Can Janus' Core Funds Keep Up With Its Ambition?

Known as a growth-investing powerhouse through the 1990s, Janus has endured ups and downs in the 13 years since the tech-media-and-telecom bubble burst in the early 2000s--an event that took the fund family’s superior track record and reputation down with it. To the firm's credit, it has strengthened its research organization and diversified its mutual fund lineup--something that can’t be said of all the growth-equity shops of the 90s.

But change has since been a near constant at Janus for more than a decade, and while evolution can be a good thing, it takes time for fund shops to establish a comfort level with investors as to organizational stability and investment excellence. While the firm has expanded its investment repertoire to include various equity styles, more fixed income, quantitative investing, and a slowly growing liquid-alternatives group, it is still most readily recognized as a growth-equity shop. That some of Janus' larger funds have been suffering over the past several years makes the firm as a whole a tough sell, despite encouraging performance and asset growth in its fixed-income funds.

The firm has also employed four CEOs (plus an interim one for eight months) in the 11 years since founder Tom Bailey stepped down from that position in June 2002. The funds' performance woes, both in the early 2000s and more recently among its equity offerings, and new strategic directions that came with changes at the top have resulted in spates of manager departures.

Nonetheless, Janus’ resilience as a firm has been impressive. If the firm can continue to build on its relatively strong 2012, along with some other positive developments, the firm could emerge a stronger fund company. Time will tell.

The Top Down
Janus’ latest chief executive, former PIMCO veteran Dick Weil, came aboard in early 2010 and presides over a firm that is still trying to find its way in many respects. Weil says investment excellence is his top priority, and he spends much time thinking about whether a Janus fund is fulfilling its promise to fundholders. Relationship excellence is a second priority--and that's quite important considering the firm previously closed off direct access to its retail funds for new investors and is selling the funds through advisor and institutional channels.

At the margins according to Weil, there are other initiatives. For example, Weil brought in an alternatives team in 2012, and Janus Diversified Alternatives launched that December. It’s clear he would like to launch more alternatives-based funds, but the Janus funds’ board of trustees has advised the firm to move at a measured pace in this area.

Meanwhile, a combination of sizable, consistent outflows from Janus’ equity funds and a drop in investment-advisor fees has put financial pressure on the firm overall. But it received a shot in the arm in 2012 when Japanese insurer Dai-ichi agreed to take a 20% stake in the firm and invest more than $2 billion of its clients’ assets in Janus strategies. In addition to the immediate shoring up of the firm's balance sheet, this endeavor helps Janus in its efforts to expand internationally.

All of these moves could diversify Janus’ client base and ultimately stabilize cash flows for the funds, but it may take some time--and more importantly, continued strong performance--before Janus can stake its claim as a premier investment shop again.

Still on the Road to Recovery
Meanwhile, the investment shop is still recovering from its past. Janus made a name for itself in the 1990s as a growth-investing powerhouse, particularly among U.S. mid- and large-cap stocks. The firm's superior track record at the time and its reputation took a beating in the 2000-02 bear market, as the tech, media, and telecom stocks that Janus favored at the time plummeted. With a strengthened research organization, the firm started to reassert itself several years later, but the star managers of three of its largest funds, David Corkins of  Janus Fund  and Scott Schoelzel of  Janus Twenty , along with up-and-comer Minyoung Sohn of  Janus Growth & Income (JAGIX), all left in late 2007.

The managers’ departure owed in part to a change in the investment culture brought about by then-CEO Gary Black. Janus’ analyst staff began to expand significantly once the 2000-02 bear market exposed the hefty holdings overlap among its funds, and Black--along with research director Jim Goff--established a career track for analysts that would allow them to be compensated as much as portfolio managers if they performed well enough. In addition, the firm gave its analysts the ability to establish their own track records with the launches of the analyst-run  Janus Research (JAMRX) and  Janus Global Research (JAWWX).

These moves were ultimately good for the firm’s investing culture but represented a change from the personality-driven, star-manager culture that had defined Janus from its beginning. The funds previously run by Corkins, Schoelzel, and Sohn have yet to recover from their departures: Janus Fund, Janus Twenty, and Janus Growth & Income each trail three fourths of their large-growth peers over the past five years. Those showings have been particularly disappointing because each is run by an experienced Janus manager who has had some success with other vehicles. Jonathan Coleman, co-CIO who oversees the equity team, starred at  Janus Enterprise (JAENX) before taking over Janus Fund. Ron Sachs was on a hot streak at  Janus Global Select (JORNX) before being tapped to run Janus Twenty, and Marc Pinto performed well on institutional accounts before taking on Janus Growth & Income.

 Janus Overseas (JAOSX), the firm’s largest fund going into 2011, was previously a bright spot as Brent Lynn had built a superb--if volatile--record since former lead skipper Helen Young Hayes left in 2003. However, the fund’s big bets on emerging markets and a number of individual holdings led to a dreadful 2011, and 2012 was weak in relative terms as well. The firm has also never been able to right the ship at Hayes’ other former charge, Janus Worldwide, which last thrived in 1999, and that fund—which once weighed in at more than $40 billion in assets—was merged into Global Research in early 2013.

These struggling funds have seen substantial investor defections. The funds now run by Lynn, Coleman, Sachs, and Pinto have seen more than $18 billion in net outflows over the past three years (though each manger's largest charge is still among Janus' six largest funds). That has put pressure on the managers—redemptions in many cases ultimately indicate shareholders’ disappointment in the funds, and the fund’s performance-based management fees mean advisor revenue generated from these shrinking offerings is hit doubly hard. 

The one area within equities where Janus has continued to shine is small- and mid-cap U.S. stocks.  Janus Triton (JATTX) and  Janus Venture (JAVTX) have been consistent winners under Chad Meade and Brian Schaub, and those funds have grown quickly of late. Brian Demain, Coleman’s successor at Janus Enterprise, has also done a solid job.

Janus sees Meade and Schaub’s success through the pursuit of companies with sustainable competitive advantages as a blueprint for a number of its struggling equity funds, but it’s unclear whether managers across the lineup can pull that off on a consistent basis. 2012 was the best year in relative terms for the equity funds since at least 2009. But that may simply be yet another example of Janus doing well in a risk-on environment rather than the sign of a turnaround.

Coleman says the equity team has done some soul-searching regarding process and performance and believes the equity funds are better-positioned to deliver good results now. In 2011, the large-cap funds, which had previously focused on the biggest firms, began to take significant stakes in mid-cap stocks, because the firm found evidence that its research process is more effective in that arena. While mid-caps are typically less liquid than large-cap fare, which could result in Janus again owning big firmwide stakes in some companies (as was the case in the late 1990s), there are systems in place to guard against that. Dan Scherman, hired in 2005, oversees investment risk at Janus. He and his team monitor the firm’s ownership in individual companies. They also work to ensure that the portfolio managers run the funds in a manner that is consistent with client expectations, bringing a discipline that was lacking in the late 1990s.

If the funds with weak records don’t follow up on their 2012 success, it’s difficult to imagine that changes won’t be made. But does the firm have analysts ready to step into the current managers’ roles? Most of the recent open manager slots have been filled by outsiders. George Maris was brought in from Northern Trust to run Worldwide in 2011 (he now manages Global Select), former Janus analyst Dan Kozlowski was hired from a hedge fund in 2011 to run  Janus Contrarian (JSVAX) when longtime manager David Decker left, and Hiroshi Yoh was hired from the outside to run the newly launched Janus Asia Equity (JAQTX) in 2011.

The Fixed-Income Fix
Meanwhile, Janus’ fixed-income team has thrived under Gibson Smith, who joined the firm as an analyst in 2001 after working on Morgan Stanley's fixed-income team. Smith became the co-CIO in charge of this team in 2006. The funds, most notably  Janus Flexible Bond (JAFIX),  Janus Short-Term Bond (JASBX), and  Janus High-Yield  (JAHYX), have generated consistently solid returns—each has beaten more than three fourths of its peers over the past five years--and attracted steady and sizable inflows. That team’s assets under management have grown from less than $7 billion in 2008 to nearly $35 billion today.

Janus has made considerable investments in its fixed-income business along the way. That includes building up a proprietary risk-management system, which has since been expanded to the equity platform, and upgrading the analyst team in both skill and numbers. In particular, Smith has added senior personnel with experience in mortgage-backed and global bonds while keeping the team stable. He stresses cohesiveness across portfolio managers, analysts, and traders to facilitate a transparent, collaborative, and fluid decision-making process. True, that process has been easier to develop and maintain because the team grew from a small base—Smith has hired virtually every member of the team himself. But he has also been careful not to spread the team too thin; only two fixed-income funds, Janus Global Bond  and Janus Real Return , have been launched during his tenure. The latter began as one of the team’s few missteps: It was managed jointly by the team and subadvisor Armored Wolf (led by former PIMCO manager John Brynjolfsson) as a more complex inflation-resistant vehicle. Early returns were poor, Armored Wolf was fired in mid-2012, and the fund has since become more of a straightforward Treasury Inflation-Protected Securities fund.

Asset growth in fixed income isn’t unique to Janus, as investors still fearful after horrific experiences in 2008 continue to flock to bond funds (though there are recent signs that investors are returning to equities). The continued investment in bonds is concerning, considering the currently low level of interest rates and the negative impact that rising rates can have on existing bonds. But Janus has focused on more credit work as opposed to interest-rate bets. This insulates the firm somewhat against a rising-rate environment, though not completely.

A Distinguished Value Boutique Grapples With Challenges
Another distinct element of Janus’ culture is Perkins Investment Management, a Chicago-based value shop in which Janus agreed to purchase a 30% stake in 2002 as part of a deal with the then-disappearing Berger Funds. (Janus later boosted its ownership to 80% of that firm and recently bought the last 20%, which was “put” to them as part of the original agreement.) Founded in 1980 by brothers Robert and Thomas Perkins, that firm’s long-term contrarian investing philosophy has led to solid long-term returns. And that shop has been shareholder-friendly along the way, closing funds such as  Perkins Mid Cap Value (JMCVX)—now Janus’ largest offering—when their asset bases grew hefty.

The compact but stable team is going through a performance slump right now, but it has been in similar straits before and come through. The team may face another challenge, though: Its first generation of investors may retire sooner rather than later, particularly since they’ve now sold their last ownership rights to Janus. However, Janus CEO Dick Weil believes the next generation is prepared to succeed, and Morningstar’s fund analysts agree.

Janus’ Quant Arm May Be on the Mend
The final piece of the puzzle is subsidiary INTECH, a quant investing firm Janus acquired in 2003. The firm’s mutual funds are small (none exceed $400 million in assets), but it has a large institutional asset base. Like many quant shops, this one struggled in the 2008 bear market and the initial stages of stocks’ ensuing rebound. It appears to be emerging from that slump—all of its funds land in their categories’ top thirds over one and three years. There has been personnel turnover along the way as some of the leaders have returned to academia or left for other firms.

As Janus works through some inconsistencies in performance and continues to evolve into a more diversified shop in partnership with financial advisors and institutions, some strengths have endured. Following the most-recent spate of manager departures in 2007, the firm’s five-year manager retention rate is now 91%, indicating stability in the ranks. As has long been the case, Janus managers invest heavily in their own funds, and more than 90% of assets are in funds in which at least one manager has more than $1 million invested. Its central equity research team is tenured, too, and the firm’s research-run mutual funds have good performance records, indicating stock-picking skill. And its fixed-income group overall looks robust.

This article is the Corporate Culture portion of the Morningstar Stewardship Grade for Funds for this fund family. Click here to see Morningstar's Stewardship Grade methodology.