Can Janus Regain Its Footing?

Since Morningstar issued its most recent Parent Rating and Stewardship Grade for Janus in late March 2013, that firm has seen big changes. First, firm veteran Jonathan Coleman relinquished his role as the co-CIO overseeing equities to focus on his portfolio-manager duties. Second, the firm hired an outside investor, Enrique Chang, formerly of American Century, to replace him. (Gibson Smith remains as the co-CIO in charge of fixed income.) Third, and of most concern, the firm saw a wave of portfolio-manager defections for the fourth time in the past 11 years. These changes set off a chain reaction at six Janus funds, including three of its largest.

Beyond the specific manager changes (you can read about those here), these developments suggest the firm's corporate culture and incentive programs are not working well enough to encourage good investment managers to stick with the firm for the long haul. As a result, Morningstar has reduced Janus' Parent Rating to Neutral from Positive and its overall Stewardship Grade to a C from a B.

An Unfortunate Pattern
In May 2013, three managers tendered their resignations. Ron Sachs, who had been with Janus since 1996 and who had most recently run  Janus Twenty and  Janus Forty (JACTX), left the firm, as did Brian Schaub and Chad Meade. While Sachs had been struggling recently, he was successful in a 2000-07 stint at  Janus Global Select (JORNX). Meanwhile, Schaub and Meade's charges,  Janus Triton (JATTX) and  Janus Venture (JAVTX), had been bright spots in an equity-fund lineup that had struggled over the past five-plus years. In fact, Triton and Venture were the only two diversified U.S. equity funds run by in-house Janus managers that landed in their categories' best quartiles. Most of the others landed in their categories' worst quartiles.

Schaub and Meade joined Janus in 2000 and 2001, respectively--the former straight out of college and the latter after working as an equity analyst at Goldman Sachs for two years. They left Janus to join Arrowpoint Partners, an investment firm founded by former Janus portfolio managers David Corkins and Karen Reidy in 2007. (Corkins and Minyoung Sohn, another Arrowpoint manager and former rising star at Janus, left Janus in late 2007, while Reidy left in 2005.) Arrowpoint has primarily managed money for institutions, but it is now making a move into the mutual fund world.

While the fund industry is often characterized by high manager turnover, firms with strong corporate cultures have been successful in hiring, nurturing, and retaining investment talent for the long haul. That this latest wave of manager defections comes amid a steady trickle of one-off departures during the past decade raises concerns about Janus' ability to keep investment strength in-house for the long term. It also raises questions about Janus' succession planning and is consistent with the revolving door to the CEO office since Janus' founder Tom Bailey left the firm in 2002.

More specifically, Janus has employed five CEOs since Bailey's retirement, not including the six-month period between July 2002 and December 2002 when Janus' executive management committee was in charge. Each CEO brought a different perspective and style to the firm. Mark Whiston, for example, was a Janus sales and marketing veteran who had been part of the firm during some of its darkest days, when the tech bubble burst and Janus' involvement in the industry's market-timing scandal was revealed. Gary Black brought his investment background to the CIO job in April 2004, then was promoted to CEO in January 2006; he invested in (and improved) Janus' analyst team and emphasized a performance-driven culture that included changes to compensation.

Today, Dick Weil, who also prioritizes investment performance but came with an operations and management background, wants to balance the family's asset mix among equities, bonds, and eventually liquid alternatives. He also wants to sell more to financial advisors and reach out globally. (For those who are wondering, Janus Capital Group's then-chairman Steve Scheid served as CEO between Whiston and Black, and board member Tim Armour, a former Morningstar executive, ran the show during the seven-month CEO search that led to Weil.)

It's not unusual for a company's priorities to change along with its operating environment. However, this level of turnover among senior management has corresponded with turnover in the portfolio-management ranks and has muddled the firm's identity. Janus has worked to educate investors and financial advisors on what the firm has to offer, but it continues to shed assets.

Of note is that the Janus' struggles with retaining investment talent have mostly come from the equity group that operates in Denver--the department on which the firm was built. In fact, just more than half of the mutual funds for which it is responsible have experienced manager turnover since 2011. While the firm hopes to balance the asset-class mix of its accounts, the Janus-bannered equity portion, including international equity, makes up more than two thirds of mutual fund assets under management as of June 2013. Thus, it's critical that Janus get equities in order to serve its fundholder base and to maintain and grow its business.

What's worse, Janus regularly has lost the fund managers with the best records, suggesting that they see brighter futures for themselves elsewhere. This also raises the issue of succession risk. To be sure, Janus' one- and five-year manager-retention rates, which measure what percentage of portfolio managers have remained on the same fund over those periods, remain just above 90%. But those figures land in the bottom half among similarly sized fund families and do not yet reflect this latest round of manager changes. And while some of Janus' remaining managers have impressive records and decent tenures at the firm, it's unclear where the next generation of investment leadership is going to come from. Janus recently has turned outside of the organization to fill spots on a few of its in-house equity funds. While this open-mindedness can be an attribute, it also suggests limited portfolio-management depth at the firm.

These latest manager departures also reflect Janus' limited ability to give managers incentive in the face of ongoing shareholder redemptions--particularly with restricted Janus stock. The family's in-house U.S. equity funds have borne the brunt of those redemptions and have shed assets for most of the past decade. (At year-end 2012, the firm's equity-fund assets were $55 billion--less than half the $112 billion peak in 1999.) Like many fund firms, particularly those that are publicly held, restricted shares of Janus stock can be included in manager bonuses. Firm equity can be a powerful retention tool, but Janus' share price declined sharply compared with other asset managers' in 2011 and hasn't kept up with peers' during this period of net redemptions. In fact, over the past five years, the stock has lost almost an annualized 20% a year, while asset managers on average have gained nearly 5% per year. More generally, firms' profits and bonus pools stem directly from fees earned on assets under management.

 

An Outside CIO
In an effort to turn things around and to replace Coleman, Janus brought in Chang as the new co-CIO of equities. He will start at Janus in September 2013 and comes to the firm from American Century, which itself earns a Parent Rating of Neutral and a Stewardship Grade of C. At American Century, Chang oversaw a large lineup of funds that improved the firm's performance overall, and he also was successful in attracting advisors to the funds.

That track record certainly appeals to Janus, which has struggled with consistency in equity-fund performance and which has been trying to make inroads with advisors. But American Century's funds tend to use more-buttoned-down and defined investment styles, whereas Janus' portfolio managers historically have been more flexible in their approaches. Although Chang could repeat his success at Janus, bringing in an outside CIO could be either energizing or disruptive to the existing organization and culture. While outsider Black, for example, was good for Janus' research efforts and helped develop a more collaborative environment, he certainly put his own stamp on the group and saw key departures, including Corkins and Sohn, now of Arrowpoint. At this point, it's unclear what changes Chang might implement or what tone he'll set for the group, or whether he'll fit in.

Not All Bad
Janus continues to have some feathers in its cap. Its fixed-income team, which has been strengthened over the past seven years under Smith, has been disciplined in its commitment to credit research, and its funds have shown some strength. One of Janus' subsidiaries, Perkins, has maintained its strong investment culture in the face of succession planning, even as some of its funds have struggled in the short term. And portfolio managers' ownership in their funds remains very high; in fact, Janus has always been an industry leader on fund-share ownership.

That being said, Janus' in-house equity team manages the lion's share of the firm's mutual fund assets, and the latest wave of manager defections is straining the camel's back. And while Chang could be good for the firm, it's clear that Janus has some work to do in nurturing its culture on the equity-fund side. At this point, that culture is impaired and potentially in flux, and it is subpar within the industry. Janus earns a D for the Corporate Culture portion of Morningstar's Stewardship Grade, down from a C in March 2013. Its Manager Incentives grade has been reduced to a B from an A. Overall, this puts its Stewardship Grade at C and its Parent Rating at Neutral.