Janus Managers Struggle While Its Analysts Thrive

Janus' equity funds have seen more than their share of performance woes lately. The funds generally got back on track in the middle of the previous decade after dreadful performance in the 2000-02 bear market. However, they posted weak relative returns (and hefty absolute losses) on average in 2008's sharp decline. They looked so-so in 2010 after enjoying big runups in 2009, and they've struggled mightily thus far in 2011. True, there have been a few bright spots in the firm's equity fund lineup during this period. Small-growth offerings  Janus Triton (JATTX) and  Janus Venture (JAVTX), as well as foreign-stock funds  Janus International Equity  and  Janus Overseas (JAOSX), have looked pretty good over the past three years, for example.

But the solid performers that really should draw attention are the firm's analyst-driven funds,  Janus Research (JAMRX) and  Janus Global Research (JARFX). The same analysts who supply ideas to the managers of Janus' other equity funds choose the stocks for these portfolios. And yet the analyst-run funds have beaten their in-house competition soundly of late. During the three years ended July 6, 2011, the median return ranking of Janus' other diversified stock funds within their respective categories is a mediocre 60. Meanwhile, Research and Global Research respectively land just outside the large-growth and world-stock categories' top quartiles over the same period. Results are similarly impressive for the analyst-run funds versus the Janus funds they compete with directly: Research has beaten the firm's other four large-growth funds by margins that range from an annualized 2.5% ( Janus Fund ) to an annualized 8.6% ( Janus Twenty ). Meanwhile, Global Research has beaten world-stock rivals  Janus Worldwide  and  Janus Global Select (JORNX) by an annualized 1.6% and 3.8%, respectively.

The picture over 12 months looks even worse for Janus managers: Global Research has beaten more than 80% of its world-stock peers and Research more than 60%; the other 12 diversified equity funds sport a median category rank of 88.

What's Gone Wrong?
The magnitude of the Research funds' margin of victory over their comparable siblings is eye-opening, considering the analysts apply the same philosophy at the Research funds and favor a number of the same stocks as the other funds' portfolio managers. What's behind the disparity?

A move toward style purity has been one detractor. Many of Janus' stock funds have tended to stay strictly within their stated market-cap ranges in recent years, so large-growth funds like Janus Fund and Janus Twenty have hefty stakes in big companies and little portfolio overlap with their smaller-cap siblings. That's a marked change from the freewheeling approach of the late 1990s, when many of the firm's funds owned the same red-hot tech and telecom names. In turn, that led to many of the funds' meteoric rises in the 1998-99 runup and precipitous falls in the 2000-02 bear market.

In contrast, the analyst-run funds have been allowed to stray a bit further down the market-cap ladder. While Research is still solidly in the large-cap portion of the Morningstar Style Box, its average market capitalization was recently just more than half that of Twenty and lower than the other large-growth funds' average market caps, too. That's given Research a boost over the past three years as smaller-cap stocks have beaten larger ones by a sizable margin. For example, one of Research's biggest recent winners has been semiconductor maker Atmel . It's a mid-cap stock, and prior to its 2010 runup it was on the low end of the mid-cap range. Other than Research, none of Janus' domestic large-cap funds recently owned Atmel--although Global Research, Global Select, Triton, and mid-growth fund  Janus Enterprise (JAENX) did. It's a similar story with British chipmaker  ARM Holdings , one of Research's other recent strong picks: Global Research, International Equity, and Janus Overseas hold it as well, but none of the other domestic-stock funds own this mid-cap firm.

It's hard to blame the other large-growth funds' woes purely on a large-cap emphasis, however. They do own some mid-cap firms (although their stakes were, until recently, often under 10% of assets), and they also aren't shy about fishing for ideas outside the United States. Yet they didn't own Atmel or ARM.

In the case of Global Research and its world-stock siblings, size hasn't really been a factor in their relative returns. Global Research's average market cap is well below the world-stock category average, but it isn't far from the average market caps of Global Select (which is a bit lower) and Worldwide (a bit higher). That's been the case throughout the past three years, so Global Research hasn't gained an edge over the other two by virtue of its market-cap profile. Poor stock-picking and manager turnover and shifting strategies are likely culprits. Worldwide has had no fewer than four managers in the past three years. Jason Yee's unsuccessful tenure ended in April 2009, and Laurent Saltiel, his replacement, put in just 13 months (albeit with good results) before leaving the firm. Brent Lynn, who manages Janus Overseas, took over as an interim manager for 10 months before George Maris was hired in March 2011 following a lengthy search. Meanwhile, Global Select (previously Janus Orion) saw its mandate change in September 2010 from a mid-growth fund to a global fund. It posted a big loss under manager John Eisinger in 2008, and after strong showings in 2009 and 2010, it's lagged most of its peers in 2011.

Will Recent Changes Pay Off?
It's possible that some of the shop's large-growth funds will perform more in line with Research in the future. Janus co-CIO Jonathan Coleman, who manages Janus Fund, says his fund will be modestly more flexible with regard to market caps going forward. Indeed, its mid-cap stake rose significantly in early 2011. But that's not necessarily good news: Large companies have lagged smaller ones for nearly all of the past 12 years, and many observers assert that they're cheaper. If large caps finally outperform for an extended period again, the fund might not make up as much ground on Research as it would if it maintained its mega-cap emphasis. That said, the fund's mid-cap weighting thus far is still below the large-growth category average.

Despite their struggles in recent years, we still have faith in some of the funds that directly compete with Research and Global Research. Although most of the managers don't have long tenures on their charges, some are quite proven. Janus Twenty and  Janus Forty (JDCAX) are run by Ron Sachs, who amassed a solid record at Janus Global Select in his 7.5-year stint there. And Coleman of Janus Fund did a fine job at both Venture and Enterprise in a combined 10 years of managing them. The prospects of  Janus Growth & Income (JAGIX), Global Select, and Worldwide may not be as strong, but each manager boasts substantial experience at Janus or elsewhere. True, the talent exodus that Janus endured in the middle of the past decade may still be impacting the firm; that's one reason why we regard the firm's corporate culture as just average. Ultimately, it's wise to be selective when choosing Janus funds. But perhaps if the managers take more cues from the firm's analysts, long-term performance will improve on a large scale.