Janus Henderson UK Responsible Income: April 2021 fund update

Dominic Rowles | Thu 22 April 2021

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• Andrew Jones is supported by an experienced and collegiate team of fund managers and analysts
• He invests in companies with proven business models and good management teams generating sustainable profits and cash flows
• The fund doesn’t invest in companies with significant negative impact on people, the environment or animals
• We recently added this fund to the Wealth Shortlist of funds chosen by our analysts for their long-term performance potential

How it fits in a portfolio

The Janus Henderson UK Responsible Income fund aims to provide a good level of income alongside capital growth over the long term. It’s different to most other funds in the IA UK Equity Income sector as it specifically avoids companies considered to have a significant negative impact on people, the environment and animals. Some of these areas, such as tobacco and oil & gas companies, feature heavily in traditional equity income funds because of their relatively high dividends. This fund could therefore offer some diversification to a traditional equity income portfolio, or be a good addition to a responsible portfolio aiming to provide income.

Manager

Andrew Jones has managed this fund since January 2012, and overall has more than two decades of experience managing UK equity income funds. He started his career at GT Management in 1995, where he worked with highly-regarded investor Nick Train. He managed his first fund from 1999, shortly after GT Management was acquired by Invesco. He left Invesco in 2005 to join Henderson.

Alongside managing the UK Responsible Income fund, Jones is co-manager of the Janus Henderson Global Equity Income and Global Responsible Managed funds. We think this is a reasonable workload, and there is some natural overlap between these funds.

Jones is supported by the wider Janus Henderson Global Equity Income team, which is a treasure trove of experience. Three members of the team – Job Curtis, James Henderson and Alex Crooke – have more than three decades of investment experience. Janus Henderson’s collaborative and friendly culture means Jones can make the most of the experience around him.

He also has access to a bank of 35 analysts, many of whom cover UK companies, and the Global Equity SRI team which provides challenge on Environmental, Social and Governance (ESG) issues. Overall, we think Jones has the resources required to do his job well.

Following detailed analysis of the manager’s track record and several meetings with him, our conviction has grown and we recently added the fund to the Wealth Shortlist. We admire the manager’s experience, and that of the wider Global Equity Income team, and believe he can deliver good long-term results for investors.

Process

The fund mainly focuses on dividend-paying companies in the UK. The investment process starts with a screen which excludes companies across three areas:

• Impact on people: alcohol, armaments, gambling, pornography and tobacco
• Impact on the environment: fossil fuel extraction & refining, fossil fuel power generation, chemicals of concern, contentious industries and nuclear power
• Impact on animals: animal testing (non-medical), fur and genetic engineering

All investments must also be compliant with the UN Global Compact (a United Nations pact on human rights, labour, the environment and anti-corruption). The screening process is monitored and checked by Janus Henderson’s Ethical Oversight Committee and appointed third party Vigeo Eiris, one of the largest sustainable, responsible and ESG research companies globally, so we’re confident there’s sufficient oversight.

From the remaining universe, Jones looks for companies with proven and understandable business models, high-quality management teams and strong positions in their industries. He thinks about how the company defends its position through competitive advantages like brands and intellectual property, and whether those advantages can endure over time. He also likes companies in a strong financial position with plenty of cash flow, allowing them to reinvest for future growth, while at the same time rewarding shareholders with rising dividends.

Finally, he considers the company’s valuation, applying a range of valuation techniques that are relevant to the company and the industry it operates in.

The manager also integrates ESG and considers whether companies are doing the right thing. The Global Equity SRI team monitors the fund and provides robust challenge on any ESG issues that crop up over time. Where ESG risks are identified, Jones and his team often engage with the company to help drive improvement. Over the past year, Covid-19 has been a major topic of engagement for the team, with working from home practices, training of new staff and use of the furlough scheme all high on the agenda.

Like all IA UK Equity Income funds, this one can invest up to 20% outside of the UK. Around 10% of the fund currently invests overseas, in countries like the US, France, Germany, Ireland and Switzerland. The manager uses overseas exposure to access areas that aren’t available in the UK, or to add diversification during times of uncertainty, such as the 2016 Brexit referendum and the onset of the Covid-19 crisis early in 2020.

The fund’s also diversified across a range of industries, although Jones tends to find most opportunities in the financials, consumer services and healthcare industries. The focus is on large and medium-sized companies, although the manager does have the flexibility to invest in higher-risk smaller companies too.

Recent investments include healthcare group Convatec. Jones thinks the company is in a strong financial position and is attractively valued compared to other medical technology companies. He also bought shares in MoneySupermarket.com, whose travel, credit and insurance divisions should benefit as the economy reopens. He was also encouraged by the company’s solid finances and attractive dividend yield.

Culture

Janus Henderson is a large investment firm with offices all over the world. It was formed in 2017 from the merger of two long-established groups – US-based Janus Capital Group and Henderson Global Investors.

It values experience, and fund managers at the group have on average over two decades of investment experience. Sharing knowledge and ideas between investment teams is an important part of the culture. Managers have the flexibility to tap into the wider group’s resources for ideas and insights, but also have the freedom to do their own research and form their own views without having a ‘house view’ placed on them.

Janus Henderson aims to be a responsible steward of investors’ money, and ESG is an important part of this. All fund managers have access to ESG scoring models and customised ESG research, but the firm believes ESG considerations should go beyond examining numbers. Company site visits, speaking to workers and questioning company management are just some of the ways fund managers are expected to actively assess a company’s ESG credentials.

Jones believes ESG analysis helps to highlight businesses that use more sustainable practices and could thrive over the long term. This could drive long-term dividends and uncover risks that are less obvious through more traditional company analysis. His ESG work is supported by the Global Equity SRI team, and the Governance and Responsible Investment team, which assists with voting and engagement.

Cost

The fund’s annual ongoing charge is 0.84%. This is a little higher than other equity income funds on the Wealth Shortlist and investors should be mindful this sets a higher hurdle for the manager to deliver positive returns. The HL annual platform charge of 0.45% also applies.

Please note the fund takes charges from capital, which could boost the income, but reduces the potential for capital growth.

Performance

The fund’s performed well over the long term. Since Jones took control in January 2012 it’s risen 142.0%*, compared with 87.3% for the broader UK stock market. Our analysis suggests his ability to select companies with outstanding prospects, regardless of their size or the sector they’re in, boosted returns, although past performance is no guide to the future.

Like all funds, this one has had weaker periods too. After the Brexit referendum in 2016, for instance, the fund underperformed the UK market and other UK equity income funds. A focus on UK-centric firms and less exposure to companies that earn a significant proportion of their money overseas held back returns.

The manager’s track record running UK equity income funds prior to this one is positive, but less consistent than his record on the UK Responsible Income fund. This is partly down to the relatively poor performance of the Henderson UK Growth & Income fund, which he co-managed with Graham Kitchen between October 2005 and May 2010. The fund’s investments in banks held back performance during the financial crisis, and its defensive positioning meant it didn’t fully participate in the recovery in 2009. However, Jones took several lessons from this experience which helped him navigate later crises, including the recent Covid-19 pandemic. It’s worth noting his previous ventures didn’t have any exclusions, and were run alongside a co-manager, so the UK Responsible Income fund is a different proposition and will perform differently.

The fund’s exclusions mean we expect it to perform differently to the broader UK stock market, and its peers in the IA UK Equity Income sector. Oil & gas, for instance, makes up a relatively large part of the UK stock market, and has tended to pay high dividends, so the sector features heavily in many equity income funds. This fund’s lack of exposure to oil & gas means it could underperform the UK market, and other equity income funds, if oil & gas firms perform well.

Jones tries to plug some of the exposure gaps created by the fund’s exclusions. For example, the fund can’t invest in tobacco companies, which have tended to be less sensitive to the health of the economy. He therefore increases investments in other areas that are less sensitive to the economy, such as utilities and pharmaceuticals, to account for the lack of exposure to tobacco. This isn’t an exact science though, and we still expect the fund to perform differently to its benchmark and peers at times.

The fund performed well over the past year, rising 31.7%*, and beating the UK market by 5.0%. Our analysis suggests the manager’s stock picking was particularly strong amongst financials, with insurance companies Prudential and Aviva, and asset managers Intermediate Capital Group, M&G and Standard Life Aberdeen all performing well.

Overall, Jones aims to beat the performance of the FTSE All Share over the long term and achieve a yield in excess of the index by building a balanced, diversified portfolio of companies yielding between 1.5% and 6%. We think he’s done a good job of growing the income over time, particularly given the additional challenge of managing an exclusions-based fund.

2020 was tough for all equity income funds as companies across the UK slashed their dividends in response to the coronavirus crisis. We were pleased to see that the manager stuck to his investment process throughout this period though and didn’t compromise the portfolio’s growth potential to achieve a short-term income boost. At the time of writing, the fund yields 3.6%, although income is variable, not guaranteed. Yields are not a reliable indicator of future income.

Past performance is not a guide to the future. Source: *Lipper IM to 31/03/2021.

Find out more about Janus Henderson UK Responsible Income including charges

Janus Henderson UK Responsible Income Key Investor Information