July unfolded in much the same manner as June, with the continued decline in US 10-year Treasury yields corresponding to a further narrowing of equity market leadership; the technology-heavy NASDAQ led the S&P 500, which in turn led its European counterpart. “Peak economic-growth” anxiety and delta variant concerns held the narrative and triggered a mid-month sell-off, with cyclical/value names the most eagerly shed, just before entering the bulk of the quarterly earnings reporting season. We are well-conditioned to expect outsized and often disproportionate share price reactions immediately after company results. Such is the weight of short-term positioning in markets, and the second quarter was no exception, exacerbated by thin volumes and a market struggling for direction. However, a notable observation – one supportive of our anticipation of a broader market even in the event of persistently low interest rates – was the impressive delivery from companies that the market had been quick to punish just a week or two earlier for having the wrong attributes at ‘factor’ or ‘basket’ level.

We were encouraged to see several stock specific attributes rewarded among the earnings results season noise and four out of the top five contributors to performance in July were from our “cyclical” or “value” positions: UPM Kymmene (paper, packaging and forestry products), ArcelorMittal (steel), Hugo Boss (apparel), and ASR Nederland (Insurance).

In July, our overall activity reduced the value tilt and beta of the portfolio through the trimming of early-cycle and industrial names along with the exit from positions in AIB and Santander (banks are always our most tactical of hedges against inflation and rising rates). Conversely, we initiated new positions in Legrand and Atlas Copco (defensive, quality and late-cycle attributes respectively) while adding to increasingly high conviction names such as Danone (a position initiated in June).

 

Beta Expand

This measures a portfolio’s (or security’s) relationship with the overall market or any chosen benchmark. The benchmark always has a beta of 1. A portfolio with a beta of 1 means that if the market rises 10%, so should the portfolio. A portfolio with a beta of more than 1 will be expected to move more than the market, but in the same direction. A beta of 0 means the portfolio’s returns are not linked at all to the market returns. A negative beta means the investment should move in the opposite direction to the market.

Cyclical stocks Expand

Companies that sell discretionary consumer items, such as cars, or industries highly sensitive to changes in the economy, such as miners. The prices of equities and bonds issued by cyclical companies tend to be strongly affected by ups and downs in the overall economy, when compared to non-cyclical companies.

Early cycle Expand

Early cycle: Generally, a sharp recovery from recession, as economic indicators such as gross domestic product and industrial production move from negative to positive and growth accelerates. More credit and easy monetary policy aid rapid profit growth. Business inventories are low, and sales grow significantly.

Factor investing Expand

Factor investing utilizes multiple factors, including macroeconomic as well as fundamental and statistical, are used to analyse and explain asset prices and build an investment strategy. Factors that have been identified by investors include: growth vs. value; market capitalization; credit rating; and stock price volatility – among several others.

Inflation Expand

The rate at which the prices of goods and services are rising in an economy. The CPI and RPI are two common measures.

Hedge Expand

Consists of taking an offsetting position in a related security, allowing risk to be managed. These positions are used to limit or offset the probability of overall loss in a portfolio. Various techniques may be used, including derivatives.

Value investing Expand

Value investors search for companies that they believe are undervalued by the market, and therefore expect their share price to increase. One of the favoured techniques is to buy companies with low price to earnings (P/E) ratios.

Yield Expand

The level of income on a security, 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.

References made to individual securities should not constitute or form part of any offer or solicitation to issue, sell, subscribe or purchase the security. Janus Henderson Investors, one of its affiliated advisor, or its employees, may have a position mentioned in the securities mentioned in the report.