doesn’t degrade over time. That’s not the case for plastic or paper, which you may be able to recycle once but ultimately require you to discard due to degradation.

In terms of interest in a company, you mentioned sustainability as part of their business model is a factor. How do you think about environmental, social and governance (ESG) considerations as you consider buying particular companies in your portfolio?

ESG is not new to us; it has always been part of our investment process, which starts by assessing the durability of the company’s business model. And if you want a durable business model, you can’t invest in a company that is dumping chemicals in a river or treating its employees poorly.

For example, we don’t have any oil and gas exposure in the Contrarian strategy, and this is based on our belief that we’re going through a generational transformation in terms of how we consume power. We’re moving from a fossil fuel based economy to an electric grid based economy. This is one of the largest capital cycles taking place in society today, and we want to invest in front of that trend.

How do you avoid things such as oil and gas companies in your value-oriented strategy?

I think when people hear the word value, they tend to think of how Warren Buffett would’ve defined it 50 years ago. Today, we have an intellectual capital based economy where traditional value factor metrics just aren’t that effective. We see value in a number of different ways. And it’s not something you can figure out just by running a screen. There’s an art to it, and there’s some creativity that comes into play. While oil and gas may look attractive using traditional valuation metrics – or at least it did earlier this year – when you consider the long term declining end market as we find new sources and uses of energy, the business is not attractive. Additionally, in a commodity oriented sector, it is hard for business models to be differentiated.

You’ve already mentioned the misunderstood business model. Can you tell us about a company that is potentially undervalued?

These tend to be more traditional value stocks in the portfolio, where it’s a re-reading of the company. One example is a company we’ve increased our exposure to during the pandemic, Freeport-McMoRan, which is one of the largest copper miners in the world. I discussed our societal transformation in terms of moving toward an electric-grid economy. One of the key inputs in that transition is copper, which is one of the most electrically conductive materials.

To illustrate, an electric vehicle requires four times more copper than an internal combustion engine vehicle. Renewable power grids such as solar and wind-based require four times the amount of copper than a traditional fossil fuel-based grid. So we have a clear demand picture for the next decade-plus as this transformation takes place. At the same time, supply has been extremely limited. Copper was one of the materials that was in high demand during the China fixed-asset investment cycle of the early 2000s. Unfortunately, many of the mining companies’ balance sheets incurred a lot of damage during that time as they took on a great deal of financial leverage through M&A activity. Those companies have spent the past decade repairing their balance sheets and paying off debt holders, but that has come at the expense of no new mines being built.

As a result of the pandemic, we’re seeing a pace of change that’s perhaps greater than it’s ever been. How do you look forward to where opportunities and risks in the market exist?

I think there are a couple of different ways to think about that question. One, people who own more traditionally oriented growth funds are benefiting from the pace of change because their companies are leading this digital transformation that’s taking place in society. However, you also have to think about what you’re willing to pay for those assets. Because even those these trends appear to be firmly in place, at some point the businesses are going to have to grow into the stock price in the stock multiple.

However, we don’t always have to stay on the side of the market disruption, either. About one-third of the market consists of companies whose business models are increasingly in doubt, and they’re being disrupted by those growth companies that are creating the disruption in society. So we seek out the companies whose business models are durable enough that the digital transformation is not likely to have a meaningful long-term impact.

You have the freedom to invest in companies across the market cap spectrum – large companies all the way down to small companies. Why do you think that latitude creates an advantage for investors?

What’s important to realize is that we’re a business model investor first, but we have the flexibility to go to where we believe the value opportunities exist in the market. We think this gives us an advantage because we’re not limited to only looking at companies with a certain top-line growth rate. The core of our strategy will always be in identifying these misunderstood business models, and it doesn’t really matter if it’s a value market or growth market or if GDP is going to grow 8% this year or 2%. Because we believe those misunderstood business models will create value over time.

Considering the dynamic nature of the pandemic, what is your outlook for the economy and markets going forward?

One of the most contrarian opinions to hold over the past three or four years has been being positive on equity markets. As I sit here today, even considering the challenges of the past year, I’m still constructive on the markets.

In terms of the economy, there are factors that can impact it such as the Delta variant of COVID-19, but we’ve seen a V-shaped recovery on the back of a health care solution to the pandemic. We’ve seen GDP growth reach levels in 2021 that we haven’t seen in years. A lot of people tend to equate what we’re experiencing now with the financial crisis of 2008 because that was the last recession they remember. But the current situation differs quite dramatically.

Coming out of the 2008 financial crisis, GDP growth was never above 3% in a given year and the consumer savings rate was very low. Today, we have one of the highest consumer savings rates in history, and that’s due to the fact that we’ve had strong home price appreciation and equity market appreciation. The direct stimulus checks also enabled consumers to make it through this very difficult period of time. At the same time, there is a lot of pent-up demand following the COVID lockdowns, and people have built up the savings to be able to fund that spending that is restarting as the economy reopens. That’s a very healthy backdrop for the economy. We also continue to see fiscal stimulus, with a $1.9 trillion stimulus package introduced earlier this year as well as child tax credits being made or saved by families.

Now that you’ve told us a little bit about what you anticipate from the economy and the stock market going forward, how do you anticipate your portfolio performing within that environment?

There are numerous news organizations that make their money by creating noise, and that noise can influence the way people approach investing in the markets. But for investors who are focused on their long-term goals and needs, we believe being invested in the stock market offers the best opportunity for capital appreciation. However, trying to time the market isn’t going to help returns; the goal of investing should be to capture the compounding growth potential that is associated with durable business models over time.