With an integrated investment approach and a strong sense of Environmental, Social and Corporate Governance factors (ESG), Janus Capital Group has enjoyed another winning year. The firm received two House Awards under Healthcare Sector and US Small/Mid Cap Equity in the BENCHMARK Fund of the Year Awards 2016.
There are many similarities in the core approach to investing taken with Janus Global Life Sciences and Janus US Small Cap Growth strategies. Each has dedicated, experienced teams who foster a collaborative style to promote the generation of fresh ideas. The management teams aim to be long-term, fundamental investors who dive deep into their markets to sift out the best possible opportunities. Always, the search is for companies with a sustainable competitive advantage, differentiated products or services, above-market growth or game-changing potential.
It’s Good to Talk
The respective management teams spend a great deal of time researching investment prospects. This includes traveling the world to meet with company management, attending specialist conferences, speaking to experts and gaining an extensive knowledge of the investment areas. As lead manager of the Janus Global Life Sciences strategy, Andy Acker, sees it: “Our analysts should know their companies as well or even better than anyone. This demands going beyond conversing with management. We spend a lot of time talking to physicians – whose decisions affect 80% of healthcare spending – attending medical conferences and interviewing thought leaders in virtually every therapeutic area.”
“Healthcare is experiencing an acceleration in innovation,” explains Acker, “We aim to invest in companies which address unmet medical needs or make the healthcare system more efficient.” The managers are also very focused on doing the deep fundamental research which will identify companies trading below their intrinsic value. Acker explains: “We are still in the early stages of the confluence of demographics and innovation that will drive demand for the sector. Therefore, we think the market’s distraction on regulatory risk provides an attractive and inexpensive opportunity to participate in the sector.”
One recent success story concerned a biomedical company innovating treatment for Hepatitis C. The team surveyed doctors and researchers, studied the research and began to understand the potential of clinical stage therapies. The decision was then taken to buy a biopharmaceutical company that was subsequently acquired by an industry leader at a significant profit to the portfolio. The team went on to increase its stake in the market leader, and when the Hepatitis C treatment was launched, it was one of the most successful products in biotech.
Having the Correct Tools
Research tools include an internally developed Information Management System database that combines volume data with weekly pricing on over 10,000 products to project sales trends. Also, clinical trials can be analyzed using bio-statistical models developed in-house.
Acker describes their method as: “A bottom-up approach to research that seeks to understand companies and the ecosystem within which they operate. Rigorous modeling and competitive analysis, plus Environmental, Social and Governance (ESG) is a significant part of our research process.”
A Pragmatic Approach
Naturally, in such an innovative field, there is risk. The success of a new business or a new treatment is highly uncertain. Acker says that risk is carefully calculated and assessed: “Our risk management approach reflects a certain caution about the downside in a stock. We take into account business and regulatory uncertainty and the difficulty of estimating future cash flows,” adding, “for those companies facing binary outcomes that significantly impact their future, such as a company with no products on the market and important clinical trials, we use a ‘Value at Risk’ framework. This establishes the size of any one position so that in a worst-case scenario the estimated adverse impact from a particular event should not exceed 1% of the portfolio’s performance.”
For Jonathan Coleman, lead manager of the Janus Small Cap Growth strategy, diversification of this portfolio is the key to managing healthy, sustainable growth. “Stable growth names populate the portfolio,” he explains, “companies with a low risk of surprises and a proven track record. These don’t have the fastest growth, but they are the most consistent.”
As an example, the team invests in a service company focused on the non-profit industry with solid organic revenue growth and the potential for margin expansion. Other favorite holdings include cyclical share gainers which operate in cyclical end markets but outcompete their competition in difficult times and emerge stronger when the tide turns in their favor.
Coleman admits that: “Game-changing growth names are the ones everyone likes to talks about – the firms that are doing something so dramatically different that growth rates can be very fast. With these firms, we watch position size closely and keep our holdings small but meaningful enough to matter.”
Keeping an Eye on Events
The team’s in-depth research leads to regular updates and improvements to the portfolio, which are sometimes guided by external events. Coleman explains: “We have made recent changes across a few sectors including industrials, financials and consumer, where we think the new US administration’s policy could shift the landscape subtly to create new opportunities.”
Always, investment is guided by a research-driven process which focuses on quality small-cap companies with differentiated business models and sustainable competitive advantages, with the aim of driving outperformance against the benchmark and peers, over time. “We take a moderate approach,” says Coleman, “seeking to identify companies with large addressable markets that are poised for growth over a multi-year period.”
The Office of Responsible Investment
The two managers see themselves and their teams as long-term fundamental investors. The importance of strong ESG criteria in every company they invest in is emphasized by the appointment of a Responsible Investment Officer. This officer oversees the dissemination of ESG issues and coordinates ongoing ESG education and ESG-related proxy voting.
However, the managers expect everyone to take responsibility for monitoring the sound governance of a company. As Acker concludes: “The primary responsibility for fundamental research lies with the analysts. However, the Responsible Investment Officer helps to focus the conversation and keep relevant material and issues to the fore.”
Both managers are confident that their thorough and innovative, deeply considered approach to investing will maintain the portfolios at the forefront of their areas of expertise for many years to come. BM