Janus Henderson Short Term Income Managed Account Q1 2025 Commentary

The portfolio outperformed its benchmark due to an overweight allocation to credit spread risk and an underweight to interest rate risk, despite negative impacts from security selection. Looking ahead, the fund favors overweighting credit spread and duration risk, particularly in sectors like CLOs and ABS, citing attractive yields supported by a resilient U.S. economy and the Fed's rate-cutting cycle. The fund emphasizes maximizing income per unit of risk through careful bond selection, as macro bets are deemed less likely to outperform in the current environment.

Analysis

The portfolio delivered a gross return of 0.38%, outperforming the Bloomberg 1-3 Year US Gov/Credit Index, which returned -0.02%, driven by an overweight allocation to credit spread risk and an underweight to interest rate risk, although overall security selection detracted from relative performance. Key contributors included overweight positions in securitized credit sectors like CLOs, non-agency mortgages, CMBS, and ABS, while an allocation to agency MBS detracted. The U.S. economy demonstrated resilience with Q3 2024 GDP growth at 2.8% and unemployment steady around 4.1%. Despite a Treasury market sell-off that saw the 10-year yield rise from 3.78% to 4.57% by quarter-end, risk markets responded positively to the November election outcome, anticipating expansionary fiscal policies. The Federal Reserve initiated its rate-cutting cycle with a 50-basis-point cut in September but adopted a more hawkish stance in December, signaling only 50 bps of further cuts in 2025. Corporate investment-grade credit spreads tightened by 9 bps to 80 bps, and high-yield spreads tightened by 8 bps to 287 bps. Looking to 2025, the manager anticipates a favorable environment for fixed income, supported by a strong U.S. economy, the ongoing Fed rate-cutting cycle, and normalizing rate-spread correlations as inflation moderates towards the 2% target. The strategy favors an overweight to both credit spread risk, due to strong fundamentals and attractive relative valuations in securitized products over corporates, and duration risk, expecting further rate cuts and a steeper yield curve. The current market is viewed as a 'carry' and bond-picker's market, emphasizing income generation per unit of risk and careful bond selection over broad macro bets, with potential alpha opportunities arising from policy changes under the new administration.

Key Decisions for Investors

• Investors should consider focusing on maximizing income per unit of risk through diligent bond selection, as the current environment is seen as more favorable for carry strategies rather than broad macroeconomic bets.
• An overweight allocation to credit spread risk, particularly within securitized sectors such as CLOs and ABS which offer cheaper relative valuations compared to corporate bonds, may be warranted given the supportive economic backdrop and potential for spread tightening.
• Given the Federal Reserve's initiated rate-cutting cycle and expectations for further easing, investors might consider an overweight position in duration risk, anticipating a re-steepening of the yield curve.
• Monitor potential market volatility and alpha generation opportunities stemming from new U.S. administration policies, while also tracking inflation data to assess its impact on Fed policy and rate-spread correlations.