A Disappointing Turn for Janus

In the summer, Janus was looking like a great comeback story. Following poor bear market returns, the firm had managed to rebound to produce strong performance at a number of funds. Even longtime laggards  Janus Fund  and  Janus Worldwide  had started to outperform. In addition, we were pleased to see the firm hiring experienced analysts and revising manager bonuses to better align them with shareholder interests. Managers appeared to be buying in by investing large sums in their own funds.

However, just as we were warming up to the idea of recommending Janus again, it has taken a couple of big steps backward with the departures of three managers of its largest funds. Scott Schoelzel, who has put up strong returns at  Janus Twenty  over the past 10 years and at Janus Olympus before that, is leaving at year-end. Now we have two more departures. Within the past month, David Corkins, manager of Janus Fund, and Minyoung Sohn, manager of  Janus Growth & Income (JAGIX) and  Janus Fundamental Equity , have abruptly left the firm. Schoelzel and Corkins were two of its best and most experienced managers, and Sohn is a rising star who it tapped to run a substantial amount of money.

It's a big disappointment for a firm whose talents and depth had just finally caught up with its asset size. Previous waves of manager departures--some welcome, some not--had left Janus thin at the top even as the analyst ranks had been restocked. Put another way, it really couldn't afford to lose these three.

It's a shame because CEO Gary Black's plan seemed to have been working. He beefed up the analyst staff by hiring experienced analysts and broadening the coverage list. Janus' narrow focus on growth sectors had played a big part in its downfall in the bear market, as had its thin analyst ranks and the fact that it had to press some analysts into duty as managers before they were ready. Black also brought a welcome focus on risk, which had been clearly lacking in the period leading up to 2000.

Black also pushed Janus to refocus away from individual investors buying directly and instead on institutional accounts and broker-sold funds. Institutions demand greater discipline and often prefer multimanager approaches for the sake of stability. There's nothing wrong with that, but it's the polar opposite of Janus' history of freewheeling managers who enjoyed a lot of freedom. With the improved analyst staff, Black pushed managers to justify going against analyst recommendations. He also named fund managers to serve as chief investment officers and had the other sometimes more experienced managers report up to them.

Unfortunately, something about the changes to compensation, risk controls, and analyst work (or likely a combination of the three) rubbed managers the wrong way, and the firm has seen a number of good investors depart. That makes me more cautious about Janus, and I'm back in the wait-and-see mode. Janus still has some good managers, but I'd like to see greater stability before jumping in.

Who knows, we might see some former Janus managers take their resuscitated records and set up shop across the street.

Janus Goes Down a Notch in Culture
In our  Stewardship Grades, we have taken Janus' culture grade down a notch to D from C. (Click  here to see the grade.) We view management stability as a key gauge of culture, and unfortunately too many analysts and managers at Janus are voting with their feet. In addition, the firm has lost some top executives, such as the chief financial officer and the general counsel. We've seen that turnover is a hard thing to stop at many firms including Janus. Building a healthy culture that attracts and retains talented investors is one of the hardest things to do in the fund world. Usually stability or lack of it shows up in performance.

While we're pleased that Janus' performance has perked up, rapid turnover of managers threatens to undo it.