This fund manager doesn’t jump on the bandwagon, and this contrarian approach drives the fund’s success.
Janus Contrarian (MUTF:JACNX) invests in quality companies others dismiss. David Decker, the fund’s portfolio manager since its inception in 2000, is confident that his team’s detailed research can uncover overlooked opportunities at favorable values—and his track record backs him up.
Decker’s investment strategy emphasizes the long term. Utilizing a bottom-up approach, he and his team target names that generate ample free cash flow and trade at a discount. Management is also interested in companies that are improving their free cash flow and returns on invested capital. Companies experiencing management changes or ones currently out of favor are also high on Decker’s list.
“Contrarian investing is, by definition uncomfortable. You have to have the conviction to invest where others are not,” says Decker.
Contrarian investing revolves around the notion that oftentimes the risk-reward equation is better when a company or industry is substantially out of favor. “Markets are influenced and driven by humans; quite often we see excessive fear drive multiples down to irrational levels,” says Decker.
This dynamic often creates situations where the downside is limited because nobody wants to buy a company that’s doing poorly; when times are tough, people exit as fast as they can and ask questions later. This was the case for the financial and real estate sectors last year.
North American names account for more than half of the fund's investable assets, while Asian equities make up 24 percent of the portfolio and European stocks have a 7 percent allocation. This diversification offers exposure to the developed and developing markets.
The fund's strategy focuses on individual names rather than sectors. And a broad investment mandate enables Decker and his team to stake out positions in equities of any market capitalization, from micro-cap names to giant multinationals.
There are four themes that management believes will contribute to high risk-adjusted returns: high dividend yield, growth in Asia, global companies with strong and growing Asian sales and special situations.
Names with attractive dividend yields feature prominently in the portfolio. “Companies with a strong commitment to returning cash directly to shareholders will be rewarded, which will lead to strong equity returns,” says Decker.
Management’s focus on Asian emerging markets also makes sense. India, China and Indonesia are the three fastest growing markets in the world. Whereas the US gross domestic product is expected to expand 1 to 2 percent, these economies continue to post growth rates in the high single digits.
Decker expects big things from Indian utilities. The country continues to ramp up infrastructure spending to meet increasing demand for electricity; Decker is fairly confident that India’s power sector will grow at annualized rate of 15 percent over the next 10 years. “And as India grows its power supply,” the manager notes, “Its economic cycle will become more sustainable.”
That being said, the rise of consumerism is the biggest growth story in Asian emerging markets. “Over the past 20 years a few hundred million people have emerged from poverty in Asia,” Decker observes. “As household incomes improve, demand for consumer goods expands and evolves. This trend is occurring throughout Asia, and companies that cater to rising domestic demand stand to benefit tremendously.”
Facing slow, unsteady economic growth in the developed world, the most successful investors will add indirect or direct exposure fast-growing emerging markets. The US, Europe and Japan drove global economic growth for the last 30 years, but a paradigm shift is underway. Over next 10 to 20 years, growth will come from the Asian emerging markets.
That being said, a lumpy US recovery and overwrought investors present plenty of opportunities to profit from volatility. These are prime conditions for contrarian investing.
Janus Contrarian is a great option for investors seeking a global portfolio that holds up in bull and bear markets.
Disclosure: no positions