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Janus Capital’s Gross, Scholes, Maris Open 2015 Playbook

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Buckle up, investors, because the new year is likely to be volatile.

That is a consensus view from not one, but rather all the experts at Janus Capital Group, including Nobel Prize winning economist Myron Scholes, who assumed the fund company’s chief investment strategist role in 2014.

The Denver-based investment firm has kicked off the new year with an advisor-directed presentation of the range of views held by its portfolio managers, including bond fund manager Bill Gross.

The Janus experts don’t agree on every issue—the firm is showcasing the diversity and breadth of its talent pool—though on the question of volatility, all expect a wilder than usual ride, with Scholes calling for investors to boost liquidity, even at the expense of maximizing return.

“Now would be the time to avoid overreaching for the highest returns,” is how Scholes puts it, adding that “investors should gravitate to more liquid investments and consider increasing reserves at the margins. I would suggest paying up for liquidity at this juncture, even if it means taking a slightly lower return on those investments.”

The reason for the increased volatility?

“In the U.S., there is uncertainty about whether the Federal Reserve will continue to keep rates low in the face of increasing evidence the economy is improving,” comments Scholes. “Europe is teetering on the brink of deflation, and individual countries in the region differ on how to stimulate the economy. There is increasing instability in the Middle East. China and India are trying to make fundamental shifts in what drives their economy, and there will be bumps along the way.”

The Nobel Prize winner calls for increased diversification and warns that if a shock occurs, “a number of investments that looked unrelated before are going to look much more related during the volatility.”

The shared expectations on volatility make liquidity strategies a common theme in the Janus commentaries, a view Bill Gross of the Janus Global Unconstrained Bond Fund outlines in a discussion on global growth. Gross recommends short-maturity bonds, and is generally gloomy about global growth prospects (and indeed gloomier than others of his colleagues).

“Asset prices depend significantly on economic growth, and that isn’t good news for investors in 2015,” Gross says. “Aside from the United States, the growth outlook for developed countries and many emerging ones is subpar … Almost all economies are facing structural headwinds such as aging demographics, technological advances which depress job growth, and importantly, still highly levered private and public balance sheets.”

Gross’ colleague George Maris of the Janus Global Alpha Equity and Janus Global Select Fund expressed a far greater degree of optimism — about U.S. stocks in the short-term and global, especially Chinese, stocks in the medium to long term:

“As rising GDP leads to improved sales, companies with fixed operating costs should register expanding profit margins,” Maris comments. “This, along with lower energy prices putting more dollars in consumers’ pockets, is supportive of U.S. stocks. Yes, equities have become more fairly valued, but in comparison to bonds, cash or real estate, they remain a compelling asset class.”

That U.S. economic growth should support global exporters like Japan, Germany and China, adds Maris, who is especially sanguine about Chinese prospects:

“For China to be trading at a substantial discount to European market multiples, while recording 7% or even 6.5% real growth, seems like an attractive opportunity. Many investors are missing the big picture. For those who have a longer-term view and can withstand some short-term volatility, I expect exposure to this country to pay off over the medium to long term.”

Undergirding expectations about stocks and bonds are the Janus team’s view of monetary policy. The consensus view seems to be that the Fed will tighten this year, while other central banks hang loose, or possibly loosen further, creating a “central bank divergence” scenario.

To Ashwin Alankar, Janus’ head of asset allocation & risk management, this divergence is a “gift in disguise,” since the result of multiple monetary authorities tightening at the same time would be a liquidity crunch and global recession.

“A hard to beat scenario is for the major central banks to inject liquidity and stimulus in a coordinated fashion, but to turn off the spigots one at a time,” Alankar says. “And this is how the story has unfolded.”

While market observers are expecting that first tightening to come this year from the U.S. Fed, Bill Gross is not so sure the timing will occur according to that general consensus.

“With the U.S. dollar strengthening and oil prices declining, it is hard to see even the Fed raising short rates until late in 2015, if at all,” he comments.

That expectation fuels his risk-averse investment preference for the new year:

“With much of the benefit from loose monetary policies already priced into the markets, a more conservative investment approach may be warranted by maintaining some cash balances,” says Gross. “Be prepared for low returns in almost all asset categories.”

Those seeking high returns in various asset categories, namely Janus’  portfolio managers, expect that success in 2015 will require greater than usual discernment. That is because, the recovery in markets coming off the 2008 market crash was the rising tide lifting all boats, but success in the current more fully valued environment should be more restricted.

To Jeffrey Kautz, co-manager of Perkins Mid Cap Value, a fund in the Janus Capital Group family, that means emphasizing “quality stocks,” which he defines as: “companies that have balance sheets with low leverage, strong and recurring stable cash flow generation and strong capital return metrics like return on equity, return on assets and return on invested capital.”

Kautz expects “attractive entry points” for such stocks “should volatility re-emerge and push the market lower.”

While “high-quality” offers assurance to the investors cautious about market risks, other Janus Capital Group managers see catalysts to growth, among them Marc Pinto, who manages Janus Large Cap Growth, Opportunistic Growth and Focused Equity portfolios.

Pinto sees opportunity in companies that can dramatically reduce costs or enhance productivity, particularly among “companies where oil, or oil-based products, are a high input cost,” he says.

“I’m investing in a number of companies that should see their cost bases shrink significantly due directly, or indirectly, to cheaper oil,” Pinto continues. “Examples include anything from transportation companies, where fuel is a high input cost, to companies that use a lot of plastic or oil-based resin. Oil prices were a meaningful detriment to these companies’ earnings on the way up, and we expect it to be a meaningful benefit on the way down.”

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