- Despite a challenging year in the European equity markets, Janus Henderson's John Bennett returned 19.74% to investors with his European Focus Fund and came second in our best-performing European fund manager list.
- Bennett breaks down his 5-part investing strategy for Insider.
- He also makes 5 major predictions for 2021 and beyond, including the dawning of the Asian century.
- "We are in a very easy money environment, we have bubbles underway. One of them's called the NASDAQ. The next bubble that's going to be enormous is ESG," Bennett said.
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"I am obviously a masochist, because this is year 33 in this business, and I do European equities, I mean, my God, who wants European equities," John Bennett, director of European equities for Janus Henderson, said.
This year has been tough for European stocks. By the end of November, the STOXX 600 was up 6%, while across the pond, the NASDAQ had clocked a 34% gain, the Dow Jones Industrial Average was up 36% and the S&P 500 was up 12%.
The European stock market has been at a disadvantage to the US during this time period, as it doesn't feature as many of the big stay-at-home winners, such as Peloton (PTON), Zoom (ZM) and Docusign (DOCU), where stock prices have doubled and sometimes tripled.
"Unless you've been an all outgrowth manager, you've faced a headwind," Bennett said. "And I'm not an all-out growth manager, I've actually found it very, very frustrating the extent to which growth stocks have just continued to puff up on their valuations."
Despite this headwind, Bennett came second in our top European fund manager list this year with his European Focus Fund providing returns to investors of 19.74% year-to-date.
Bennett has successfully navigated the complex and tricky European market with his investment strategy that is a blend of both growth and value investing with a particular focus on valuation.
"We are blend managers, and we are valuation conscious managers," Bennett said. "So actually, the prevailing wind has been against us because you're not wanting to worry about valuation and I think that's changing."
Stock picking is at the core of Bennett's strategy. This is a skill he started to learn at school through a competition in an economics class, which then developed into a hobby alongside his job at the Clydesdale bank.
Now he works full-time trying to identify compelling stock picks across a number European equity funds for the firm amounting to around $7 billion in assets.
A compelling stock is one that meets five key components: good valuation, strong balance sheet, cash flow, a strong management (or a management team that can be changed), and catalysts, which enable the fund to be on the "right side of surprise."
"We just bought oil," Bennett said. "I'm not mad, I'm not going big overweight energy, but that comes down to the fact of being on the right side of surprise. It's so hated. It's so consensus to hate it. And I think inflation is coming back, it might just change things. So that given set of cash flow, that cash stream, we now think it is attractively enough valued that the risk reward, and we have had no oil, but that the risk reward comes into our favour because it's so hated as a sector and so shunned as a sector, aided and abetted by this ESG bubble that's underway."
However, not every stock in the portfolio needs a catalyst.
"Some are steady state growth businesses, tremendous franchises, we're still happy with the valuation, but others are either change or undervalued cash streams."
Bennett believes his success in 2020 came down to recognizing early on that there would be V-shaped recovery in the industrial sphere and the economic recovery would follow the same trajectory of East to West in the same way the pandemic did. Thus, he tilted his portfolio to become more industrial and more cyclical.
For 2021 and beyond, Bennett and his team are making a bigger bet.
"So we're actually making a big call that the pandemic coincides with, if not, ushers in a change in market leadership," Bennett said.
Bennett predicts the following 5 changes into 2021 and over the course of the decade:
1. A change in sentiment toward bonds
"I think you're coming to the end of a three-decade or more bond bull market and you're going to enter the bond bear market," Bennett said.
This prediction comes as government bonds in both the US and Europe have record low yields. As a result, many top investment firms are recommending investors be overweight equities and other risky assets to compensate for low yields in 2021.
2. The end of growth supremacy
Bennett thinks growth stocks have gone into a bubble, including technology stocks. But that will shift in 2021 as investors return to value investing.
One thing Bennett cautions investors on is not to underestimate the sheer number of fund managers and funds who have become "style junkies", Bennett said.
There is a full generation of fund managers who have never known rising interest rates, never known inflation and never known value stocks to outperform growth stocks, Bennett said. He believes in a lot of cases certain factors, such as a style, is what's really driving fund strategies.
"There's quite a lot of fund managers at the moment looking good because they're growth managers and I think that's just on the verge of being challenged," Bennett said.
3. The bursting of bubbles
"We are in a very easy-money environment, we have bubbles underway. One of them's called the NASDAQ. The next bubble that's going to be enormous is ESG," Bennett said.
Bennett believes "bubbly behavior" is linked to the abundance of cheap credit, thanks to central banks slashing interest rates and pumping the financial system full of liquidity.
"You already had money printing, along comes the pandemic," Bennett said. "And now it's just all bets are on. I mean, throw money at it, print money, fiscal expansion, and everybody looks good in such times."
"This could morph into the roaring 20s and then it will end horribly badly, as the roaring 20s did," Bennett said, referring to the decade of widespread economic and financial expansion that ensued after the First World War and that culminated in the stock market crash of 1929 that triggered the Great Depression.
"There's a real chance here of a roaring 20s type of boom, I think you're gonna get an inflationary boom and it could be a roaring 20s that will end badly," he said.
4. Inflation comes back
"I see so much of the world's assets and savings parked and dammed up in asset classes in areas that are going to prove painful and that is disinflationary beneficiaries, which have won for the last 10 to 30 years," Bennet said. "There's a massive regime change underway in terms of the winners of the next decade not being the winners of the last decade."
5. Dawning of the Asian century
Bennett's most bullish call is what he calls the dawning of the Asian century. He believes we are witnessing the end of the American century, which has been accelerated by the pandemic.
Looking at China's rise and broader Asia's momentum, he expects a change in market leadership regardless of what regimes are in control, driven in particular by inflation.
"I think we can, sometimes we can be guilty of affording too much respect or power to regimes or individuals within parliament or at the White House," Bennett said. "In other words, they're not in control, they won't be in control of inflation if the inflation genie gets out the bottle, they can't put it back in the bottle … there are powerful forces going on, that are way beyond any individual particular regime."
Where does Europe fit?
Bennett highlights Europe's focus on the green recovery and its initiative on the green taxonomy will be of benefit in coming years.
"Europe lost the tech race, Europe lost to Silicon Valley," Bennet said. "It doesn't want to lose this one. And it's ahead of the game versus America when it comes to the taxonomy."
The country's push on the green agenda and recovery combined with its historic roots in many Asian countries will place Europe in a good place going forward, Bennet said.
"I just think you and I are living through a really quite seismic change geopolitically speaking, but also in market leadership, regional leadership. I think the sort of hither to unthinkable is now thinkable and Europe might just be on the verge of outperforming America in equity terms, I actually think that's what's going to happen," Bennett said.
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