2022 was a bumpy year in the markets, even for portfolio mangers who purposefully went out of their way to avoid turmoil. But the Janus Henderson Investors’ Balanced Fund has been able to shield itself from at least part of the year’s volatility by reducing exposure to equities and leaning more on fixed income. “The intention has always been to provide our investors with a smoother ride over time, with less volatility to returns by combining growth equities with fixed income,” said Jeremiah Buckley, a portfolio manager. In a year of broad market losses, that strategy has allowed the fund to outperform, at least on a relative basis. The retail share class (JABAX) lost 16.4% in 2022. That gives it a slight edge over the S & P 500 , which dropped nearly 20% last year . Morningstar rates the 30-year-old fund five stars among peers with 50% to 70% of allocations in equities. It has an annual expense ratio of 0.82%. ‘Harder to find a safe place’ In recent years, the fund’s focus on growth stocks has helped drive gains. The fund gained 22%, 14% and 17% annually in 2019 through 2021, respectively, as technology stocks outperformed. (JABAX ranks in the 8th percentile among its peer funds over the past five years, and the 4th percentile over the past 15, Morningstar says.) Winds shifted in 2022, however, as investors traded growth for value names as interest rates rose and concerns mounted over a looming recession. Buckley said he recognized early in the year that the inflationary environment could trigger Federal Reserve interest rate hikes, creating a harsh environment for both stocks and fixed income. But he felt more confident in how bond holdings would respond. In turn, he cut the percentage of the fund’s stock exposure to 55%, as of Nov. 30, from around 64%. Fixed income accounted for about 44%. “This year has been tricky, obviously, because there’s been such a high correlation between fixed income and equity returns,” he said. “It’s been harder to find a safe place, essentially, during this year.” The fund’s recent history shows a trend of underperforming during strong up years for the S & P 500, while being able to outperform in downdrafts. In 2018, for example, the last time the S & P 500 saw a down year, the Janus Henderson fund, which today runs assets of some $23.7 billion, eked out a 0.5% return. Buckley said it’s normal to adjust the fund’s allocation in times of turmoil. Equity allocations came down in 1999 ahead of the 2000-2002 bear market. Stock exposure came down again again in 2006 before the 2008 financial crisis, then rose back in 2009 to coincide with recovery. In early 2020, Janus Henderson lowered the fund’s equity allocation, but quickly added exposure again as the market improved. Microsoft , which Buckley characterizes as a “core growth” stock, made up the largest share of the fund as of Nov. 30, at 4.4%. The top 10 holdings comprised nearly 23% of fund assets . Within fixed income, Buckley said the fund has been more conservative by reducing exposure to corporate credit. The fund has moved from a focus on short duration to becoming more neutral amid growing hope the Federal Reserve will continue slowing its hikes in interest rates. The central bank raised borrowing costs half a percentage point in December after four straight increases of three quarters of a point earlier in the year. Long-term outperformer Most recently, Janus Henderson Balanced underperformed 77% of its peer group in 2022, pushed down by the recent rally in value stocks, according to Morningstar analyst Karen Zaya. But Zaya said the returns are attractive for long-term investors over longer time periods, especially given its relatively lower risk. When looking at its Sharpe ratio, which measures risk-adjusted returns, Zaya found that from December 2012 through November 2022, the balanced fund outperformed 97% of its peer group. “Diversifying your portfolio with bonds has historically added stability,” she said. “You may sacrifice some returns … but in the long run, it gives you a less volatile experience and can help keep an investor invested through the ups and the downs.” Another aspect of the portfolio is its emphasis on domestic rather than overseas securities compared with peers, which are typically more internationally diversified, Zaya said. That’s helped in recent years as U.S. equities outperformed international stocks. Despite the challenges of 2022, Buckley is optimistic about 2023. The fund has been watching for stocks with high yields and strong balance sheets that would help it navigate current volatility and a potential economic downturn in 2023, he said. Buckley is also expecting a “far less dramatic” correlation between the performance of stocks and bonds, which he hopes will provide more areas for returns in the new year. While he said tilting more toward bonds helped limit losses in 2022, he expects 2023 to be a relatively more favorable environment for stocks. “It’s going to be more of a stock-picker’s market, where security selection matters even more than a kind of macro orientation of a portfolio,” he said. “We’re doubling down on focusing on companies that we think have productivity initiatives, that have been able to invest through the pandemic, that will start to reap the rewards of that investment as we go into 2023.”
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