Janus Henderson UK Responsible Income

This fund has a well-defined approach to investing responsibly, combined with a tried and tested equity income investment process. Manager Andrew Jones has extensive experience in the equity income space and has a common-sense approach to this fund, allowing screens to filter the universe, followed by in-depth analysis on the remaining opportunities. He won’t chase yield and will look for a balance of growth as well as an attractive income. The fund has a bias towards mid-caps.

Our opinion

Andrew is a very pragmatic fund manager. He took on the fund due to his understanding of the need for responsible investing and mitigates any biases this may create to generate a well-rounded portfolio. For those looking for a sustainable yield, in both senses of the word, this makes for a great option for investors.

Fund manager

Andrew Jones has been the manager of the Janus Henderson UK Responsible Income fund since 2005 when he joined the firm. He has a further ten years’ experience in the income equities sector having previously worked at Invesco and has been running equity income mandates since 1999. Andrew graduated with a BA (Hons) degree in economics from Queens’ College, Cambridge University.

Andrew JonesFund manager

Investment process

The investment universe starts with all the companies in the FTSE350, before sectors the fund won’t own (due to its ethical constraints) are removed. This narrows the list down to around 280 companies. The manager doesn’t screen for income at this point, as he wants to consider a company’s future yield prospects, rather than just simply the level today. At this point Andrew will then apply the same process used across the whole Janus Henderson UK desk, which allows for collaboration with other managers.

This process looks at company fundamentals, identifying those with defendable competitive positions which have resilient cash flows and are unlikely to be disrupted. This will often be those with enduring brands or intellectual property and that are an important part of an established value chain without too much threat of new entrants.

Andrew will also look for firms with affordable capital requirements such as capex and R&D. This will identify those with the ability to pay dividends. Andrew is conscious that companies need to strike a balance of adequately investing in their business and paying an attractive income to shareholders. He does not want dividends today at the expense of a business tomorrow, so will want to see a company reinvesting in itself as well as paying an appropriate level of income.

Andrew also has an eye on valuation and will sell a stock when it meets his valuation targets. He will also sell if a company no longer passes the screening criteria, or there is a substantial change in the outlook of the business. Conversely, he will add to the holding if the share price is underperforming but nothing has changed with the company’s investment thesis.

This valuation discipline and awareness of the sustainability of dividends will mean the fund will have a range of stocks yielding between 1.5% and 6%. Above this level Andrew becomes sceptical and may see the stock as a potential value trap.

The final portfolio will contain 60-70 names. Andrew believes this is the sweet spot between the diversification of income streams and consistent returns. Normally, all stocks in the portfolio will pay a dividend, though he may hold stocks that have temporarily suspended theirs if there is good reason and a path back to paying them again.

ESG

ESG - Explicit  

The fund has a two-step approach with ESG. Firstly, there are the initial screens which removes companies and industries the fund can’t invest into. The resultant universe is then subject to full ESG analysis. The avoidance criteria are led by clients, with consultations every few years. They come under three broad criteria: People, Environment and Animals, and include industries such as fossil fuel extraction and power generation, animal testing, fur, chemicals of concern, alcohol, armaments, gambling, tobacco and corruption. This excludes around a third of the universe by market cap, though only a fifth by number, showing that this typically excludes the largest companies in the index. There is an allowance for up to 10% of revenue to come from an excluded industry to allow for companies that are transitioning. A good example of this is SSE, which is one of the largest renewables providers in the UK, but which has some legacy coal assets which it is closing down and transitioning away from. The resulting portfolio has a carbon footprint that is a fraction of that of the FTSE All Share benchmark. In the stock analysis, there is further consideration given to governance, with a desire for management incentives to be aligned to shareholders, and a particular focus on the sustainability of the dividend.

Risk

There are no formal constraints on the weights of stocks and sectors within the portfolio, but Andrew has a soft rule of 3-3.5% overweight of a single stock for risk purposes. The fund has a bias towards mid-caps, an underweight to large caps and will hold very few small caps. Andrew and the team will have a quarterly risk review to make sure they are on top of their allocations and to reassess why they are positioned where they are.

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