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Has Janus Tamed Its Wild Side?

This fund family's corporate culture has mellowed, and investors likely will be better served by it.

Andrew Gogerty, 03/09/2010

Much has changed at Janus since founder Tom Bailey launched Janus Fund nearly 40 years ago. The Denver-based firm has faced booms and busts due to market cycles, but self-inflicted wounds stemming from succession, pay, and business-strategy squabbles have also taken a toll.

At Janus today, there's much less shooting from the hip, but its funds aren't tame. The firm has demonstrated a stronger commitment to serving shareholders well in recent years, and a new chief has a chance to show whether Janus can measure up to stiff competition from tested stewards of capital.

Richard Weil, former global head of PIMCO Advisory, assumed Janus' chief executive officer role in February 2009. Weil, a Denver native, also had previously served as PIMCO's chief operating officer. Weil's appointment brings much-needed stability and certainty to the firm's corporate ranks. Former CEO Gary Black, who arrived from Goldman Sachs in 2004 and stepped down in July 2009, was a controversial leader. Black reined in manager compensation at Janus and worked to de-emphasize Janus' star manager culture in favor of a more moderate culture in which responsibility and attention were spread more evenly among analysts and managers.

As part of that shift, Black cut back on manager compensation and ultimately drove several of its star skippers to leave the firm. In 2007, Janus' manager retention rate dipped to 86%. Firms known for their stable investment teams, such as American Funds and T. Rowe Price, have five-year manager-retention rates of greater than 94%. Since then, however, Janus' management ranks have stabilized. In 2009, 91% of Janus' fund managers remained the same throughout the year. One manager who left, Jason Yee of Janus Worldwide JAWWX, did so in April 2009 after a string of poor performance.PAGEBREAK

There are still good veteran managers around who represent the unconstrained, growth-seeking investment style that Janus has been known for, including David Decker of Janus Contrarian JSVAX, Brent Lynn of Janus Overseas JAOSX, and Ron Sachs of Janus Twenty JAVLX. But as a whole, Janus managers have grown more risk-aware. Dan Sherman, Janus' risk-management chief, is regarded by many managers as a valuable resource who provides insight into portfolio positioning. Janus also has invested in its analysts, having hired experienced researchers to help with stock and bond selection as well as less-experienced hires that it can train and mentor. The analysts now run three Janus funds--Janus Research JAMRX, Janus Research Core JAEIX, and Janus Global Research JARFX--and returns have been encouraging. Further deepening these teams would be a good step forward. A slew of manager departures in 2006 and 2007 pulled many of the strongest analysts into the manager ranks within a short period of time, leaving fewer viable candidates for more recent vacancies, such as the one left by Yee at Worldwide. Replenishing the bench is important and takes time.

Performance at many of Janus' key funds has been strong in the seven years following the 2000-02 bear market. While some riskier offerings tumbled in 2008's market slide, many rebounded sharply in 2009, returning to the top of their respective categories, as seen during the previous multiyear rally. Janus' stock price and fund flows also ticked up in 2009, surely boosting morale and helping the firm get on firmer footing. While total returns and peer-group rankings have been strong over the longer term at Janus, many shareholders, however, haven't realized those gains. Investors of many Janus funds--as well as riskier funds in general--tend to buy in when the funds are running hot and sell after they've fallen behind peers, locking in losses. At funds such as Janus Contrarian, Janus Overseas, and Janus High-Yield JAHYX, Morningstar Investor Returns, which reflect a typical investor's purchases and sales of fund shares, trail total returns over the past five years.

Janus has been an industry leader when it comes to aligning executive pay and investment with fund performance as well. Members of Janus' executive committee have made big, personal commitments to the firm's funds and have taken steps to mitigate the conflict that can exist between stock and fund shareholders. For example, each executive must own at least 2 times his salary in Janus stock and 2 times his salary in Janus mutual funds. The executives' compensation is tied to company financial metrics as well as more strategic goals, one of which is the performance of Janus mutual funds--the latter a rarity for fund company executives.

It remains to be seen how Weil's recent arrival will influence Janus' corporate culture. PIMCO is different in many ways, but it has some parallels to Janus: Both have a competitive, independent streak and a willingness to make bold investments. Weil will have to meld with top executives, many of whom also are new to Janus in recent years. He will also need to continue to guide the firm through its transition from a direct-sold fund shop to one that sells primarily through advisors, which represents a significant cultural shift at the firm. Janus streamlined its fund offerings in the summer of 2009, collapsing its advisor-sold and direct-sold strategies into single funds with multiple share classes.

Janus's fund performance and star manager culture has settled down and stabilized. The latest change at the top marks the next stage in Janus's development. While many of the pieces are in place to help sustain the performance turnaround at the firm's funds, the true test lies in its ability to create a better investing experience for shareholders. To be sure, the firm faces stiff competition from stewards that have produced decades of good results for fundholders, but Janus has demonstrated that it's in the hunt.

Andrew Gogerty is a mutual fund analyst with Morningstar.

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