According to Marc Pinto, Portfolio Manager at the Janus Henderson Balanced Fund investment team, the three characteristics that differentiate his portfolio are: the growth orientation in the equity sleeve of their strategy, the dinamically managed allocation between equity and fixed income, and the fact that the equity team and the fixed income team maintain a very collaborative working relationship.
The latter being especially noticeable when the investment team makes decisions on asset allocation, where equity and fixed income teams must compete for capital, taking into account the opportunities offered by their markets.
Additionally, the investment team has a three-way approach for disruption. They think about the companies that have been disrupted, the companies that are creating the disruption and the companies that will benefit from it. Currently, the team identifies two major disrupting forces, the e-commerce and the cloud computing. In these two trends, the investment team assess who are the winning and losing companies, and how to invest on the right side of each trade.
E-commerce
Consumers are clearly benefiting from all the innovation that is going on in the world. Technology is providing consumers more bargaining power, anyone can go to a store and compare the price of the product offered online at Amazon.
“People have said that traditional retail stores have become the showroom for Amazon, and that is true to a certain degree. However, the smart retailers have chosen to be the showroom for their e-commerce model. At Janus Henderson, we have invested in those retailers that have done a good job migrating the physical store aspect s of retail sales to e-commerce, proving an incentive to buy through them and not through Amazon”, explained Marc Pinto.
“The e-commerce penetration is still low. The retail e-commerce is going to continue growing as a percentage of total retail sales. The question is, how do traditional retailers survive in this environment? For example, Nike, the sportwear brand, is one of our largest positions in our Balanced portfolio. A couple of years ago, Nike realized that developing a direct relationship with the customer will give them a huge opportunity to essentially know their customers better. Additionally, the direct relationship with consumers would allow Nike to bypass the middleman and capture its margin, avoiding having to compete for shelf space at retail stores.
NikeID is Nike’s direct to consumer offering, where basically customers can go online and get a pair of customized training shoes, choosing the colors, putting their names on them, and shipping them directly to their homes. Nike does not incur in any retail margin and can sell them at a more expensive price. It is a very profitable business, NikeID represent now 15% of their business and it is growing around 30% to 40% per year.
Traditional retailers who have figure out how to nail the on-line and traditional retail models are the ones who will be successful on the future. These businesses have to invest a big sum of money in terms of technology to create a seamless model where customers can go into the store and decide what they want to buy and how they want to buy. Another example of a traditional retail company that has managed to have an integrated model of e-commerce and traditional retail business is Home Depot. Their website is offering the possibility of knowing the exact inventory that they have in every store and their location within the store. They have an integrated inventory management system and they have created a customer friendly portal where customers can know in real time how much of every item they have in a store. It is not technology for technology sake, is technology to make the consumer experience better”, he added.
Migrating to the cloud
Another big source of disruption are the cloud computing and the software as service players. Amazon Web Services, Salesforce, Microsoft Azure are some of the companies that are going to benefit from the migration to the cloud. “Players on the cloud are doing really well. As investors, the big question we have is about valuation levels and when it is the right time to get in. But as growth investors we definitively want to be invested in these companies”, said Pinto.
“In this case, the losers are the companies that are providing the traditional hardware and their prices. Companies like HP, IBM or Oracle are still supplying hardware to a lot of offices, but their demand is at risk to decline as cloud spending becomes a bigger portion of the business. Total IT spending is going to start flattening because the cost of deployment in the cloud is substantially less than it is for buying traditional hardware and software. Some estimates point out that the cloud deployment is 10% the cost of the traditional IT infrastructure deployment. There is going to be a massive deflationary pressure on IT spending when every company migrates to the cloud. Companies will benefit form a massive reduction on their technology costs and they will be able to spend those dollars in other areas”.
Is the growth trade over?
Since January 2009, the returns of the growth component of the S&P 500 have consistently beaten the returns of the value component of this index. With only 2016 being an exception, growth stocks have outperformed value stocks in the last 9 years. Because it has been such a long period without alternance, investors are beginning to be worried about the possibility of a mean reversion to value.
“We think that this is happening for good reasons. This is not a question of market rotation or even low rates, there is a logic behind the outperformance of growth stocks. What is driving this discrepancy of growth versus value is that the companies that are disrupting are the growth companies; and the companies that normally are being disrupted are typically value companies. The companies that are benefiting from disruption are in the growth category. More companies are going to be in the growth space as they will continue to do well”, he concluded.