US soft drink manufacturer PepsiCo and chocolate producer Hershey are the top shorted names in the Janus Henderson Absolute Return portfolio managed by FE fundinfo Alpha Manager Ben Wallace.
His bets against these two names have already proven successful for the fund over the past year, as PepsiCo’s share price was down 8% in the time frame and Hershey’s more than 20%. But the manager thinks there’s still further to go and is still running a number of short positions in the food and beverage sector, especially in the US.
The opportunity lies in the spread of anti-obesity drugs such as Novo Nordisk’s and Eli Lilly’s GLP-1 products, which work by quenching thirsts and satisfying hungers. When prescribed them, calorie consumption drops by 40%, the manager explained.
But these medicines haven’t only declared war on extra pounds – they might also take down some companies in the process too.
“We're still halfway through the journey of discovering what these drugs might do to suppress human behaviour and appetite,” he said.
“The share prices of Novo Nordisk and Eli Lilly anticipate a huge market penetration, suggesting a proportional impact on companies such as PepsiCo. And yet there was no change in its long-term valuation. To me, it just didn't seem remotely logical.”
Once the bottom-up evaluation of those companies pointed to an attractive risk-reward opportunity, the manager initiated short positions in a few of those names, a lot of which are still on.
Wallace insists all his short positions derive from a bottom-up analysis of stock fundamentals, rather than macro or sector calls.
To prove his dislike for the food and beverage sector derived from bottom-up considerations, Wallace named another food-and-drink-related company that he likes, coke bottler Coca-Cola Europacific Partners (CCEP).
Performance of stock over 1yr
Source: Google Finance
“It has been taking market share in Europe and the Philippines, where there is a lot of volume growth and GLP-1s aren't prevalent and aren't likely to be for a long time,” he said.
“It's always the bottom-up that we look at. But what was very glaring to us was that there was nothing in the forecast to take any account of GLP-1s hitting US-facing companies.”
The performance of Janus Henderson Absolute Return is mostly attributed to stock selection. To use Wallace’s words: “I shouldn’t say this strategy is immune from market trends, but when it is at its best, the risk is in the stocks”.
The fund won a Trustnet ‘fund battle’ against one of its competitors, Aviva Absolute Return, last October, and has also been on many people’s radars for its winning streak, having concluded in December 2024 the 27th month in a row without losing money.
Performance of fund against sector and index over 1yr
Source: FE Analytics
In January returns have briefly been in the red, then recovered to just below 1% but tapered off again after that. Although he came close to losing his streak this month, the manager wasn’t disheartened.
“It is great having the streak, I really would love to keep it going,” he said. “But I have always measured myself over longer time frames and if this volatility means we have a down month, I’ll take it, if it leads to better outcomes further down the road.”
He also remained positive about his outlook for the rest of the year.
“Our portfolio works best in environments with dispersion and an element of volatility – be it because of geopolitics, economic noise or interest rates – and we will continue to have plenty of volatility and noise,” he said.
“Our data also showed that 2024 was the year with the highest amount of stock dispersion since 2009. If that continues, stock dispersion means although we might not get the macro right, we can still make money in the stocks, because the fundamentals outweigh the rest, with business models and valuations getting more differentiated.”