Fund Spotlight: a way to capture four megatrends

Over the past month, global stock markets have experienced gains despite high volatility. Meanwhile, investor sentiment has remained resilient despite broader geopolitical and economic challenges.

A subtle shift appears to be taking place, with investment returns broadening over the past quarter across a range of sectors and away from just large technology and growth stocks towards previously less popular small mid-cap stocks.

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Year to date, US utilities have been the best-performing global sector, closely followed by emerging market consumer discretionary, utilities and communication services.

Sectors such as utilities and financials, which previously struggled and were overlooked, are now showing signs of recovery as interest rates decline across global markets.

Meanwhile, the dominance of the so-called Magnificent Seven tech giants is showing signs of fading, as many other global companies outperform these widely held names.

One way to capture this shift in market dynamics is through the Janus Henderson Global Sust Equity Fund, which leans towards mid-cap stocks compared to its peers and the MSCI World Growth Index.

While NVIDIA Corp (NASDAQ:NVDA) and Microsoft Corp (NASDAQ:MSFT) remain the two largest holdings, the fund's management team has been actively reducing these positions to avoid concentration risks and reallocating capital to other growth opportunities in international markets.

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This high-conviction portfolio focuses on companies poised to deliver long-term compounding growth, while contributing to a more sustainable global economy. The fund aims to provide capital growth over the long term (five years or more) by investing in businesses whose products and services drive positive environmental or social change. The management team emphasises the connection between sustainable development, innovation and long-term growth, positioning the fund to benefit from enduring global trends.

The fund is managed by Hamish Chamberlayne, who has led it for more than a decade, with support from Adam Scully, who joined as co-manager in 2019, and the broader global sustainable equity team.

What does the fund invest in?

The fund holds 50 to 70 positions and employs a GARP (Growth at a Reasonable Price) strategy. This approach balances growth and value, with a notable bias toward mid-caps. Its largest sector allocations are technology, industrials and financial services, with technology underweight relative to the index and the latter two significantly overweight.

Stock selection begins with an exclusion screen, removing sectors that conflict with the fund's sustainability mandate. Eligible companies must generate at least 50% of their revenue from activities aligned with the fund's 10 positive impact themes, which stem from four megatrends: resource constraints, climate change, population growth, and an ageing population.

Management believes industries misaligned with these trends risk disruption as the global economy transitions towards sustainability.

Financial resilience is then assessed, with the team selecting companies with durable business models, consistent revenues, strong margins, reliable cash flows, and robust balance sheets. This disciplined approach results in a portfolio that diverges from the index, favouring companies with long-term growth potential and supported by structural trends.

A recent addition to the portfolio is Compagnie de Saint-Gobain SA (EURONEXT:SGO), a leader in sustainable construction materials. With its focus on energy-efficient and affordable housing, the company is well positioned to capitalise on trends related to energy scarcity and rising oil prices, where energy efficiency is increasingly critical.

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While maintaining conviction, the team has recently reduced positions in Nvidia and Microsoft, the fund’s top two holdings, responding to concerns over the longevity of their rallies.

Instead, the team have been diversifying the portfolio of companies within the artificial intelligence (AI) ecosystem, increasing positions in companies such as ASML Holding NV (EURONEXT:ASML), nVent Electric (NYSE:NVT) and Prysmian SpA (MTA:PRY).

Due to the revenue and exclusionary criteria previously mentioned, the fund excludes Alphabet Inc Class A (NASDAQ:GOOGL), Meta Platforms Inc Class A (NASDAQ:META) and Apple Inc (NASDAQ:AAPL).

How has the fund performed?

The JH Global Sustainable Equity fund has delivered robust returns, consistently outperforming the MSCI World Growth Index and peers in its category over one and five-year periods. Despite the aforementioned mid-cap bias and stock selection restrictions, the fund boasts an impressive five-year return of 85%, outperforming both the benchmark and peers by +3% and +38%, respectively.

While 2022 brought more modest returns amid rising inflation and interest rates, the fund’s mid-cap allocation would have been a detractor from relative performance versus the index.

However, the fund has recovered well throughout the past year. Stock selection and sector positioning have been contributors, in particular the significant holding in Microsoft.

Source: Morningstar Total Returns (GBP) to 31/10/2024. Past performance is not a guide to future performance.

Why do we recommend this fund?

The consistent and effective investment process, with its strategic focus on sustainability and long-term growth, stands out as a competitive option for investors looking for global equities.

Our positive view of the fund is based on the experienced lead manager, the significant resources supporting him, and the robust sustainability approach that is fully integrated into the investment process.

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As global trends shift toward decarbonisation, resource efficiency and social development, the fund’s focus on companies driving positive environmental and social change aligns with key megatrends shaping the future economy.

By investing in businesses with durable models, consistent cash flows, and robust balance sheets, the fund seeks consistent financial returns alongside positive sustainability outcomes.

The fund is positioned to deliver outperformance over the long term from its exposure to quality and growth companies and by offering modest protection on the downside. Backed by experienced leadership, a robust investment process, and a clear focus on compounding growth, the JH Global Sustainable Equity fund is a new addition (added in October 2024) to ii’s ACE 40 rated list as a core global equities option.

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