A Look at Janus' Big New Hire

PIMCO has gotten a lot of attention in the past couple of days, and rightfully so. Many investors need to consider the changes at that firm brought about by Bill Gross' departure and the implications for PIMCO's funds. But those interested in following Gross to Janus or investing with him for the first time have some other factors to consider. Similarly, existing investors in Janus fixed-income funds need to think about Gross' impact on that operation, which is currently run quite capably by fixed-income chief investment officer Gibson Smith.  

Janus Global Unconstrained Bond and Beyond
Effective Oct. 6, 2014, Gross will take the reins of Janus Global Unconstrained Bond (JUCIX), a fund that Janus launched in May and was originally intended as a best-ideas portfolio for Smith and comanager Darrell Watters. Janus hasn't yet provided specific prospectus changes, but the offering will be tailored to Gross' top-down, macrocentric portfolio-management style.

How big it will ultimately get is anyone's guess, but the new fund will undoubtedly grow rapidly from its tiny $13 million asset base. Gross, of course, is clearly able to manage vast sums of money. Even after significant redemptions during the past 16 months at  PIMCO Total Return (PTTRX), that fund still held more than $200 billion in assets when he departed. Gross additionally oversaw more than $20 billion at  PIMCO Unconstrained Bond (PFIUX), a strategy that's more similar to the one he'll start running at Janus. By contrast, Janus' entire fixed-income business comes to just over $30 billion.

To support Gross' end of the business, Janus will need to have the infrastructure in place to manage a sudden influx of cash. So far, Gross has requested just one trader to assist him in the Newport Beach, California office that Janus will set up for him, as well as potentially one client-facing person. That level of support won't be sufficient for long as assets grow. And it stands in stark contrast to PIMCO, where Gross was able to get more and better information than any other bond investor, thanks to the firm's army of traders, research analysts, portfolio managers, and other specialists, none of whom has joined Gross in leaving PIMCO. It's unlikely that Janus will ever match that level of support, raising the question of how successful Gross can be with fewer resources.  

Furthermore, Janus has been consistent in saying that in addition to the fund, Gross will manage related strategies as he builds out a macro fixed-income business, and that he will join the global asset-allocation team that includes recent hires Myron Scholes and Ashwin Alankar. Janus CEO Richard Weil indicates that Janus will give its clients what they want from Gross, and he says there will be more offerings through multiple distribution channels in both the U.S. and abroad. Thus, it's difficult to imagine Gross spending the bulk of his time focused on managing client assets, as he indicated he wanted to do in his statement that he was joining Janus.

Finally, while a small initial asset base gives Gross the ability to shift gears much more quickly than he could at PIMCO, his stock in trade has recently been a focus more on macroeconomic calls than issue selection. The smaller asset base thus doesn't offer him the same kind of advantage that, say, a small-cap stock-picker or manager sorting through another liquidity-constrained universe might have. True, the global unconstrained portfolio Gross is assigned may allow him more freedom to pursue less-liquid areas, and earlier in Gross' career he spent more of his time on bond fundamentals; they just haven't been his focus recently.

Risk Management
There's more for Janus and investors to think about. On the infrastructure front, there remain questions surrounding risk-management tools for Gross' portfolio(s). Granted, Smith and his team have built out an impressive risk-management system and portfolio-construction tool for its fixed-income portfolio managers. And Alankar oversees a broader risk-management effort at Janus. However, it's safe to say that while Janus may have had some experience with derivatives and other esoteric fixed-income instruments, Gross and PIMCO have had much more for longer. As Janus updates the prospectus of Gross' new assignment and communicates with investors about new offerings, questions surrounding investment guidelines and risk parameters will need to be answered.

Key-man risk can't be ignored. While he shows no signs of retiring soon, it's fair to ask how long the 70-year-old Gross will stay at it. As beneficial as Gross' investment prowess may be to Janus, there is also no employment contract in place nor has there been any statement about the length of his commitment to the firm.

Two Sheriffs
Weil has been careful to communicate his support for Smith and Janus' existing fixed-income efforts, noting that the differences in investment approach (top-down and bottom-up) mean there's room for two fixed-income leaders and their teams at Janus. Weil's confidence in Smith isn't misplaced. Smith deserves much credit for building out a strong team, and his individual contributions are also significant. 

The team's flagship  Janus Flexible Bond (JFLEX) earns a Morningstar Analyst Rating of Silver thanks to its strong performance, cohesive analyst team, and risk-management systems. While Janus Flexible Bond lands in the same intermediate-term bond Morningstar Category as PIMCO Total Return, the former fund is distinct from many peers because of its focus on credit. As of June 30, 2014, Janus Flexible Bond held 32% of its portfolio in investment-grade corporate bonds and another 17% in high-yield bonds, while only 23% of the Barclays U.S. Aggregate Bond Index was composed of investment-grade corporates, and the index held virtually no high-yield bonds.

Investors in the bond funds run by Smith and his team should expect few changes and can feel comfortable that their money is being managed prudently. But it would be naive to think that Gross' influence will be absent in this group for long. For one thing, it shouldn't be--Janus' fixed-income analysts and portfolio managers should take advantage of the experience and wisdom that Gross has to offer, even though they take a different tack to portfolio management and construction. For another thing, Gross' reporting line directly to Weil means he has the CEO's ear on the strategic direction of Janus' overall fixed-income business, and it's possible his influence will affect Smith and his team. Finally, with Janus open to new strategy ideas, particularly in response to its clients, investors can't rule out the possibility that Gross and Smith will work more directly together. By the same token, they can't rule out the possibility that the two will not work happily together, given Gross' recent difficulties getting along with his longtime colleagues at PIMCO.

Certainly, the idea of Bill Gross rolling up his sleeves and single-handedly managing money at a startup fund is an intriguing one. But the reality is that he has long relied on a talented team and vast pool of resources at PIMCO that Janus can't possibly match anytime soon. The reality is also that Gross will have broader responsibilities related to building out Janus' fixed-income business and that we don't have much indication on the length of his commitment. Investors considering Janus should keep these issues in mind.