Jay Sivapalan

Janus Henderson Investors as announced the launch of its fifth exchange-traded fund (ETF) in Australia, responding to increased investor and adviser demand for actively managed fixed interest products.

The Janus Henderson Australian Fixed Interest Active ETF (ticker: JFIX) is listed on Cboe Global Markets. First launched as a managed fund in 1994, the Janus Henderson Australian Fixed Interest strategy has more than $5.2 billion in funds under management ^[1] The actively managed ETF provides investors exposure to government and semi-government bonds as well as corporate and asset-backed securities.

Jay Sivapalan, Portfolio Manager and Head of Australian Fixed Interest at Janus Henderson Investors said: “We believe 2025 marks the beginning of a new growth story for fixed interest in Australia. Government policy settings aimed at stimulating growth are likely to reignite investor interest in the asset class.”

“The fixed income ETF market has expanded significantly, and actively managed solutions are playing a growing role in helping investors navigate today’s complex market environment. These strategies offer access to income-generating opportunities, can help stabilise portfolios during volatility and provide a pathway to attractive returns across market cycles.”

The Janus Henderson Australian Fixed Interest Active ETF (JFIX) has been successfully run as a strategy for more than three decades and has been available to investors during that time as a managed fund. JFIX is the third fixed interest ETF in Janus Henderson’s local product suite, joining the Janus Henderson Tactical Income Active ETF (Cboe: TACT), and the Janus Henderson Sustainable Credit Active ETF (ASX: GOOD). The fund manager’s two remaining ETFs are in global equities (ASX: FUTR and JZRO) which are both available on the ASX.

Matt Gaden, Head of Australia at Janus Henderson Investors said: “As advisers reassess client portfolios, we’re seeing a clear shift in fixed income allocations. After a period of underweight exposure, many are now restoring bond allocations to benchmark levels — or even increasing them — to capture renewed opportunities in the asset class.”

“In an increasingly dynamic market, investors and advisers are strengthening their core portfolios and turning to actively managed fixed income solutions for diversification and income stability. With a strong 30-year track record, this strategy remains true to its objective — offering high-quality interest-bearing securities while prioritising capital preservation.”

JFIX’s launch adds to the fund manager’s global position as a fixed income ETF specialist. Globally, Janus Henderson is the third largest provider of actively managed fixed income ETFs and the eighth largest active ETF provider. ^[2]

———-
Notes:
[1] Strategy AUM includes the Janus Henderson Australian Fixed Interest Fund and Janus Henderson Australian Fixed Interest Fund – Institutional as at 31 December 2024.
[2] Source: Morningstar, as at 31 December 2024.

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Jay Sivapalan

Key takeaways

• The outlook for 2025 is broadly positive for fixed interest investors, with actively managed strategies well positioned to capitalise on opportunities and mitigate risks within the supportive policy environment.
• The global economic landscape will likely feature growth disparities between various regions and industries, highlighting the need for investors to be strategic in their fixed income allocations.
• Despite uneven growth, prepared investors can find opportunities by actively managing risks related to geopolitical tensions and a shift in the cost of capital.

Navigating fixed interest portfolios in 2025

As we look forward to 2025, the outlook for financial markets is positive, influenced by government policies that are anticipated to stimulate economic growth and revive investor enthusiasm. In our view, for fixed interest as an asset class, the return opportunities for investors remain positive for the year ahead. An active approach will likely be better placed to fully extract these opportunities and at the same time manage reasonable risks.

The financial landscape is expected to be shaped by a variety of factors, including falling interest rates and cash rate expectations, bond yields with less upside risks, credit risks driven by fundamentals and geopolitical dynamics. Despite the complexities, and the volatility that may ensue, we believe these risks are manageable if sized appropriately in portfolios and provide the opportunity for attractive returns through active management.

Our optimism stems from an assessment of where we are currently in the economic and business cycle, marginal policy direction (becoming more accommodative), underlying robust fundamentals and supportive technical factors including liquidity conditions. Whilst global economies were late cycle with restrictive monetary policy, they have weathered this well. In spite of the recent economic environment being much slower growing than during the pandemic policy-boosted era, labour markets remain resilient and corporate defaults are at only moderate levels.

We have witnessed a noticeable slowdown only within particular areas such as highly leveraged sectors, consumer discretionary, property development and small to medium enterprises. The results have been uneven across economies, with the US faring materially better than regions such as Europe and China, and with elevated defaults occurring in specific regions and sectors, whilst others have thrived and still exhibiting historically low defaults. We believe this is partly due to the healthy starting position for this recent managed downturn driven by highly targeted policy – namely consumers with built up savings during the pandemic, elevated levels of corporate profitability (especially relative to pre-pandemic levels), terming out of debt maturities and overall demand being better than anticipated.

The road ahead

As we turn to 2025, the marginal monetary and fiscal policy is becoming more supportive and the recent supply chain induced inflation is moderating. We assess this as a new ‘early stage’ pro-growth environment. While we still expect uneven growth across regions and industries, in our assessment the year ahead represents a positive one for fixed interest investors in both the rates and credit context. As always, risks remain that investors need to keep an eye on and navigate in an active manner, including:

• Winners and losers: The ability of policy to drive confidence and consumption, business investment based on emotions, otherwise known as the ‘unleashing of the animal spirits’, is much greater in some countries and industries than others. As an example, the US and its technologically-driven productivity enhancements aiding growth as opposed to the debt-laden fixed asset investment transition underway in China.
• Shifting global trade alignment: The importance of supply chains, philosophically aligned global trade, tariffs and the protection of key industries are all likely to play a role in supporting growth for some at the expense of others, as has been the case over the past four decades.
• Geopolitics at the fore: The peace dividend has been all but exhausted with a need for greater defence spending not seen in decades. We may well see markets and pure fundamentals play second fiddle to greater nationalistic motives. Investors will need to ‘swim with the tide’ to participate profitably, despite these currents being strong.
• Higher cost of money capital for all: Despite the easing cycle globally underway, the resulting cash rates and bond yields are unlikely to go down to anywhere near those witnessed through the pandemic. The cost of capital, as well as its availability, has changed for the better from an allocation perspective. This will continue to challenge certain over-levered industries as the recent past restrictive policy continues to work through economies. Monetary policy has long and variable lags having an adverse impact even after central banks progress their current easing cycle. Perhaps not as well assessed is the leverage governments carry, especially when fiscally challenged, even including the US and their privileged treasury bond market. It is not without risk that markets challenge this privilege with spikes in risk premia, as key buyers of treasuries look for alternatives.

Positioning opportunities

Whilst the already known and other left field risks need to be managed, as investors it is imperative that we remain focused on the opportunities in front of us. The acceptance of some volatility, coupled with a strong investment plan or blue print will assist in navigating any adverse scenarios and yield the best overall outcomes for investors.

Looking ahead, we see the environment as highly conducive for active and deliberate portfolio positioning in:

• Duration and yield curve selection, currently preferring an overweight stance in short to mid-term maturities most sensitive to the near term cash rate cycle.
• Breakeven inflation, looking for opportunities where short term factors incorrectly drive long term pricing of expected inflation.
• Sector allocation and selection, currently pursuing unfavoured areas such as semi-government bonds, senior debt of A-REITs, university debt, utilities and infrastructure that are necessary for the energy transition but have been caught up in the ESG crossfire.
• Higher yielding sectors, albeit defensively positioned for now, recognising the elevated defaults in certain pockets with minimal compensation, but remaining selective in certain areas such as loans where re-pricing has occurred.
• Tail risk hedging with credit protection, currently quite cheap compared to physical bonds and provides a cost efficient way to enjoy long physical credit exposures with good total expected returns from move, roll and carry (MoRoCa) whilst offsetting to varying degrees the risk of adverse outcomes.

With the above economic, market and valuation dynamic, a proactive and constructive stance to portfolio allocation we feel will serve fixed interest investors best, incorporating attractive levels of yield, some opportunity for capital gains and an element of cost efficient portfolio protection. Whilst not immediately obvious, 2025, in our assessment, is the beginning of a new growth story, driven by animal spirits rather than the end of the last that relied upon policy support.

By Jay Sivapalan, Head of Australian Fixed Interest

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Jay Sivapalan

Janus Henderson Investors is pleased to announce the Janus Henderson Sustainable Credit Fund and Janus Henderson Sustainable Credit Active ETF (Managed Fund) (ASX: GOOD), has been awarded a “Recommended” rating by Zenith Investment Partners.

Launched to Australian investors in February as an actively-managed unlisted managed fund and active ETF, the Janus Henderson Sustainable Credit Fund is a diversified credit portfolio designed to provide investors with an avenue to manage the fixed income portion of their portfolio with a sense of purpose.

Jointly managed by Melbourne-based Head of Australian Fixed Interest Jay Sivapalan and Portfolio Manager Shan Kwee, GOOD invests in credit securities which aim to make positive contributions to people and the planet by promoting decarbonisation, aiding the circular economy, supporting social equality, working to alleviate poverty and encouraging inclusion and social diversity.​

In its report, Zenith acknowledges the strong investment experience of Janus Henderson’s Australian Fixed Interest team, and its alignment with the investment approach of the strategy.

In its report, Zenith states, “Sivapalan is an experienced fixed income investor with strong leadership qualities. As one of the team’s longest-standing representatives, he has also been a key contributor to JHI’s fixed interest process, which has proven to be resilient across varying market conditions.”

Additionally, Zenith said it considered Shan Kwee “to be a pragmatic investment professional who demonstrates broad-based knowledge across credit market.”​

“From a portfolio perspective, the Fund may be suitable as a component in the income portion of a well-diversified portfolio. The Fund is considered appropriate as an exposure to domestic fixed interest and for blending with international fixed interest strategies to produce a more balanced set of investment outcomes,” Zenith said.​

“We ascribe a high level of conviction to its most senior representatives, who in turn benefit from the global insights garnered across JHI’s global network of portfolio managers and analysts. Furthermore, we view favourably the addition of further resourcing to the Melbourne-based team which we believe has helped to strengthen its bottom-up research and ESG capabilities.”

Matt Gaden, Head of Australia, said: “The Sustainable Credit Fund and Active ETF reflect Janus Henderson’s commitment to expanding and extending our local product offering to meet the growing demands of investors seeking responsible investment opportunities.

The launch of both products earlier this year complements our sustainable global equity offering (Global Sustainable Equity Active ETF (Managed Fund) (‘FUTR’)) and allows investors to build sustainable portfolios in a flexible way that aligns with their personal values and preferences.”

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As a senior member of the team, Emma will contribute to the investment strategy decision making process across all portfolios, conduct research for the investment team and contribute to the generation of active interest rate strategies that help achieve investment performance objectives.

Emma brings more than 25 years’ experience as a financial markets’ macroeconomist and strategist across investment management, investment banking and government sectors. She was most recently at Treasury Corporation of Victoria where she was responsible for providing views and analysis on the global and Australian economy to a large range of clients. Prior to this Emma held roles across National Australia Bank, Morgan Stanley and Merrill Lynch where she largely focused on combined macroeconomics and currency investment strategies roles. Emma has a Masters in Economics from the University of Adelaide.

Jay Sivapalan, Head of Australia Fixed Interest at Janus Henderson Investors said:

“Emma’s hire was a result of a thoughtful, patient and extensive search. Every member of the Australian Fixed Interest team was involved in her appointment and reached a unanimous agreement on her selection. We are delighted to welcome such a well-established, seasoned and high calibre economist. I know every member of our team is looking forward to working with her to deliver exceptional investment outcomes for our clients”.

Emma’s appointment enables the planned and phased retirement of Frank Uhlenbruch, who has decided to retire from the from the funds management industry after a long-standing career spanning over 39 years, including 28 years at Janus Henderson. Frank is due to retire in the second half of 2023 and will work closely with Emma to ensure a smooth transition and handover of responsibilities before his departure.

Jay Sivapalan, continues: “Whilst Frank will be with us for some time yet in order to ensure a smooth transition, I want to express that it has been a real privilege and pleasure to work alongside him. He has been a valued member of the investment team and has tirelessly put the needs of our clients first over the journey.  His experience and friendship will be missed. We look forward to keeping in close contact with him as he embarks on the next chapter and wish him well for the future.”

Matt Gaden, Head of Australia at Janus Henderson Investors said: “Emma’s appointment and smooth transition will ensure that clients and their investment outcomes driven by a long-standing repeatable process that has been in place for over two decades will be seamless.”

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Jay Sivapalan

Janus Henderson Investors (ASX / NYSE: JHG) has announced the launch of the Janus Henderson Sustainable Credit Active ETF (Managed Fund) (ASX ticker: ‘GOOD’).

Janus Henderson’s fourth active ETF, and second actively managed fixed income ETF, GOOD is a diversified credit portfolio designed to provide investors with an avenue to manage the fixed income portion of their portfolio with a sense of purpose.

Jointly managed by Melbourne-based Head of Australian Fixed Interest Jay Sivapalan and Portfolio Manager Shan Kwee, GOOD invests in credit securities which aim to make positive contributions to people and the planet by promoting decarbonisation, aiding the circular economy, supporting social equality, working to alleviate poverty and encouraging inclusion and social diversity.

Mr Sivapalan said, “We’re incredibly proud to introduce GOOD to Australian investors today. The complexity of modern ESG challenges require a deep understanding of, and regular interaction, with companies.

At Janus Henderson, we take an active approach to sustainable investing and working with companies and issuers that are trying to affect positive change while also aiming to enhance investment returns for Australian investors. The sustainable bond market in Australia is evolving rapidly and as such, nuanced analysis and decision making is required to select issuers that are best in class, which is critical to the success of our strategy.

To that end, GOOD will invest in debt securities issued by companies with robust sustainable practices and the potential to enhance outcomes for society’s wellbeing and the protection of our planet.”

Matt Gaden, Head of Australia at Janus Henderson Investors, added: “Janus Henderson is committed to expanding and extending our local product offering to meet the growing demands of investors seeking responsible investment opportunities.

“Along with our established sustainability strategies in global equities (Global Sustainable Equity Active ETF (Managed Fund) (‘FUTR’)) and natural resource equities (Net Zero Transition Resources Active ETF (Managed Fund) (‘JZRO’)), the launch of GOOD provides Australian investors with an all-important fixed income option to build portfolios around sustainable investments in a cost-efficient and flexible way.”

Mr Gaden noted the launch of GOOD marked Janus Henderson’s commitment to increase the accessibility of actively managed strategies for Australian investors.

“To date we’ve launched four active ETFs in Australia, enabling investors to take advantage of our deep pool of global investment expertise, with the ease of a simple stock market trade,” Mr Gaden said.

Overseen by Janus Henderson’s wider Australian Fixed Interest team, GOOD will benefit from exposure to investment experts with more than 18 years’ average investing experience, who are entrusted to manage more than A$18 billion on behalf of a wide range of institutional, wholesale and retail clients^.

The team is also supported by a growing global team of 16 dedicated ESG investment experts, and Janus Henderson’s deep global fixed income experience, with more than 110 fixed income investment professionals managing more than A$88 billion of assets for clients^[1].

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[1] All figures as at 31 December 2022, unless otherwise stated.

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Jay Sivapalan

Focus on Australia

• By 2025 Australia is expected to owe US$50,021 (AU$68,806) per person in government debt, doubling in value from 2021, adding a significant burden to taxpayers
• This increase will be accelerated in coming years as debt interest costs rise and the cost of government pandemic borrowing compounds – with Australia expected to see borrowing rise faster in 2022 than the UK or Europe
• Over the last five years, Australia’s debt has increased by 68%, or US$465bn (AU$639bn)
• In 2021 alone, Australian government debt jumped by US$107 billion (AU$147 billion) to US$1.063 trillion (AU$1.462 trillion) – more than all of APAC (ex-Japan) combined, raising the country’s debt burden by 11.2%, well ahead of the wider world
• In pursuit of Australia’s continued zero-Covid policy during the pandemic, the government borrowed additional debt worth over a fifth (22%) of Australia’s GDP

Global picture

• Global government debt jumped to US$65.4 trillion (AU$89.9 trillion) in 2021, up 7.8% as every country increased borrowing
• Debt servicing costs fell to a record low of US$1.01 trillion (AU$1.39 trillion), an effective interest rate of just 1.6%
• A strong economic recovery meant the global debt / GDP ratio improved to 80.7% in 2021 from 87.5% in 2020
  2022 will see sovereign debts rise further – to a record US$71.6 trillion (AU$98.4 trillion) – and interest costs are set to accelerate sharply, adding a significant burden to taxpayers globally in the coming years

2022 will see global sovereign debt rise by 9.5%, up by US$6.2 trillion (AU$8.53 trillion) to a record US$71.6 trillion (AU$98.4 trillion), according to the second annual Janus Henderson Sovereign Debt Index. The increase will be driven by the US, Japan and China in particular, though almost every country is expected to borrow further.

2021 saw sovereign debt levels hit new records, with Australia adding US$107 billion (AU$147 billion)

Global government debt jumped to a record US$65.4 trillion (AU$89.9 trillion) in 2021 with some countries taking on more debt than others as they continued to meet the pandemic’s challenges. On a constant-currency basis, public debt levels rose 7.8% as governments borrowed an additional net US$4.7 trillion (AU$6.5 trillion). Since the pandemic began, global sovereign debt has soared by over a quarter, up from US$52.2 trillion (AU$68.4 trillion) in January 2020 to today’s record.

Every country Janus Henderson examined saw borrowing rise in 2021. China’s debts rose fastest and by the most in cash terms, up by a fifth, or US$650 billion (AU$894 billion). Among large, developed economies, Germany saw the biggest increase in percentage terms, with borrowing rising by one seventh (+14.7%), almost twice the pace of the global average.

In pursuit of Australia’s continued zero-Covid policy, the country’s debt burden rose by over one tenth (+11.2%) in 2021, amounting additional debt worth over a fifth (22%) of its GDP. However, because Australia entered the pandemic with an exceptionally low debt/GDP ratio compared to its international peers – it remains one of the least indebted among the major industrialised nations.

Despite surging levels of borrowing, debt servicing costs remained low. Last year, the effective interest rate on all the world’s government debt was just 1.6%, down from 1.8% in 2020. This brought the total cost of servicing the debt down to $1.01 trillion, compared to $1.07 trillion in 2020. The strong global economic recovery meant the global debt / GDP ratio improved to 80.7% in 2021 from 87.5% in 2020 as the rebound in economic activity outpaced the increase in borrowing.

2022 will see debt servicing costs significantly increase – and continue to rise in the coming years

The global interest burden is set to rise by around one seventh on a constant-currency basis (14.5%) to US$1,160bn (AU$1,595bn) in 2022. The biggest impact is set to be felt in the UK thanks to a rising interest rates, the impact of higher inflation on the large amount of UK index-linked debt, and the cost of unwinding the quantitative easing (QE) program. As interest rates rise, there is a significant fiscal cost associated with unwinding QE. Central banks will crystallise losses on their bond holdings which have to be paid for by taxpayers.

Although Australia’s debt interest costs rose only slightly in 2021, the costs are set to accelerate in the coming years as interest rates rise. For this, Australia will also see its borrowing rise faster than the UK or Europe in 2022.

Bond market divergence signals opportunities for investors

During the first couple of years of the pandemic, bond markets around the world converged. Now, the theme is divergence. The US, UK, Europe, Canada and Australia are focused on tightening monetary policy to squeeze out inflation – both through higher interest rates and with tentative steps towards unwinding quantitative easing programmes. By contrast, the Chinese central bank is stimulating the economy with looser policy.

Rising inflation meant a bad year for bond-market returns, but at a time of global risk, bond markets offer opportunity for investors by picking the right geographies and maturities.

Janus Henderson sees asset allocation opportunities in shorter-dated bonds as they are less susceptible to changing market conditions. Janus Henderson believes markets are expecting more interest rate hikes than are likely to materialise and this means shorter-dated bonds will benefit if the tightening cycle ends sooner.

Jay Sivapalan, Head of Australian Fixed Interest at Janus Henderson said: “Australia entered the pandemic with an exceptionally low debt/GDP ratio by comparison to its international peers – 47%. Over the past two years, the government has borrowed significantly to support the economy, amounting to additional debt worth over a fifth (22%) of its GDP. This puts Australia at the top end of the global response over the past two years, taking on a larger additional debt burden than the UK and US (20%) and France and Germany (18% and 17% respectively).”

Bethany Payne, portfolio manager, global bonds at Janus Henderson said: “The pandemic has had a huge impact on government borrowing – and the after-effects are set to continue for some time yet. The tragedy unfolding in Ukraine is also likely to pressure Western governments to borrow more to fund increased defence spending. Despite recent volatility, opportunities exist for investors in sovereign bonds markets. During the first couple of years of the pandemic, the big theme was how bond markets around the world converged. Now, the theme is divergence; regime change is underway in the US, UK, Canada, Europe and Australia, which are now focused on how to tighten monetary policy to squeeze out inflation, while other regions are still in loosening mode. Regarding Asset Allocation, there are two areas of opportunity. One is China, which is actively engaging in loosening monetary policy, and Switzerland, which has more protection from inflationary pressure as energy takes up a much smaller percentage of its inflationary basket and their policy is tied, but lagging, to the ECB.

“As well as picking the right geographies, we think shorter-dated bonds look attractive at present relative to riskier long-term ones. When inflation and interest rates are rising, it is easy to dismiss fixed income as an asset class, particularly since bond valuations are relatively high by historical standards. But the valuation of many other assets classes is even higher and investor weightings to government bonds are relatively low, so there is a benefit in diversifying. Plus, the markets have largely adjusted for higher inflation expectations, so bonds bought today benefit from higher yields than a few months ago, meaning they are better value.”

The Janus Henderson Sovereign Debt Index tracks the borrowing of governments around the world and identifies the investment opportunities this presents.

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Jay Sivapalan

Focus on Australia

• Australian government debt jumped by US$163 billion (AU$211 billion) in 2020, equivalent to Hong Kong’s entire national debt
• The increase sees Australia jump two levels higher to 13th position in global public debt rankings
• Australia owes US$30,919 (AU$40,068) per person, half the amount owed by US citizens, and one-third that of British citizens
• Debts will again jump in 2021, adding further US$5,301 (AU$6,870) per person
• But the interest bill has dropped 56% from 1995, and with rates set to remain ultra-low, it is expected to drop a further 45% by 2025
• Despite Covid-19 resulting in a budget deficit of 7.3% in 2020, Australia’s debt to GDP ratio remains among the lowest in the
  developed world

Global picture

• Government debts jumped by 17.4% in 2020, rising by US$9.3 trillion (AU$12 trillion), taking on eight years’ worth of borrowing to fight Covid-19
• The increase was equivalent to one seventh (14.8%) of global GDP
• Government debt is worth US$13,050 (AU$16,912) for each citizen
• The biggest economies (US, Japan and China) took on the biggest debts in 2020, but the UK had the largest budget deficit
• But this debt is cheap to finance – borrowing costs have only risen by a fifth in 25 years despite debts 4x larger
• Debts will jump again in 2021, adding US$768 (AU$995) per person
• The steady fall in interest rates has driven dramatic returns for bond investors, but they are now on the rise (meaning bond prices are falling) as the world economy begins to recover

Global government debts jumped by over a sixth in 2020 to a record US$62.5 trillion (AU$81 trillion)

The world’s governments took on eight years’ worth of borrowing in 2020 to fight the global pandemic, increasing their debts by over a sixth (17.4%), according to the first edition of Janus Henderson’s Sovereign Debt Index. As eight in ten countries in the index slipped into recession, governments added US$9.3^[1] trillion (AU$12.1 trillion) to their tab. This is equivalent to one seventh (14.8%) of the world’s GDP^[2], a bigger slice than was needed to shore up the economy in the aftermath of the global financial crisis.

The world’s government-debt tally ended the year at a record US$62.5 trillion (AU$81 trillion), almost four times its 1995 total (+273%) and equivalent to US$13,050 (AU$16,912) per person^[3].

The biggest economies took on the biggest debts in 2020, with Australia adding US$163 billion (AU$211 billion).

Some countries have taken on more debt than others to meet the challenges of the last year. In absolute terms the biggest economies naturally borrowed most. The US, Japan and China alone accounted for more than half of the world’s new government borrowing in 2020.

Australia’s debt profile looks in some ways like its European and North American peers and in others like its Asian peers. Australia added US$163 billion (AU$211 billion) to its national debt in 2020, equivalent to the entire national debt of Hong Kong, pushing its total debt to a record high of US$788 billion (AU$1,021 billion). Since 1995 national debt has risen 420%, which has seen Australia jump two notches in the world’s public debt rankings to 13th position.

While growing its national debt at the same rate as the UK over the last 25 years, the 257% expansion of Australia’s economy during that time – almost three times faster than the UK – has ensured its debt to GDP level is just half of the UK’s at 55%, and 30 percentage points below the world average (at 84%). The figure is among the lowest in the world, and places Australia in the company of its Asian neighbours South Korea and Hong Kong.

Though the world’s governments ran deficits in every one of the last 25 years as spending ran ahead of tax collection, Australia had begun to reign in its outlays prior to Covid-19. However, the pandemic caused the nation to re-evaluate its economic priorities, and eventually saw it post a budget deficit of 7.3% in 2020.

But this debt is cheap to finance

As a respite, the sharply higher borrowing has not increased the burden of servicing all this debt. In 2020, the world’s governments had to pay just 2.0% for their loans^[4], compared to 7.6% in 1995.

Australia’s debt per capita increased by US$6,102 (AU$7,908) to US$30,919 (AU$40,068) in 2020, due to the government’s efforts to combat the economic impacts of the pandemic. However, the interest charged to each Australian has consistently dropped by 56% over the last 25 years as average interest rates have fallen from 6.6% to record low levels of 0.9%.

And because of the RBA’s ultra-low rates for longer approach, the interest bill will continue to drop by a further 45% by 2025, even as debt is expected to continue to rise.

The steady fall in interest rates has driven dramatic returns for bond investors

Governments finance their deficits by issuing bonds to investors which can be bought and sold on financial markets. The steady decline in interest rates over the last 25 years has driven significant returns for bond investors. Between 1995 and 2020 the Global Government Bonds Index^[5] generated a total return of 308% in USD terms, nearly five times the rate of inflation over the same period.

Matt Gaden, Head of Australia at Janus Henderson said: “The issuance of debt can sometimes be accompanied by negative connotations, but this view misunderstands the importance of government borrowing to support the economy in bad times like 2020. Things would have been far worse had governments not acted to protect millions of livelihoods. While debts are at record levels, lower interest rates have helped cushion the impact of that higher debt.

As we look to the year ahead, we expect the impact of the global pandemic to recede and perhaps even surprise on the upside in terms of economic activity. Coupled with fast recovering consumer and business confidence, this should bode well for investors.”

Jay Sivapalan Head of Australian Fixed Interest at Janus Henderson added: “Bond markets are a huge machine for judging the creditworthiness and economic performance of each country – they determine how much a government can borrow and what rate they must pay. In a sense, they are both the engine and the oil of financial markets. They are not only important for bond investors. The interest rates set in the bond markets affect the value of every asset, from peoples’ homes to stock markets.

“One way or another, everyone has a stake in the bond markets. People can own bonds in their own right, or they can choose to own them via fixed-income investment funds. Bonds help fund retirement incomes for superannuation funds. Insurance companies use them to manage risks and fund payouts. The banking system, mortgages and savings rates all depend on the bond markets. Without the bond markets modern economies simply could not function.

“Investors have enjoyed superb returns from bonds in recent years, with Australian government bonds particularly strong performers. However, record breaking lows in bond yields within the context of 400+ years of bond market history are now behind us. Risk free rates will begin to trend upwards gradually over the coming decade as central banks and governments err on the side of creating a slightly higher level of inflation than perhaps they’ve targeted in the past. At times, the moves in bond yields can be brisk as we have observed this year. Stronger economies tend to be bad news for bond prices and as such it’s prudent for investors to actively manage interest rate risk over the years ahead.”

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[1] If we take out the effect of changing exchange rates, the increase was US$8.1 trillion ($AU10 trillion)
[2] 14.8% of GDP of countries in the index – these countries represent 88% of global GDP
[3] Countries in our index represent 67% of the world’s population in 2020
[4] Debt interest payments divided by average public debt
[5] Bloomberg: W0G0, Total return, USD, Hedged

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Based in Melbourne, this role will directly report to Mr Jay Sivapalan, Head of Australian Fixed Interest.

Mr Sivapalan said: “The Janus Henderson Australian Fixed Interest business has experienced significant growth and evolved over the past few years with an increase in clients, products and assets under management. As we continue to serve our clients’ changing needs and expand our spectrum of contemporary investment solutions, we have added further resourcing in the area of credit research to help support this growth.”

Mr Sivapalan continues: “We are excited that Dinesh Kuhadas is joining our close knit Australian Fixed Interest investment team in Melbourne. Dinesh brings extensive credit research expertise to the team, with more than 19 years industry experience and 12 years’ specifically in credit analysis, which will further enhance our ability to deliver market-leading investment solutions for our clients.”

Mr Kuhadas, originally a trained Auditor, joins Janus Henderson Investors from River Capital (a Melbourne based boutique asset manager) where he has worked for the past 12 years as a Credit Analyst. During his time, he was responsible for bottom up credit research of Australian and global issuers in investment grade and high yield credit securities, as well as private debt/loans and asset backed markets. Mr Kuhadas is both a Chartered Accountant (CA) and a Certified Practicing Accountant (CPA) having gained his earlier experience in the financial services industry at Deloitte and PWC.

In addition, Janus Henderson announced that in recognition of the comprehensive inclusion of Environmental, Social and Governance (ESG) factors in bottom-up research over the past few years by the Janus Henderson Australian Fixed Interest team, Mr Ashley Kopczynski, Associate Portfolio Manager – Credit & ESG, will formally take carriage of the team’s ESG approach. This incorporates the ESG framework employed by the team, company engagement, investor advocacy and working with the firm’s steering committees as part of his role.

Commenting on this, Mr Sivapalan said “Investor preferences are evolving quickly in the area of ESG. The ability to direct capital to shape company strategy and behaviour is also becoming more tangible as clients’ expectations will only increase in the years ahead. We feel that having a dedicated champion such as Ashley within our investment team will ensure best practice is critical to being at the forefront of these developments.”  

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Jay Sivapalan

Janus Henderson’s flagship Tactical Income Fund (Fund), one of Australia’s most highly regarded defensive income strategies for investors, has marked its 10-year milestone.

Since inception in June 2009, the Fund has returned 5.25% p.a. (net of fees) compared to the Benchmark^[1] return of 4.48% p.a. over the same period^[2]. Established just after the Global Financial Crisis, the actively managed Fund aims to provide investors with a more flexible approach to the management of defensive assets.

With fixed interest central to investment portfolios of many Australian retirees, the Fund has navigated a challenging local bond market, exhibiting a stable return profile with a focus on capital preservation. Of the 31 negative monthly returns experienced in the Australian bond market over the last decade, the Fund has delivered positive monthly returns on 27 occasions.

Jay Sivapalan, Co-Head of Australian Fixed Interest, said: “In today’s complex and low return environment, an active investment management approach is crucial to ensure investors secure the best possible returns.

“Over the last decade, we have consistently delivered on the objectives crafted in 2009. The Fund’s nimble design enables tactical decisions on asset allocation, allowing us to respond favourably to changing market conditions.”

Matt Gaden, Head of Australia, added: “The Tactical Income Fund has been one of Janus Henderson’s most well supported funds, particularly with retail investors looking for reliable, risk-adjusted returns. The Fund continues to be a stand out investment option in the Australian fixed interest sector.

“Congratulations to the Australian Fixed Interest team for reaching this impressive milestone.”

The Fund is available to investors with a minimum investment of $25,000. The award-winning Australian Fixed Interest Team of eight manages in excess of $13 billion (as at 30 June 2019).

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Lee Mickelburough

Lee Mickelburough, Head of Australian Equities, discusses the lessons learned from 2018 and the themes shaping the team’s 2019 outlook.

What are the key themes likely to shape markets in 2019?

We expect some of the dominant themes of 2018 to persist into 2019. The strong growth we’ve seen in the United States, which has been pushing up interest rates and inflation pressure, will continue.

On the political side, the trade tension between the United States and China, and the resulting slowdown in Chinese growth will also likely persist. In Europe, moderating growth and potential risks arising from the Italian bond market are also significant, adding to a backdrop of potential risk events for 2019.

Where do you see the most important opportunities and risks within your asset class?

In Australia, the main area of focus for us has been on the slowdown in the housing market and the tightening of credit standards. This is particularly important for Australian equities given the dominance of banks in the benchmark and we are very cautious about this sector. Additionally, the Banking sector currently has very low levels of bad debts in the system, which is on the one hand is positive, but from such a low base, means we are likely to see an increase in bad debts in 2019.

Mining, the other dominant sector in the Australian market, is one we are wary of due to the slowdown in China. Interestingly, while this slowdown has been occurring, iron ore prices have been consistently strong, which has been encouraging from a cash flow perspective for businesses like BHP and Rio Tinto, within which we have select investments.

Given the headwinds for the banks and miners, which together make up about half of the Australian equity market, we’re looking outside these sectors for other opportunities. These include Consumer Staples players, like Woolworths. While this company hit a little bit of an air pocket the middle of the year with a slowdown in sales, it is now re-accelerating. In our view, it is a very well-managed business, a dominant player in its market, and the balance sheet is very strong. We also anticipate some capital return at some point in the early New Year, so strong cash flows and capital returns are very positive in the context of a cautious backdrop.

We also like the outdoor advertising sector and have holdings exposed to the sector. Outdoor advertising is coming back into vogue as part of an advertiser’s marketing mix given how it complements other forms of media. This is especially the case with the digitalisation of the sector, which is reducing the production costs associated with printing and installing advertisements, as well as enabling advertising to be more dynamic and varied by geography and time of day.

The outdoor advertising sector has also consolidated from a five player market down to a three player market, so we think returns and growth will be strong.

In a cautious market, we’re looking for interesting bottom-up opportunities and generally if they’ve got some defensive characteristics or they’ve done a reasonable acquisition, we’re interested in taking a closer look. We added Amcor, a packaging company, in the second half of 2018 as it is mainly exposed to the fast-moving consumer goods segment – a relatively defensive opportunity, which also benefits from a strong economy as well. Amcor has good US exposure and also just completed the acquisition of US competitor, Bemis. While Bemis has been very strong on product development and product innovation initiatives, it was not as strong on the manufacturing side, complementing Amcor, which was the opposite case.

Aside from defensive stocks, the Q4 market correction is throwing up a lot of really interesting opportunities from a bottom-up valuation perspective. With the market now trading closer to 14 times earnings, even though the backdrop is cautious, we think a lot of it is priced in and we’re finding really interesting opportunities in the market. Since the Global Financial Crisis we haven’t really seen that type of attractive earnings multiple.

Which chart do you think will be a key indicator for 2019?

I think the best indicator that you can focus on for 2019 is US 10 Year Bonds. It reflects what is going on in the interest rate markets, inflation and growth and also some of the geopolitical tensions that may occur in 2019.

If the bond yield is tracking higher, that would suggest inflationary pressures are building and we should be more cautious, growth will obviously be pretty strong in that environment. If it’s chugging along and we’ve got good moderate growth and moderate inflationary pressures, that is an ideal situation for staying long stocks and if yields start to fall rapidly that is obviously where there has been a hiccup somewhere, growth has deteriorated or there’s been a political issue.

Jay Sivapalan

Jay Sivapalan, Co-Head of Australian Fixed Interest, discusses the key themes, risks and opportunities for Australian fixed interest in 2019:

What are the key themes likely to shape markets in 2019?

As we look forward to 2019, we see further divergence of what the US Federal Reserve (Fed) will be doing relative to other central banks in terms of tightening the various forms of monetary policy that have been employed over the last decade. The Fed will continue to tighten monetary policy toward neutral policy settings over 2019. One key theme we’ll see is the impact from the unwinding of Quantitative Easing (QE) at a time of higher treasury bond supply.

A reassertion of inflation, especially wages inflation, will likely occupy the market’s focus and will dominate the broader commonly assumed disinflationary themes of the past decade, such as demographics, technological change and disruption.

For the US, the markets will grapple with properly pricing in tight monetary policy that is above neutral cash rates. It has been forgotten over the past decade that monetary policy has two sides, easy and tight.

Overall we continue to expect yields to rise further in 2019 and for the yield curve to become flatter as this occurs, but the broader trend is for a higher rates structure. Ultimately this is good for investors, but we do need to manage the journey along the way.

Where do you see the most important opportunities and risks within your asset class?

The key risk that needs to be watched and managed for fixed interest investors is interest rate risk, or more specifically, duration in a rising rate environment. In the case of Australian fixed interest, whilst we think this risk is relatively low given the Reserve Bank of Australia (RBA) is likely to be on hold over 2019 at a cash rate of 1.5%, Australian bond yields can lift in the short term on the back rising US yields. This creates for us both a risk that needs to be managed, but also great opportunities to add duration to capture higher yields that may not ultimately be sustained in markets.

In credit markets on the other hand, participating in the income remains an important source of excess return for investors. But the manner in which we participate is important at this more mature phase of the credit cycle. Whilst we don’t see credit markets as imminently risky, it is worthwhile continuing to be prudent when investing in corporate debt, favouring defensive sectors and being biased towards the higher credit quality spectrum. There have been some pockets of the Australian credit markets that have underperformed this year where we’ve had minimal exposure. One example is Australian AAA rated residential mortgage backed securities for obvious reasons. But at some stage, pricing is likely to get to levels where the breakeven returns are very much in favour of investors. This is an area we’ll be watching with interest over 2019 and looking to exploit.

How have your experiences in 2018 shifted your approach or outlook for 2019?

In many ways, 2018 was a year when we witnessed the shift in market thinking from the past decade where ultra-easy monetary and fiscal policies had supported economies to one where, at least in certain economies like the US, the degree of policy accommodation needed to be reined in. We think this paradigm shift will accelerate through the course of 2019. As such, our portfolio strategies will take this dynamic into account and we think a very flexible approach when dealing with both interest rate and credits risks will be paramount in navigating 2019 and beyond.

Which chart do you think will be a key indicator for 2019?

The one chart to continue to watch in 2019 will be the wages inflation in each economy. It is the ultimate validation of the effectiveness of monetary policy – of course, this comes with long and variable lags.

Markets had incorrectly assumed in the post-GFC era that relationships, like the Philips Curve, are no longer applicable. 2019 should confirm that they are indeed valid relationships, where economies operating above full employment will in due course produce wages inflation, which the central bank will ultimately need to respond to.

Clearly this is very relevant in the US, but even in economies like Australia which of course is lagging the US in terms of the monetary policy cycle, it is important to watch wages as a barometer of the positive offsets of consumption, infrastructure and exports relative to the slowing housing construction story.

Even in Australia, markets could at some stage in 2019 start grappling with some form of tightening monetary policy cycle over the subsequent two to three years (2020 and 2021). These dynamics need to be managed and will likely create opportunities for active managers.

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