Janus Henderson Mortgage-Backed Securities ETF JMBS embraces the opportunity to generate alpha through active management, but its sometimes outsize exposure to nongovernment debt relative to peers warrants caution. It receives a Morningstar Analyst Rating of Neutral.

This strategy, launched in 2018, is one of several overseen by lead manager John Kerschner, who joined Janus Henderson in 2010 to head up the firm’s U.S. securitized effort. Nick Childs, who joined the firm shortly before this strategy’s launch, is Kerschner’s sidekick. Both come with experience managing securitized products and are making some strides in bolstering their team with additional data analytics firepower.

The managers look to maintain a tight correlation with the Bloomberg US MBS Index by adopting a duration-neutral approach and staying invested in agency MBS, though they can invest up to 20% in nonagency securities such as commercial MBS and asset-backed securities, and they have made liberal use of this allowance on multiple occasions since mid-2019. That sizable nonagency allocation (12% of assets on average for calendar year 2022) has often exceeded the 10% limit allowed for the intermediate government Morningstar Category and introduces credit risk not typically found in a strategy focused on agency MBS.

For instance, the strategy fell behind all but one of its category peers as its nonagency holdings struggled in February and March 2020, though those holdings subsequently rallied and helped the strategy to outperform its rivals in the trailing 12 months through March 2021. The strategy’s relatively modest interest-rate risk versus its peers in part owing to its avoidance of U.S. Treasuries also provided a boost in the early stretches of 2021 as interest rates rose. Longer-term performance over its relatively brief history from October 2018 inception through March 2023 lands it in the top quintile of the category.

Analyst Rating

More than a sprinkle of nongovernment debt.

Analyst

Chiayi Tsui

The strategy can take on large positions in nonagency securities and has at various times exceeded nonagency allocation limits for the intermediate government category; moreover, it can also utilize meaningful leverage. It earns a Process Pillar rating of Average.

The strategy adopts a duration-neutral approach and maintains closeness to its benchmark, the Bloomberg US MBS Index. The foundation of the investment process is the team's prepayment modeling and analysis. The team uses Bloomberg and Yield Book for its prepayment model, then layers its own assumptions to further analyze the underlying mortgage pools, seeking to identify instances where borrower behavior or risk is misunderstood and mispriced. The team’s prepayment analysis takes into consideration loan-level attributes as well as macroeconomic level factors.

The strategy’s investable universe consists primarily of agency MBS; exposure to nonagency fare typically will be AAA or AA rated, though the managers don’t pay much heed to credit ratings, preferring to focus on factors such as risk diversification and carry enhancement. That allocation to nonagency can be up to 20% of holdings and has served as a return enhancer considering the benchmark consists of only agency MBS. Like some mortgage-focused peers, the managers employ leverage by using TBA securities (a type of mortgage forward) to take the strategy’s economic exposure above 100%, typically in the range of 120% and 130% of net assets.

Average

Process

This strategy’s management duo brings broad knowledge of securitized products to this strategy, but the supporting cast has seen some experience drain, and budding efforts to bolster its data analytics personnel require further observation. It earns a People Pillar rating of Average.

Lead manager John Kerschner and comanager Nick Childs are the backbones of this strategy; the duo boasts 50-plus years of combined industry experience, and neither is a stranger to managing fixed-income strategies focused on MBS. Kerschner has served as head of Janus Henderson’s U.S. securitized group since 2010 and has gradually built out the firm’s securitized effort, while Childs came to Janus with experience in prepayment modeling, borrower behavior modeling, and MBS structure analysis. Both managers have been on this strategy since its 2018 inception.

There is not the same level of depth in the overall tenure of the supporting team of analysts and traders, however, and departures since 2019 have represented some experience drain, though the analysts possess diverse backgrounds and a couple have ascended the ranks quite rapidly. And while the focus on agency MBS indicates that a lighter support lineup might suffice, ongoing efforts to improve quantitative capabilities require more manpower than is available at their disposal and the managers are looking to make additional hires.

People

The May 2017 merger of Janus Capital and Henderson Group helped both firms expand their investment capabilities, scope of distribution, and scale. As of September 2021, Janus Henderson had USD 419 billion in assets under management. However, the firm has seen USD 80 billion in net outflows since the merger.

The specter of another merger looms large. Nelson Peltz's Trian Partners is now the public company's largest shareholder with a 15% stake. Peltz, who also owns a 10% stake in Invesco and serves on that firm's board of directors, has been vocal about the need for consolidation and scale in the asset-management industry. He played a part in Franklin Templeton's acquisition of Legg Mason as a shareholder of the latter.

Meanwhile, CEO Dick Weil will retire in March 2022, and no successor has been announced. Weil's departure adds to executive instability since the merger: The firm initially had a dual-CEO structure before Weil took over as the sole CEO in mid-2018.

Instability on the firm's Denver-based analyst team is also a concern. The 36-person team has seen consistent turnover since the merger with 18 departures. The firm has recruited experienced replacements, but the persistent turnover is not ideal. Positives include lower fees on legacy Henderson funds and the global implementation of risk-management tools. Janus Henderson earns an Average Parent rating.

Parent

Janus Henderson Mortgage-Backed Securities ETF

JMBS is an actively managed fund of mortgage-backed securities. The fund seeks a high level of total return.

JMBS is an actively managed ETF focused on producing alpha on mortgage-backed securities. The ETF managers employ leverage to give an extra push to long allocations focused on agency MBS. There is downside risk in the event of a recession, but JMBS may provide some protection due to its longer duration and historical outperformance during credit crunches.

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