Janus Henderson Balanced Fund Q2 2024 Commentary

Performance - USD (%)

Expense Ratios (% as of most recent prospectus)

Investment environment

• The S&P 500® Index returned 4.28%, while the Bloomberg U.S. Aggregate Bond Index registered a slight gain, returning 0.07%.
• Inflation moderated but remained above central bank target levels. Early in the quarter, sticky inflation data led to uncertainty over the timing of potential Federal Reserve (Fed) rate cuts. However, the 10-year Treasury bond yield retreated from April highs as investors grew more hopeful that slower economic growth and easing core inflation could lead the Fed to cut interest rates in the coming months.
• While jobs growth remained healthy, other economic data showed signs that the labor market is coming back into better balance and economic growth is cooling.
• The stock market continued gains following a very strong first quarter. The advance was relatively narrow, driven by mega-cap technology stocks with artificial intelligence exposure. Six of 11 sectors in the S&P 500 Index posted negative returns, and market breadth was negative, with 199 stocks in the index up and 304 down. First quarter earnings and guidance for the second quarter were broadly solid and supportive of market gains.
• The yield on the U.S. 10-year Treasury ended the quarter at 4.40% relative to 4.20% at the end of March. Corporate investment-grade credit spreads widened marginally to 94 basis points (bps), while high-yield credit spreads also ended the quarter slightly wider, at 309 bps.

Portfolio review

The portfolio, which seeks to provide more consistent returns over time by allocating across the spectrum of fixed income and equity securities, outperformed the Balanced Index, a blended benchmark of the S&P 500 Index (60%) and the Bloomberg U.S. Aggregate Bond Index (40%).

Asset allocation positioning benefited relative performance, with an overweight to equities versus the Balanced Index and a corresponding underweight to fixed income, aiding results as equities outgained bonds. Security selection in the equity and fixed income asset classes was additive to relative performance. We entered the quarter with approximately 63% in equities and 37% in fixed income and closed the quarter with roughly the same allocation.

The equity allocation outperformed the S&P 500 Index. Stock selection in healthcare and information technology contributed to relative performance, while stock selection in the consumer staples and consumer discretionary sectors detracted. The portfolio’s stronger growth bias, including an overweight to the information technology sector, aided relative performance as investors gravitated to companies tied to the AI growth theme.

Chipmaker NVIDIA (NVDA) was among the top contributors to relative performance. The company reported very strong revenue and earnings growth, fueled by soaring demand for its graphics processing units (GPUs) from data centers investing to support the deployment of generative AI. Semiconductor manufacturing equipment company KLA was also a top contributor. The company delivered solid earnings results and an even more impressive outlook, with growth set to accelerate through the remainder of 2024 and into 2025.

Mastercard (MA), a leading payment processor, was among the top detractors from relative performance. Shares pulled back after the firm lowered full-year guidance, citing foreign currency headwinds from the strong U.S. dollar. Also, a longstanding lawsuit on fees that merchants pay Mastercard and other credit card companies continued to weigh on stock sentiment. Consulting firm Accenture (ACN) was another top detractor. The company’s growth slowed due to a shift in IT spending toward AI and away from legacy software projects. Although the company’s effort to grow new generative AI consulting business was successful, it did not offset declines elsewhere in the business.

The fixed income allocation outperformed the Bloomberg U.S. Aggregate Bond Index. The key drivers of outperformance were sector allocation and security selection decisions - specifically, our overweight allocations to securitized credit and high-yield corporates, and security selection within investment-grade corporates.

In securitized credit, we have maintained our overweight exposure. We did trim our allocation to agency mortgage-backed securities (MBS) over the quarter, though we remain overweight MBS risk. In high yield, we increased our allocation as we were able to identify attractively priced assets in the new issue market.

With respect to yield curve positioning, we entered the period with a modest duration overweight and actively managed duration throughout the quarter. We closed out the period with a small duration overweight as we believe rates are likely to fall in 2024 due to declining inflation. We also like the defensive characteristics of higher-duration exposure in the event the economy cools more quickly than expected.

Manager outlook

As we enter the second half of 2024, we believe the U.S. economy continues to provide a solid foundation for investment opportunities across equity and fixed income markets. We are starting to see some softening in the economy and the labor market, but we do not believe this is cause for investor concern.

The economy appears to be slowing but not stalling, and this is key to bringing inflation back to target, ultimately unlocking rate cuts. Low unemployment, steady job growth, robust corporate earnings, and relatively healthy consumer balance sheets contribute to an overall strong economic backdrop.

Equity and corporate credit markets have embraced this optimism, pricing in a soft-landing scenario. S&P 500 earnings estimates project over 10% growth both this year and next, a forecast that appears realistic based on company interactions. However, the realization of these estimates may hinge on two critical factors: productivity and innovation.

Recent gains in U.S. labor productivity are particularly encouraging. Non-farm labor productivity has increased between 2.4% and 2.9% year-over-year in each of the last three quarters, significantly above the 1.5% 10-year average. This uptick bodes well for corporate margins and may help mitigate inflationary pressures. The productivity gains are particularly evident among tech and Internet firms, many of which streamlined operations while maintaining or growing revenues.

Regarding innovation, in order to capitalize on productivity trends in equities, we’re focused on two key areas: AI infrastructure providers offering enabling technologies and large-scale companies leveraging these technologies to improve efficiency and growth potential. While AI dominates innovation discussions, breakthroughs extend beyond tech into sectors like healthcare, with advances in gene editing and AI-based diagnostics.

In terms of equity market risks, we are monitoring consumer spending trends and the dampening effects that higher interest rates can have on long-cycle capital spending. Consumer spending, while still resilient, has shown signs of a slight slowdown. High-income consumers continue to spend on travel and experiences, while more leveraged consumers are becoming increasingly selective. The construction industry is another area of focus, with weakening data in housing, multifamily homes, and manufacturing capacity. However, government and non-residential spending remains robust, driven by data center and chip manufacturing plant buildouts.

In the fixed income market, we believe we are at the beginning of a Fed rate-cutting cycle. While the start date and cadence may be open questions, the fact that the Fed is shifting cycles is positive for fixed income markets in the long run, both from a returns and a diversification perspective. Overall, we favor an overweight to both credit spread risk and interest rate risk, as corporates and consumers remain largely resilient and the Fed readies itself for rate cuts.

Regarding our overweight to corporates, we acknowledge that spreads are tight versus historical metrics. But the favorable macroeconomic environment, coupled with strong technicals and fundamentals, continues to support these valuation levels. We are closely monitoring valuations in light of the economic landscape and are ready to adjust as required should conditions change. Additionally, we seek to find attractive opportunities in the primary issue market and in securitized credit sectors, which look cheap versus corporates on a relative value basis. As always, we will dynamically adjust each of the equity and fixed income allocations and the portfolio’s overall mix between equities and fixed income as we analyze the risks and opportunities in each market.

Portfolio

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