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BlackRock Science and Technology Trust (BST), is a perpetual closed-end equity on underlying equity portfolio, potentially reducing the fund's volatility. RiverFront currently offers model investment portfolios, ETFs and mutual funds, income and equity ETFs through partnerships with ALPS and First Trust. Battle of the internet: First Trust's FDN vs Invesco's PNQI. of these stocks most likely appear an investor's portfolios already due to.

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In this article, Neil Hermon, portfolio manager of the Henderson Smaller Companies Investment Trust at Janus Henderson Investors, explores moments that have defined the decade in Europe and reveals the “secret sauce” to the trust’s long-term outperformance.

Look past the noise, it’s the stocks that count

Investors could spend months mulling over geopolitical events or gloomy economic forecasts and what they might mean for their portfolios and their stock-picking process. The “macro” is undoubtedly important – unexpected events, such as the pandemic, can shake markets vigorously – so it’s understandable that they’re given close attention. Yet, very few long-term investors attribute their investing success to how they navigate the range of complex scenarios that may play out in markets, but rather take a disciplined approach to stock picking that remains consistent.

The past decade is a case in point. Though, by some measures, it was a blinding success for some equity investors, many describe the period as the “most hated rally in history”. Fresh from a searing financial crisis and a prior decade that proved a flop for equities, gains were built on a hesitant economic recovery, sceptical investor optimism, and underpinned by doses of emergency stimulus measures. With newspaper tabloids pedalling potential catalysts for the next financial downturn, there seemed plenty to worry about for European and UK investors.

At Henderson Smaller Companies Investment Trust, we looked past this macro noise, and instead focused on finding high-quality, high-growth businesses within the small and mid-cap (smid-cap) market. As long-term investors, we believe that these sorts of companies will weather the storms and thrive in the years beyond them. The trust aims to maximise shareholders’ total returnsby investing in smaller companies that are quoted in the UK. And through a disciplined and consistent investment approach and philosophy, the trust has beaten its benchmark in 16 of the 18 years in which I have been the manager.

A decade of curveballs

There is a reason why some call it the most hated bull market in history, and this resonates particularly strongly with European and UK investors. Still recovering from the financial crisis, the 2011 sovereign debt crisis dealt a fresh blow to Europe’s recovery. Political churn uncovered financial mismanagement by a range of governments, starting with Greece. Ratings downgrades and rising yields ensued, and snappy headlines containing the now infamous “[country]-exit” portmanteau – in this case “Grexit” – led to fears of contagion across the bloc and abroad.

To thwart the dissolution of the union, politicians argued and debated, and rounds of bailouts eventually followed. Meanwhile, central banks dosed markets with quantitative easing (QE) to sooth concerns and keep borrowing costs low amid the uncertainty. Yet still, the crisis dragged on for years, and European equities remained broadly out of favour.

Some would say the difficulties in finding a political solution in Europe laid the groundwork for Brexit, with groups taking aim at the perceived sluggishness of multilateral organisations such as the European Union and the International Monetary Fund amid a backdrop of rising nationalism. After the shock UK referendum result in 2016, four years of political spats between Britain and its incensed neighbour followed, and it was UK equities’ turn to feel the cold from investors.

Protracted Brexit uncertainty segued neatly into pandemic chaos, which sparked a global bear market. The impact was sharp and dramatic, although relatively short-lived thanks to the rapid injection of fiscal and monetary stimuli. Though Brexit uncertainty has abated, and we slowly put the pandemic to bed – the threat of inflation, rising transportation costs and concerns that central banks will begin removing stimulus measures and raise interest rates have emerged to hang over markets. It seems the anxiety never ends.

Remaining clear-eyed

Though the decade reads rather nightmarishly, the returns have been quite the opposite and particularly strong for smid-cap stocks, as illustrated below1:

Returnsover the past decade
FTSE 100+93%
Euro Stoxx-600+178%
FTSE 250+198%
Numis Smaller Companies Index+211%
Henderson Smaller Companies Investment Trust+521%

Warren Buffett once remarked that he doesn’t concern himself with the “macro stuff” because, although important, it is ultimately “not knowable”. Instead, he mused, it is much better to focus on “what is important and knowable”. For us, the Henderson Smaller Companies Investment Trust team – bottom-up stock pickers – what is important and knowable are the companies we invest in.

First, smaller companies tend to outperform broader markets over time. This is because, by their very nature, they are more innovative, faster-growing and have more entrepreneurial management at the helm. In addition, the ability to leverage their operations makes it easier for them to turn a pound of earnings into two when compared to larger firms.

Second, we believe that strong, high-quality growth companies are not only positioned to survive the crisis of the day but should continue on a trajectory of solid growth as idiosyncratic macro events fade into the history books. However, small and mid-cap stocks can be more volatile compared with their large counterparts.

We constantly follow the tried-and-tested process I have been using ever since taking over management of the trust in 2003. The primary ingredient we look for in a company is solid fundamentals – all the essential bits of a business that contribute to its success. By understanding these fully and ensuring they’re robust, we gain detailed insight into the potential of the company.

A process built to last

Alongside the insights and expertise of the small and mid-cap team at Janus Henderson Investors, we evaluate companies through our “4Ms” process. We analyse the quality of the business “model” and its “management”, the ways in which it makes and uses its “money”, and the “momentum” of its earnings reported to investors. This enables us to gain a clear understanding of the business and its markets. This also includes a strong valuation discipline encompassing a wide range of valuation techniques to ensure that the growth stocks we are purchasing are bought at an attractive price. It’s neatly summed-up as GARP – growth at a reasonable price.

The buy-and-sell criteria surrounding the 4Ms model is outlined in the chart below2:

What is more, we aim to hold on to stocks and “run our winners” as we believe long-term investing is consistent with wealth creation. This is evidenced in our portfolio holdings: 19 stocks have been held for longer than ten years and have weathered the storms of the past decade, while helping deliver exceptional performance. Prime examples of stocks that fit this bill can be seen in the table below3:

StockTenureReturn (share price total return)
Bellway+15 years+707%
RWS+15 years+883%
Howden+10 years+1,008%

This consistency of approach has also delivered at the portfolio level. The trust has returned +521% over the past decade (ending August 2021) compared with the benchmark (Numis Smaller Companies Index) return of +211%. This is significantly higher than its large-cap counterparts, which have returned +93% (as measured by the FTSE 100) over the same period. More recently, the trust outperformed its benchmark over its previous financial year ending May 2021 – meaning it has outperformed its benchmark in 16 of the past 18 years. It also marks the 18th consecutive year the trust has increased its total dividends. This consistency in outperformance not only reflects the quality of the team, but also highlights the importance of staying disciplined and sticking with a tried-and-tested investment process, in spite of the macro noise that has characterised the decade.

The next leg

On the whole, the outlook for markets looks much brighter than it has been for years. Companies are performing strongly, profits are growing, buoyed by the release of pent-up consumer demand, and UK valuations remain cheap compared with developed markets. However, inflation poses a risk, QE will soon be withdrawn, and who knows what might cause the next financial downturn. What is clear, however, is this it is a stock-pickers’ market and the ability to tune out the noise and focus on the fundamentals will be key to generating solid returns. As such, we at Henderson Smaller Companies Investment Trust will continue to focus on what is  “important and knowable”.

1 Source: Bloomberg, 31/08/2011 to 31/08/2021

2 Source: Henderson Smaller Companies Investment Trust: A decade of outperformance, as at August 2021

3 Source: Bloomberg, share price total return, 31/08/2011 to 31/08/2021

Discrete year performance % change (updated quarterly)Share PriceNav
30/09/2020 to 30/09/202166.156.6
30/09/2019 to 30/09/2020-10.6-4.0
28/09/2018 to 30/09/2019-2.9-5.2
29/09/2017 to 28/09/201818.410.6
30/09/2016 to 29/09/201723.626.2

References made to individual securities should not constitute or form part of any offer or solicitation to issue, sell, subscribe or purchase the security. Janus Henderson Investors, one of its affiliated advisors or its employees may have a position mentioned in the securities mentioned in the report.

These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. Any securities, funds, sectors and indices mentioned within this article do not constitute or form part of any offer or solicitation to buy or sell them.

Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.

The information in this article does not qualify as an investment recommendation.

For promotional purposes.

Important information

Please read the following important information regarding funds related to this article: The Henderson Smaller Companies Investment Trust plc

Before investing in an investment trust referred to in this document you should satisfy yourself as to its suitability and the risks involved. You may wish to consult a financial adviser.

Specific risks:

  • If a trust’s portfolio is concentrated towards a particular country or geographical region, the investment carries greater risk than a portfolio diversified across more countries.
  • Most of the investments in this portfolio are in smaller companies’ shares. They may be more difficult to buy and sell and their share price may fluctuate more than that of larger companies.
  • This trust is suitable to be used as one component in several in a diversified investment portfolio. Investors should consider carefully the proportion of their portfolio invested into this trust.
  • Active management techniques that have worked well in normal market conditions could prove ineffective or detrimental at other times.
  • The trust could lose money if a counterparty with which it trades becomes unwilling or unable to meet its obligations to the trust.
  • Shares can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
  • The return on your investment is directly related to the prevailing market price of the trust’s shares, which will trade at a varying discount (or premium) relative to the value of the underlying assets of the trust. As a result, losses (or gains) may be higher or lower than those of the trust’s assets.
  • The trust may use gearing as part of its investment strategy. If the trust utilises its ability to gear, the profits and losses incurred by the trust can be greater than those of a trust that does not use gearing.
  • Derivatives use exposes the trust to risks different from, and potentially greater than, the risks associated with investing directly in securities and may therefore result in additional loss, which could be significantly greater than the cost of the derivative.


References made to individual securities should not constitute or form part of any offer or solicitation to issue, sell, subscribe, or purchase the security. Janus Henderson Investors, one of its affiliated advisors, or its employees, may have a position mentioned in the securities mentioned in the report.

For promotional purposes. Not for onward distribution. Before investing in an investment trust referred to in this document, you should satisfy yourself as to its suitability and the risks involved, you may wish to consult a financial adviser. Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. Tax assumptions and reliefs depend upon an investor’s particular circumstances and may change if those circumstances or the law change. Nothing in this document is intended to or should be construed as advice.  This document is not a recommendation to sell or purchase any investment. It does not form part of any contract for the sale or purchase of any investment. We may record telephone calls for our mutual protection, to improve customer service and for regulatory record keeping purposes.

Issued in the UK by Janus Henderson Investors. Janus Henderson Investors is the name under which investment products and services are provided by Janus Capital International Limited (reg no. 3594615), Henderson Global Investors  Limited (reg. no. 906355), Henderson Investment Funds Limited (reg. no. 2678531), Henderson Equity Partners Limited (reg. no.2606646), (each registered in England and  Wales at 201 Bishopsgate, London EC2M 3AE and regulated by the Financial Conduct Authority) and Henderson Management S.A. (reg no. B22848 at 2 Rue de Bitbourg, L-1273, Luxembourg and regulated by the Commission de Surveillance du Secteur Financier).

Janus Henderson, Janus, Henderson, Intech, VelocityShares, Knowledge Shared, Knowledge. Shared and Knowledge Labs are trademarks of Janus Henderson Group plc or one of its subsidiaries. © Janus Henderson Group plc. 

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First Trust Capital Solutions L.P. (“FTCS”) is a holding company whose subsidiaries offer a curated spectrum of alternative investments across private equity, venture capital, hedge funds, real estate, and private credit. These solutions are offered in a variety of structures across the accreditation and liquidity spectrums including interval funds, private funds, and direct investments to broker-dealers, investment advisors, family offices, and institutions.

First Trust Capital Management

We offer a curated spectrum of alternative investments across private equity, venture capital, hedge funds, real estate, and private credit. These solutions are offered in a variety of structures across the accreditation and liquidity spectrums including interval funds, tender offer funds, private funds, and direct investments to financial advisors, family offices, and institutions.

First Trust Alternative Investment Research (“FTAIR”)

FTCS leverages an experienced research team to source top-tier managers across the alternative investment universe. Through a comprehensive due diligence process, the FTAIR team utilizes its expertise and extensive network to source investments offering competitive risk-adjusted returns.

First Trust Innovative Technologies (“FTIT”)

A FTCS subsidiary, First Trust Innovative Technologies delivers proprietary technology, integration, and transparency leading to an intuitive and user friendly  best-in-class investor experience. These benefits include a streamlined subscription process, consolidated K-1 tax reporting, efficient fund reporting and administration, and reduced investment minimums.



Investors should consider the investment objectives, risks, charges and expenses carefully before investing. For a prospectus or summary prospectus with this and other information about the META Metaverse ETF please call 1-855-561-5728 or visit the website at Read the prospectus or summary prospectus carefully before investing.

Investing involves risk, including possible loss of principal. Metaverse Companies and other companies that rely heavily on technology are particularly vulnerable to research and development costs, substantial capital requirements, product and services obsolescence, government regulation, and domestic and international competition, including competition from foreign competitors with lower production costs. Stocks of such companies, especially smaller, less-seasoned companies, may be more volatile than the overall market. Metaverse Companies may face dramatic and unpredictable changes in growth rates. Metaverse Companies may be targets of hacking and theft of proprietary or consumer information or disruptions in service, which could have a material adverse effect on their businesses. Fund investments will be concentrated in an industry or group of industries, and the value of Fund shares may rise and fall more than more diversified funds. Foreign investing involves social and political instability, market illiquidity, exchange-rate fluctuation, high volatility and limited regulation risks. Emerging markets involve different and greater risks, as they are smaller, less liquid and more volatile than more developed countries. Depositary Receipts involve risks similar to those associated with investments in foreign securities, but may not provide a return that corresponds precisely with that of the underlying shares. Please see the prospectus for details of these and other risks.

As an ETF, the fund may trade at a premium or discount to NAV. Shares of any ETF are bought and sold at market price (not NAV) and are not individually redeemed from the Fund. Due to the costs of buying or selling Shares, including brokerage commissions imposed by brokers and bid/ask spreads, frequent trading of Shares may significantly reduce investment results and an investment in Shares may not be advisable for investors who anticipate regularly making small investments. The Fund may invest in securities issued in initial public offerings. The market value of IPO shares will fluctuate considerably due to factors such as the absence of a prior public market, unseasoned trading, the small number of shares available for trading and limited information about the issuer. The purchase of IPO shares may involve high transaction costs. IPO shares are subject to market risk and liquidity risk. The Fund is a recently organized investment company with no operating history. The Fund invests in equity securities of SPACs, which raise assets to seek potential acquisition opportunities. Unless and until an acquisition is completed, a SPAC generally invests its assets in U.S. government securities, money market securities, and cash. Because SPACs have no operating history or ongoing business other than seeking acquisitions, the value of their securities is particularly dependent on the ability of the entity’s management to identify and complete a profitable acquisition. There is no guarantee that the SPACs in which the Fund invests will complete an acquisition or that any acquisitions that are completed will be profitable. Public stockholders of SPACs may not be afforded a meaningful opportunity to vote on a proposed initial business combination because certain stockholders, including stockholders affiliated with the management of the SPAC, may have sufficient voting power, and a financial incentive, to approve such a transaction without support from public stockholders. As a result, a SPAC may complete a business combination even though a majority of its public stockholders do not support such a combination. Some SPACs may pursue acquisitions only within certain industries or regions, which may increase the volatility of their prices.

Foreside Fund Services, LLC: Distributor.


*Neither Roundhill Investments nor META Metaverse ETF are affiliated with these financial services firms. Their listing should not be viewed as a recommendation or endorsement.


7 popular thematic ETFs: Here’s how to invest in some of the hottest trends

Thematic exchange-traded funds, or ETFs, allow you to invest in a number of the hottest trends and industries — from blockchain to cloud computing, and clean energy to cybersecurity. Thematic ETFs are an easy way to play a trend rather than trying to pick a winner, allowing you to ride the wave that’s carrying the whole sector.

Here are some thematic ETFs in the market’s hottest industries, including how big they are, their largest positions and how much they’ll cost you to own.

What is a thematic ETF?

A thematic ETF is a fund that offers the opportunity to invest based on a particular theme, such as climate change or artificial intelligence. The ETF then holds companies that should benefit from that trend.

While traditional ETFs are often based on a broad market index where investors can achieve diversification at a low cost, you likely won’t be sufficiently diversified just by owning a thematic ETF, because the companies’ fortunes will be heavily tied to the same underlying trend.

How a thematic ETF works

While ETFs first began as a cheap way to invest in the Standard & Poor’s 500 Index, they’re now a way to buy slices of any “exposure” you want. Looking for a specific country, industry or investing style? It’s a good bet there’s an ETF doing what you’re looking for. For example, new thematic ETFs get you a slice of red-hot industries.

Thematic ETFs allow investors who don’t want to do all the analytical work on individual companies to simply buy the industry or trend. So if you see the potential in cloud computing, you can buy the ETF and get a diversified cross-section of the industry at low expense and hassle.

Most ETFs work by replicating a specific weighted index of stocks, and thematic ETFs are often no different. They’ll buy whatever stock is in the index and weight it accordingly in the portfolio. By buying one share of the ETF you’re buying a stake in all the companies in the fund, gaining quick exposure to the theme and a narrow diversification across the companies there.

For that privilege, you’ll pay the fund manager an expense ratio. That’s a management fee measured as a percentage of the money you have invested in the fund. While the cost is quoted at an annual rate, the fee is deducted almost undetectably each day from the fund’s value.

Thematic ETFs are somewhat more expensive than some of the most popular index ETFs such as those based on the S&P 500. Fees on those popular funds can run less than 0.1 percent per year. In other words, you’ll pay $10 for every $10,000 you have invested in the fund.

While thematic ETF fees may be pricier than these cheap funds, they’re largely in line with the average expense ratio. Typically they’ll charge somewhere between 0.5 and 0.75 percent, meaning you’ll ultimately spend between $50 and $75 each year for every $10,000 invested.

If there’s a downside, the fund could be seriously hurt if something hits the sector or investors decide they don’t like it, and a thematic ETF’s narrow diversification won’t help reduce this risk.

These ETFs often have playful ticker symbols indicating what they are. For example, the symbol for the cloud computing fund is SKYY.

7 popular thematic ETFs

Below are seven popular funds that invest in some of the market’s hottest industries.

1. First Trust Cloud Computing ETF (SKYY)

This index ETF invests in companies that make money in cloud computing, a sector of the market that supplies on-demand services via the internet, such as data storage or computing power. The ETF has enjoyed a 28 percent annualized return in the previous five years, as of Oct. 20, 2021. The fund caps the position size of each stock to 4.5 percent of total assets.

Top 5 holdings: DigitalOcean Holdings, Oracle, VMWare, MongoDB, Alibaba

Net assets: $6.8 billion (as of Oct. 20, 2021)

Expense ratio: 0.60 percent

2. ARK Innovation ETF (ARKK)

This actively managed ETF invests in what the fund manager calls disruptive innovation, new products or services that could dramatically shift how the world works. Investments include genomics stocks, energy and automation technologies, shared infrastructure and services as well as fintech innovators. Over the five years to Oct. 20, 2021, the stock returned about 44 percent annually to investors.

Top 5 holdings: Tesla, Coinbase, Teladoc Health, Roku, Unity Software

Net assets: $21.4 billion (as of Oct. 20, 2021)

Expense ratio: 0.75 percent

3. Global X Robotics & Artificial Intelligence ETF (BOTZ)

This index ETF invests in companies that could benefit from the proliferation of robotics and artificial intelligence, including such products as industrial robots and automation as well as autonomous driving. The fund tracks the Indxx Global Robotics & Artificial Intelligence Index. As of Oct. 20, 2021, the ETF has returned about 20 percent annually over the past five years.

Top 5 holdings: Upstart Holdings, Nvidia, Keyence, Intuitive Surgical, ABB

Net assets: $2.8 billion (as of Oct. 20, 2021)

Expense ratio: 0.68 percent

4. First Trust NASDAQ Cybersecurity ETF (CIBR)

This fund’s ticker symbol indicates what it invests in – cybersecurity companies – and it tracks the Nasdaq CTA Cybersecurity Index. More specifically, it owns cybersecurity companies in the technology and industrial sectors, including those protecting networks, computers and mobile devices. As of Oct. 20, 2021, the fund returned about 23 percent annually over the last five years.

Top 5 holdings: Palo Alto Networks, Accenture, CrowdStrike, Okta, Cisco Systems

Net assets: $5.3 billion (as of Oct. 20, 2021)

Expense ratio: 0.60 percent

5. iShares Global Clean Energy ETF (ICLN)

This fund is sponsored by BlackRock, one of the world’s largest fund companies, and it tracks an index of global clean energy companies, including those involved with solar, wind and other renewable sources. As of Oct. 20, 2021, the fund returned 23 percent annually over the previous five years.

Top 5 holdings: Vestas Wind Systems, Enphase Energy, Orsted, Plug Power, Consolidated Edison

Net assets: $6.4 billion (as of Oct. 20, 2021)

Expense ratio: 0.42 percent

6. ARK Genomic Revolution ETF (ARKG)

Medical technology is one of the most exciting industries, and this actively managed fund is looking for those companies that can extend and improve human life through technological and scientific breakthroughs, and include those working with gene editing, stem cells and targeted therapeutics. As of Oct. 20, 2021, the fund returned about 35 percent annually to investors over the prior five years.

Top 5 holdings: Teladoc Health, Exact Sciences, Pacific Biosciences of California, Fate Therapeutics, Vertex Pharmaceuticals

Net assets: $7.2 billion (as of Oct. 20, 2021)

Expense ratio: 0.75 percent

7. Amplify Transformational Data Sharing ETF (BLOK)

Like its name suggests, this actively managed ETF invests in companies that develop and use blockchain technologies, the process behind cryptocurrency such as Bitcoin. The fund is relatively new, having been founded in January 2018, and so it’s also relatively small. As of Oct. 20, 2021, the fund returned more than 31 percent annually, including 111 percent over the last year.

Top 5 holdings: Marathon Digital Holdings, Hut 8 Mining, MicroStrategy, Coinbase, PayPal

Net assets: $1.4 billion (as of Oct. 20, 2021)

Expense ratio: 0.71 percent

Pros and cons of thematic investing

Thematic ETFs are popular for a number of reasons, but they also have some drawbacks. Here are some of the most important pros and cons of this approach.

Pros of thematic investing

  • Flexibility – Thematic ETFs offer investors a way to invest in a targeted “slice” of the market quickly and then sell it just as easily if they think the opportunity has run its course.
  • Diversification – Thematic ETFs may offer narrow diversification (all companies in a given industry) or broader diversification (companies across industries), but either way they put your eggs in more than one basket, reducing your risk.
  • Ease – Rather than needing to research and buy multiple stocks, you can know less about the individual companies and get in and out of the market with one transaction.
  • Low cost – You’ll pay a fee to the fund company running the ETF, but it’s often not so expensive for the diversification and expertise offered by the manager.

Cons of thematic investing

  • Higher risk than more diversified funds – A thematic ETF may be exposed to certain risks – such as declining multiples on growth stocks or specific sector risks – that make them riskier than more broadly diversified funds such as an S&P 500 index fund.
  • Volatility – Higher risk can translate into higher volatility, both on the upside and downside, especially for narrowly diversified funds.
  • May need to more actively manage – If you’re trying to use thematic ETFs to play a hot trend, you may want to actively manage them more so than you would for a typical broadly diversified index fund such as the S&P 500, where passive investing is a better approach.

Bottom line

From low costs to instant diversification to the ability to invest in a hot sector in one click, ETFs offer investors a lot of benefits. However, as you’re investing in these funds, pay attention to their holdings, because some funds won’t always own what their name indicates. You want to get what you’re paying for and not a high-priced fund with the same stocks as every other fund.

Learn more:

Note: Bankrate’s Brian Baker also contributed to an update of this story.

Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.


Portfolio Intelligence podcast: what P/E ratios are saying about stocks

John Bryson:

Hello, and welcome to the Thanksgiving edition of the Portfolio Intelligence podcast. As always I'm your host, John Bryson, head of investment consulting at John Hancock Investment Management. Today is November 17, 2021. And we're going to talk about some of the things that we're grateful for. First and foremost, I am grateful for my two most popular guests, Emily Roland and Matt Miskin, the co-chief investment strategist here at John Hancock Investment Management. They always bring great content to our conversations and I'm looking forward to hearing from them and what they're thankful for. So Matt and Emily welcome.

Emily Roland:

Thanks John. Happy Thanksgiving.

Matt Miskin:


John Bryson:

Thank you. You too. So let's jump right in. I'm going to start with you, Matt. Can you tell us what your most grateful for as it relates to the markets?

Matt Miskin:

So the earnings backdrop has been phenomenal this year and I think as investors, this year feels almost unnerving with how much the market has gone up. But if you put it in perspective of the earnings and the fundamental backdrop, earnings are up or are on track to be up about 45% this year for the S&P 500. To put that in perspective over the last year, the S&P 500 price is only up 31%. So earnings are actually growing faster than prices over the last year. And if there's one thing to be grateful for to us in this market is that the fundamental backdrop is actually sound. It actually supports where the market is. The multiple on the market has come down actually a little bit, not a lot, but it's come down from about 22, just over 22 times to 21 times.

Matt Miskin:

It hasn't gone up that much. It's not been a multiple expansion year. It's been an earnings growth year. And as we, Emily and I often say, stocks follow profits, and this year has been that. So as investors think about their portfolios and think about the equity component, that profit engine has been something to really be thankful for because it's a fundamental catalyst that's really played out. And we're lucky that we got back out of this pandemic the way we did. We got corporate profitability to come back the way it did and that has really driven this market in 2021.

John Bryson:

It feels different this holiday season. Things are opening back up. There's hope that the face to face gather around the table opportunities will be there for everybody. So I share your optimism and excitement. Emily, what are you grateful for? Maybe you can focus the conversation around the economy.

Emily Roland:

So John, Matt covered the fundamental backdrop and I thought it was funny how he mentioned that stock prices were only up 31%. I guess we're conditioned to that now, but the economy's actually been another positive as of late that we're very thankful for. So Q3 wasn't all that great. We actually saw economic growth disappoint to the downside. So one thing we watch is the Citigroup Economic Surprise Index. It measures the degree to which economic data is essentially beating or missing estimates. And starting in September, we actually saw that fall into negative territory as the data came in worse than expected, but it started to turn up about two months ago and the data really just keeps crushing it. Looking just here in the first part of November, we just saw retail sales jump 1.7% month over month for the month of October. That's the largest gain that we've seen since March.

Emily Roland:

And it exceeded economists’ expectations by quite a bit. Retail sales are actually now up 16.3% on a year over year basis for October. So the consumer is really remaining the workhorse of this economy. Another standout data point, U.S. services PMI hitting a new all-time high. So we are seeing this shift from goods consumption, which has been the primary driver of growth since the pandemic over to services, as this reopening has continued to accelerate.

Emily Roland:

And then also the jobs report for October, we saw really solid gains in employment. We added over 500,000 jobs for the month of October. We saw significant upward revisions, the tune of 235,000 for the prior two months. So the data is really coming in solid, which essentially helps contribute to that better earnings backdrop that Matt talked about. And from an economic standpoint, it means that demand is still very robust. That's what we're seeing in the PMI data. That's what we're seeing in the retail sales data. So even in the face of higher inflation, it took us like three minutes to get to the I word, inflation and those higher input costs, we're still not seeing that demand destruction that sometimes comes along with higher prices. So all good signs here as we head into the last month of the year and into 2022.

John Bryson:

Excellent. Now, when we bring this together, the combination of the economy and the markets, a big player that we haven't mentioned yet is the Fed. Matt, how does this play into your view of the Fed and what they're thinking going forward? And is there anything that we should be thankful for?

Matt Miskin:

One thing that I think, it's going to turn it on its head is I think we should be thankful for supply chain disruptions. And I know that sounds crazy because as we go out shopping right now for holidays, it's nuts and we're trying to find things and it's difficult, but if you didn't have these supply chain disruptions as basically an excuse for this higher inflation, the Fed would be probably raising rates already. And Powell and the Fed are using these supply chain disruptions as a scapegoat. They're saying, look, it's transitory, higher inflation. Yes. But we're going to be really slow to move forward because they believe that as these supply chain disruptions come off, these bottlenecks come off, that actually inflation could dissipate. And that is a key linchpin to the overall view that we have on the equity markets, on the cycle.

Matt Miskin:

If the Fed, if Powell, if you rewind to old Fed chairs Volcker or Greenspan, they probably would've been raising rates by this point. Inflation is above the 2% target. They were raising rates aggressively before. Powell and The fed are giving this economy more runway. And that is something that is, I think it's a mix of Powell and the Fed and where they've become, because inflation was so low for so long, but also because they have an excuse in terms of inflation being elevated and that's giving them the ability to move slowly. So we believe that the Fed is going to raise rates next year. We have changed that. Before we thought it was 2023. Now we're thinking one in 2022. They still got to reduce their tapering. Another thing is, is that we've got some grace period here in terms of tapering.

Matt Miskin:  

So it's already started in November, but it's forecasted to go until mid-June. So we've got six, eight months or so of tapering before they can even really raise rates in our view because they're not going to raise rates and do QE. That just, it would be mixed messages. So that pushes this out. And then if the supply chain disruptions come off by then, and we got more time, that gives the cycle more time. And we really think about the cycle. If the Fed is slow, methodical, that makes this cycle longer, and that is something we can be grateful for as we move into 2022.

John Bryson:  

Well, it's funny. Your point of view is interesting that you and Emily have both shared with me many times markets don't die natural deaths, bull markets don't. They get killed by the Fed. So the fact that the Fed would probably play slower going forward is a positive. And the other interesting thing I find about your comments is if you're thankful for supply chain disruptions, that means you are not in charge of Thanksgiving dinner. I can say that with certainty. Exactly. All right. Emily, one of the things we think about when we head into Thanksgiving is having a great meal with friends and family, and sometimes we overindulge let's be honest, right? So we've got a situation with a dovish Fed, strong economy, and a resilient market. Should we be worried about any investors overindulgent on risk right now?

Emily Roland:

So I think that's a great point. And this is the part of the market cycle, Matt talked about the cycle. It's moving quickly. And this is when we would start to get worried about excessive optimism or irrational exuberance when monetary policies accommodative, when the market's ripping higher. And in some ways we're sort of seeing that behavior in pockets of the market. Mean stocks made a bit of a comeback this quarter. We saw some not yet very profitable growth stocks continuing to get bit up, but broadly speaking, the flow data are suggesting that investor sentiment is actually still very conservative. We've seen money market funds actually see over 200 billion in inflows this year, which is the second highest among Morningstar categories. The highest has actually been taxable bonds, another more risk managed asset class. We've seen about $500 billion in inflows into taxable bond funds this year.

Emily Roland:

So just relentless pace of flows into less risky parts of the market. We're also seeing just looking at bank accounts. There's a record $18 trillion in cash that's sitting in bank accounts. So consumers balance sheets are very elevated. There's a ton of cash on the sidelines, whether it's waiting to be invested, sitting in money market funds, which aren't going to do you much good as an investor with rates as low as they are and inflationary pressures here remaining, or whether it's just cash simply sitting in bank accounts. As that cash starts to get put to work, that is also something that could extend this cycle. So again, not really seeing that behavior in a broad way yet, which means that we still are feeling very constructive as far as the year ahead, in terms of equities broadly speaking. We do think that it's important to think about where the opportunities are.

Emily Roland:

We want to be cautious about taking too much risk in portfolios, really loading up on those really cyclical, highly economically sensitive areas of the portfolio that tend to do well in that very first phase of a recovery. Instead, we want to start to think about this mid cycle environment where quality is going to become more important. So looking for stocks or sectors that have great balance sheets, ability to pass on higher input costs with pricing power, a great competitive position, and strong earnings growth prospects is really where we want to be focused. So quality will be the name of the game into next year, but we still certainly think that this market has some legs. We just think it's important to be careful about where you're invested.

John Bryson:  

Excellent. And Matt maybe tie it all together for us. Our key audience here is financial advisors and investment professionals. What should they be thankful for in terms of a diversified portfolio and portfolio construction?

Matt Miskin:  

So when you think about this year, it's been a great year for U.S. equities and broadly speaking equities. And it's been a risk on year, but the part of a portfolio that has struggled is bonds and is fixed income. And you've seen high quality bond yields rise, prices down, treasuries most notably. And the higher quality bonds you had, the worse they did. And right now, I know diversification, clients never like the part of the portfolio that doesn't do as well, or might be down a bit when other part is doing better. And you almost have this feeling that you want to take the part that's down and make it more like the part that's up. But what we're seeing this year is a rerating in bond yields and higher quality bond yields are, they're in essence reloading, so they're going up.

Matt Miskin:  

And when we look out from here, you actually, that's a good thing. We're not in a recession yet. We don't believe that it's near by any means, but if yields rise on high quality bonds, when you really need them, they're going to have more return potential because that starting yield is going to be higher. So if yields come back down because we have a growth scare or we do have a recession at some point, that's going to lead to more return potential, and that's going to provide a better buffer for portfolios. So the diversifying component of fixed income is it's working this year. Stocks are up, bonds are down a little bit. That's totally normal. But what we're looking at for bonds is it's almost like your relief pitcher. So right now your pitcher in the game is equities and they're going at it.

Matt Miskin:  

It's inning after inning and they're pitching great. You're letting your bonds rest right now. Let your bonds come in at that eighth to ninth inning of the cycle, and they're getting better. They like resting because that gives them better ability to pitch for those final innings for you. And the higher the yields on a high quality bond, the better return potential, the better diversification potential. So I know on the face of it we don't like anything down, but that is something that can be beneficial as we think years from now and we move on from inflation risk to growth risk, or credit risk. And that's something that in terms of a portfolio context, we'll be better off.

John Bryson:  

That's great insight. I'll be honest I would've thought you would've gone with a football analogy since we're coming up on Thanksgiving, but I'm going to take the baseball analogy because it works. Well, what I'm thankful for, like I said at the beginning is the insights I always get from both you Matt and you Emily. So thank you for being on our podcast. Folks, if you want to hear more, they've just released their intro quarter market intelligence update. It's on our website, They also have an interesting blog piece on inflation and as always, you can follow them on Twitter @EmilyRRoland and Matthew_Miskin. And the last thing that I want to say that I'm thankful for is our audience. Thanks for listening in. Thanks for subscribing. We very much appreciate your support. I wanted to ask everybody to have a safe and wonderful Thanksgiving and we will be talking to you again before the end of the year. Bye everyone.


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