Janus Henderson’s John Bennett is never one to shy away from speaking his mind. And the European equity veteran does not mind acknowledging that active managers have not covered themselves in glory in the recent past.
‘There are a few reasons why allocators in investment funds have been disappointed with active, and the fault doesn’t just lie with the clients’ time horizons,’ he said. ‘Look at sector averages in European equities. The average systematically fails to beat the index.
‘Trends have accelerated with ever more money going to passives and so-called alternatives: illiquid, private equity, infrastructure and so on. In public equities the mass movement to passive has created a slow burn existential challenge for the active management industry.’
Moving more focused
This has led Bennett to reappraise his own approach.
‘As a fund manager in large cap equities I considered myself to be right in the crosshairs of this disruption. If you refuse to allow yourself to be boxed into a style such as growth or value and are considered “blend” you risk being dead centre of those cross hairs, at the mercy of the move to passives.’
He cited the Henderson Pan-European fund, which ran between 90 and 120 stock positions. Bennett said this made it ‘absolutely prime for disruption’.
‘In a world of ETFs and other vehicles that enable clients to access styles, trends or themes, why would those clients pay an active management fee for “covering the water” and over-diversification.’
Following a meeting in January, Bennett reduced his investment trust from around 60 positions to a maximum of 45, having originally run it with a maximum of 90.
‘Everything has moved more focused,’ he said. ‘My Pan-European fund is my longest list but will typically be around 55 names. Elsewhere our portfolios contain around 45 names.
‘What we have said to investors is if you want the index don’t come to us. Indeed, don’t go to any active manager.
‘Why would you? You can get that for a song in terms of fees via passives.
‘If it’s wrong, it’s wrong big’
Bennett also believes that active managers need to be able to read the market, and currently value is a recurring theme on his agenda, for one simple reason:
‘I think inflation is coming,’ he said. ‘Essentially, I think that too much of world is camped in the wrong assets. The world’s savings have been jammed into disinflationary beneficiaries. That was right for the investing regime, the interest rate regime and the inflation regime of the last 10-30 years.
‘But of course, it got aggravated by QE 1, 2, 3 and so on. I think you may now have the game changer. I think the pandemic has given politicians the air cover they need to take control.
‘This is a really big point. It’s doesn’t mean it is right. It means if it’s wrong, it’s wrong big. If it is right, then it is right big. I think bond investors, tech investors and growth investors risk being be routed. Because I think inflation is coming back.’
With inflation a core belief of Bennett’s immediate investment thesis, he has decided to put his money where his mouth is.
‘Given that, we think it’s coming, I said within the team, it is inconsistent that we think it’s coming that we hold no banks. So let’s just gingerly buy them to express our macro views. That’s the only reason we hold European banks to express a macro view. It’s still an underweight position.’
This time it’s different… again
But what makes this time different? With many managers, Bennett included, banging the value drum in recent years, what has made the 32-year market veteran decide to move around 10% of his portfolio on this occasion especially?
‘You can see a broadening in the market, but it was a broadening that I felt was more meaningful than the straw fires you’ve seen in those value rallies of the last 10 and 15 years. One of my bond colleagues likes to say “holiday in value stay in growth”. In other words, you get sporadic value rallies, lasting a month or two. It looks promising only to fizzle. It’s a straw fire.’
Bennett believes that active managers can add value by identifying when the real shifts are taking place.
‘Investors can express their strategies via smart beta, ETFs and others passives. They can do this whether they want a region, a factor, a style, a sector. Increasingly, they have to ask: “What are you doing that’s different?”
‘The challenge of course can be that clients want you to be differentiated but don’t you dare lag the pack. When your style is not in favour it is crucial that you stay in the race. That’s the tension every fund manager faces. Growth and tech has become something of a mania, especially in the US. There’s no doubt that the growth at any price boom challenges my DNA as an investor. Goodness I’m so boring that I even like cashflow...’
Bennett said the serious point is that fund managers have to have sufficient pragmatism to stay in the game.
‘Then, when the wind turns, you go on and win the game,’ he added.