Janus Henderson Tactical Income (IOF0145AU) Report & Performance

The Janus Henderson Tactical Income Fund (Fund) returned 0.61% (net) and 0.65% (gross). The Fund outperformed the 50% Bloomberg AusBond Bank Bill; 50% Bloomberg AusBond Composite 0+ Yr (Benchmark) by 0.16% (net) in July, which returned 0.45% over the month. The Fund continues its outperformance, beating the Benchmark over the longer term including by 2.61% (net) over the year, and 1.08% (net) since inception per annum.

We hold an overweight position in semi government bonds, mostly via New South Wales, as well as overweight swap yields over government bond yields. The fall in yields benefitted these positions while on a relative basis to government bonds the spread was broadly unchanged. It was a good month of outperformance from credit, returns benefitting from both additional income and some spread tightening. Overweight credit allocations were a positive contributor as a result.

With markets adjusting expectations for a gentler path for policy tightening and slowing growth, this aided higher beta credit sectors across loans, emerging market debt, high yield and hybrids, with all performing well. We remain very modestly allocated across these sectors as market sentiment remains fickle and the impacts of policy tightening are slowly feeding through, with asymmetric downside in our view. Australian Tier 2 continued to exhibit strong outperformance from spreads and income and has been our preferred substitute for lower quality sectors.

The Fund had another strong positive return in this month, outperforming its Benchmark significantly. This is on the back of a strong FY23 return for the Fund which delivered 4.88% (net of fees) outperforming bonds, cash and credit floating-rate note (FRN) market benchmarks over the past 12 months.

Turning points in policy can be tricky for markets to price, but we continue to remain active. We have added duration at much better yield levels. After beginning April with a slight negative duration position, we have started to see some value presented in bond yields and accelerated repositioning late in June moving to 1.6 years by the end of July.

More recently, the Fund has also been profit taking into the rally in spread sectors. We actively moved overweight in bank credit, longer semi government positions, and swap rate positions during 2022 when spreads were cheap and elevated well above average. These positions have contributed strongly to performance over the last few months. At this juncture we remain overweight but have moderated positioning as we look forward for further opportunities and keep powder dry.

With higher yields on offer, returns in the Tactical Income Fund should continue to move higher by virtue of its starting point and with successful active management.

The Janus Henderson Tactical Income Fund (Fund) returned 0.34% (net) and 0.38% (gross). The Fund outperformed the 50% Bloomberg AusBond Bank Bill; 50% Bloomberg AusBond Composite 0+ Yr (Benchmark) by 1.17% (net) in June, which returned -0.83% on the month. The Fund continues its outperformance, beating the Benchmark over the longer term including by 2.77% (net) over the year, and 1.07% (net) since inception per annum.

Our overweight positioning in semi government bonds, mostly via New South Wales, as well as overweight swap yields over government bond yields both were positive contributors to return and alpha as spreads continued to tighten.

It was a good month of outperformance from credit, returns benefitting from both additional income and some spread tightening. Overweight credit allocations were a positive contributor as a result, and we continued to actively take profit on active positions added during FY23 that have moved from cheap back towards fairer valuations.

In a stronger month for credit loans, emerging market debt, high yield and hybrids all performed well. We remain very modestly allocated across these sectors as conditions remain choppy, with asymmetric downside in our view. Australian Tier 2 also exhibited outperformance from spreads and income and has been our preferred substitute for lower quality sectors.

A positive return in June capped off a strong FY23 return for the Fund which delivered 4.88% (net of fees) outperforming bonds, cash and credit floating-rate note (FRN) market benchmarks over the past 12 months. Performance is pleasing when assessed against the fact that bond markets underperformed cash again in FY23, after a horrendous FY22. Bond markets also delivered a majority of negative monthly returns over the last 12 months with the largest monthly drawdown being -2.5%. Conversely, the Fund delivered investors a majority of positive monthly returns with less drawdown.

Turning points in policy can be tricky for markets to price, and over the FY we saw the bond market exhibit extremely volatile monthly returns. The Australian bond market returns were negative six times over the course of the past year, with a return range of -1.36% to -2.54% each time it occurred even with higher income yields. The results delivered by the Tactical Income Fund are a good reminder of the value of active duration management and credit selection, providing outperformance and a smoother journey for investors across the year.

The decisions to add/take away duration are highly complex and challenging. Over the past 12 months we have managed through the largest duration adjustments since the Fund’s inception. The Fund had almost 4 years interest rate duration at the start of FY23, then trimmed half of that taking profit on one of the strongest bond market rallies seen in years. This year, the Fund moved close to 0 years duration after Credit Suisse/SVB and whilst optically it was a nonconsensus strategy, the positioning was vindicated as it protected investors capital against the bond market which has sold off heavily since then as three- and 10-year government bond yields ended the quarter 110bps and 73bps higher. The Fund delivered 1.23% (net) versus the bond market (Bloomberg AusBond Composite 0+ Year Index) falling by -2.95% over the quarter. Now that the Fund has maintained capacity, we are actively adding duration at much better yield levels. After beginning the quarter with a slight negative duration position, we have started to see some value presented in bond yields and accelerated repositioning late in June moving to 1.4 years.

The Fund has also been profit taking into the rally in spread sectors. We actively moved overweight in bank credit, longer semi government positions, and swap rate positions during 2022 when spreads were cheap and elevated well above average. These all added strongly to the FY result via higher income and capital gains from spreads tightening. At this juncture we remain overweight but have moderated positioning as we look forward for further opportunities.

The future looks challenging from a number of fronts, we remain guarded on taking excessive low-quality risks favouring actively managing better credit quality assets with plenty of powder dry to add exposure into any weakness.

The Janus Henderson Tactical Income Fund (Fund) returned 0.32% (net) and 0.35% (gross). The Fund outperformed the 50% Bloomberg AusBond Bank Bill; 50% Bloomberg AusBond Composite 0+ Yr (Benchmark) by 0.78% (net) in May, which returned -0.46% on the month. The Fund continues its outperformance, beating the Benchmark over the longer term including by 1.05% (net) over the year, and 0.99% (net) since inception per annum.

Throughout the month we continued to favour overweight positions in semi government bonds, mostly via New South Wales. This position was increased opportunistically during March volatility when spreads became more elevated. Spreads have rallied about 15bps since then and during May we reduced overweights prior to the Victorian government budget announcement, taking profit and contributing positively to performance. Swap linked positions also outperformed government bond yields and overweight positioning added alpha as spreads continued to tighten.

Overweight credit allocations were a positive contributor, benefiting during the month mainly from additional income and constructive spread movements.

Higher yielding credit sectors largely were able to benefit from additional income in the more stable credit conditions. European Loans were the top performing sub sector, followed by Australian Tier 2 with floating rate credit classes outperforming in the rising bond yield environment. ASX listed hybrids underperformed due to new supply from CBA who issued new hybrids pushing market spreads higher. We remain patient and cautiously positioned with reduced allocations to sub investment grade, illiquid and heavily structured credit sectors moving into the latter stages of the credit cycle with pockets of repricing continuing through the year.

The Janus Henderson Tactical Income Fund (Fund) returned 0.57% (net) and 0.60% (gross). The Fund outperformed the 50% Bloomberg AusBond Bank Bill; 50% Bloomberg AusBond Composite 0+ Yr (Benchmark) by 0.32% (net) in April, which returned 0.25% on the month. The Fund continues its outperformance, beating the Benchmark over the longer term including by 0.2% (net) over the year, and 0.94% (net) since inception per annum.

Spreads on semi-government bonds tracked tighter versus Treasuries, contributing positively to performance.

April was a good month for credit, with most of the attribution coming from higher coupon income as credit spreads stabilised. The Fund added additional alpha by taking advantage of opportunities that arose after the Silicon Valley Bank collapse and Credit Suisse merger. Some of the safest segments from a default risk perspective cheapened as the baby was thrown out with the bath water. These rebounded well in April as rationality prevailed. We took the opportunity to take some profit on those trades that had rallied/rolled down. We remain cautious on the corporate debt sector whilst harnessing the income from taking larger positions in the highest quality credit segments. We remain under invested in higher beta securities with powder dry for future acquisition.

Higher yielding credit sectors were beneficiaries in the more stable credit conditions where positive returns were largely supported by the higher level of income. We remain cautiously positioned with reduced allocations to sub investment grade, illiquid and heavily structured credit sectors moving into the latter stages of the credit cycle.

The strong performance result in April for the Fund, despite bond yields tracking higher, is a good reminder of why simply adding duration to portfolios isn’t as straight forward as it sounds. Our Tactical management of duration (kept very low in April) was vindicated. While we prefer structurally more duration as the economy enters the later stages of the cycle, it pays to be patient. In addition, we took the opportunity to add some credit protection.

The Janus Henderson Tactical Income Fund (Fund) returned -0.20% (net) and -0.16% (gross). The Fund underperformed the Bloomberg AusBond Bank Bill Index and Bloomberg AusBond Composite 0+ Yr Index (equally weighted) (Benchmark) by -1.92% (net) in March, which returned 1.72% on the month.

Spreads on semi-government bonds tracked wider versus Treasuries, contributing negatively to performance on a relative basis.

Credit spreads weakened over the month, which was a detractor to performance. Generous coupon income helped to preserve capital in what was a challenging month for physical credit. Floating rate credit outperformed fixed rate as investors shifted out of fixed rate bonds and into floating rate notes following the rally in bond yields. Fixed rate bank and corporate credit, including Tier 2 debt, underperformed government bond equivalents.

Our minimised allocation to global high yield, and no allocation to Emerging Markets protected the portfolio from weakening credit returns. In addition, having fully divested from domestic listed hybrids was beneficial as they continued their run of underperformance for the calendar year, underperforming versus cash by -1.6% and underperforming higher ranking Tier 2 securities by -2.5% for the quarter.

Despite the Fund avoiding any idiosyncratic issues, performance in March was hindered by overall credit exposures as markets were roiled by the collapse of Silicon Valley Bank (SVB) and the forced merger between Credit Suisse and UBS. That said, this month’s weaker result follows strong performance in December, January and February, and the higher underlying yield baked into portfolios helped buffer performance. The Fund commenced adding duration in early March, however, it took a small amount of profit when the risk-off events occurred as the markets briskly moved to pricing in near-term monetary policy easing. Having no duration in the Fund did not provide the offset to spread sector weakness (including credit) that it would have otherwise given the fall in risk-free yields.

The Janus Henderson Tactical Income Fund (Fund) returned 0.64% (net) and 0.67% (gross). The Fund outperformed the Bloomberg AusBond Bank Bill Index and Bloomberg AusBond Composite 0+ Yr Index (equally weighted) (Benchmark) by 1.18% (net) in February, which returned -0.54% on the month. The Fund continues its outperformance, beating the Benchmark over the longer term, including by 2.26% (net) over the year, and 1.08% (net) since inception per annum.

Bond yields rose over the month, unwinding half of the strong positive return gained in the month prior. The price fall on the short end of the yield curve outpaced longer-term bond moves as the curve re-adjusted to the Reserve Bank of Australia’s (RBA) hawkish stance, indicating more rate rises to come.

We have remained cautious on adding duration, as our outlook for further central bank tightening is broadly aligned with market pricing. Meanwhile, overweight duration to swap rates over government bonds yields has been a positive contributor. Spreads on semi-government bonds tracked tighter versus Treasuries, contributing positively to performance on a relative basis.

Globally, credit spreads weakened over the month, with Australia outperforming with local spreads 5 basis points (bps) tighter despite strong supply. Generous coupon income also helped buoy performance in the month. Floating rate credit outperformed fixed rate notes given the rise in bond yields. Active allocations to Tier 2 debt were a strong driver of returns as these assets significantly outperformed. We have favoured generating excess returns by having larger positions in high quality assets with greater liquidity, complemented with sub-sectors like Tier 2 where attractive value has been on offer.

Our minimised allocation to global high yield and no emerging market (EM) exposure protected the portfolio. In addition, having fully divested from domestic listed hybrids was beneficial as we believe they still appear poor value relative to other local credit.

Overall, February was a good month for performance, following on from a strong December and January result. Active management was fruitful in the backdrop of a weaker performance month for most sectors within fixed income. The Fund has remained cautious on duration, pairing back duration to near zero. This has helped preserve capital given the back up in yields in February. High coupon income and selective rotation in subsectors of credit enhanced returns. Looking forward, the high yields now built into portfolios are already assisting performance and we expect this to continue in 2023.