Janus' Culture Has Improved
A deep look at Janus today.
Morningstar recently issued a new Stewardship Grade for Janus. The firm's overall grade--which considers corporate culture, fund board quality, fund manager incentives, fees, and regulatory history--is a B. What follows is Morningstar's analysis of the firm's corporate culture, for which Janus receives a C. This text, as well as analytical text on the other four Stewardship Grade criteria, is available to subscribers of Morningstar's software for advisors and institutions: Morningstar Advisor Workstation(SM), Morningstar Office(SM), and Morningstar Direct(SM).
Janus continues to evolve, both in terms of the strategies it offers and on the personnel front. Once arguably a one-trick pony investing in large-growth stocks from its inception through the 1990s, the asset manager has made great strides in diversifying its business. It has done so not only by equity investment style but also by asset class and distribution channel. Indeed, the 10 Janus funds that are Morningstar Medalists include two fixed-income offerings ( Janus Flexible Bond (JANFX) and Janus High-Yield (JNHYX)), a moderate-allocation fund ( Janus Balanced (JABAX)), and value offering Perkins Small Cap Value (JSIVX). Recent acquisitions and hires underscore its efforts to diversify its business and investment performance as well as investor type, which should promote stability—an attribute particularly appreciated from asset managers that are traded publicly.
The firm’s progression has hardly come without trials and tribulations. Weak equity performance, shareholder redemptions, and several bouts of portfolio-manager and CEO turnover had defined the firm as recently as two years ago and prompted Morningstar to downgrade Janus’ Corporate Culture grade to D.
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 Janus’ most-recent wave of manager defections in May 2013 came amid a steady trickle of one-off departures during the past decade raised concerns about Janus' ability to keep investment strength in-house for the long term. It also raised questions about Janus' succession planning.
The firm has shown signs of improvement, though. The September 2013 addition of Enrique Chang as the firm’s new equity CIO resulted in some changes (described below) that should lead to greater personnel stability and more-consistent investment performance over the long haul. And performance has modestly improved over the short period since Chang joined. That improved performance has helped stem the tide of outflows. In 2013, the funds saw a net $11.9 billion in redemptions--the most in a calendar year since 2004 following news of Janus’ involvement in the market-timing scandal. In 2014, outflows dropped dramatically to $3.2 billion. And in the first 10 months of 2015, a net $700 million was withdrawn by investors. Meanwhile, the firm continues to maintain some previously identified strengths.
As with most investment firms, new endeavors bear watching, but Janus’ Corporate Culture grade has been upgraded to C.
Signs of Stability
At Janus’ helm as chief executive officer is former PIMCO veteran Dick Weil, who, with nearly six years’ tenure, is the firm’s longest-serving CEO of the five who have manned the helm since Janus founder Tom Bailey retired in 2002. 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 primarily selling the funds through advisor and institutional channels.
At the margins, there are other initiatives. For example, Weil brought in an alternatives team in 2012, and Janus Diversified Alternatives (JDATX) launched that December. In late 2014, the firm hired Ashwin Alankar and Myron Scholes to help develop new allocation strategies. (Alankar is also the head of risk management.) In mid-2015, Janus Global Adaptive Allocation, which invests in exchange-traded funds and makes use of hedging strategies, was launched. Alankar and CIO Chang comanage this fund, as well as some allocation funds of primarily Janus funds. There is at least one more allocation strategy in the pipeline. The firm also acquired VelocityShares, a provider of ETFs, in October 2014, and in late 2015 the firm announced the registration of two new exchange-traded strategic-beta funds.
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, made up two thirds of mutual fund assets under management as of October 2015. Thus, it's critical that Janus’ equity operation continue to stabilize and improve performance order to serve its fundholder base and to maintain and grow its business.
In an effort to turn things around, Janus brought in Chang as the new CIO of equities. He joined Janus in September 2013 from American Century, which itself earned a Stewardship Grade of C at the time. At American Century, Chang oversaw a large lineup of funds and improved the firm's performance overall, and he also was successful in attracting advisors to the funds. That track record certainly appeals to Janus, given its struggles with consistency in equity-fund performance and difficulty making inroads with advisors.
Today, Janus’ funds generally use a bit more-buttoned-down and defined investment styles than the more flexible approaches of the past. But they’ve maintained the emphasis on research and stock selection, where Janus’ portfolio managers had historically generated alpha. Chang has made some moves that encouraged this outcome. Each fund’s manager was required to write an investment policy statement outlining its entire process, including research, portfolio construction, and trading. Chang also called for some managers to become more style-pure, and for all the managers to keep their cash stakes small--generally under 3% of assets. He also started to place a far bigger emphasis on the funds’ risk-adjusted returns versus their benchmarks when determining managers’ bonuses.
Chang is in the process of addressing another issue as well. Janus had regularly lost fund managers with strong records, suggesting that they see brighter futures for themselves elsewhere. This also raised 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, are 94% and 93%, respectively. But those figures are just average among similarly sized fund families. The firm also had to turn outside of the organization to fill spots on a few of its in-house equity funds in recent years. George Maris was brought in from Northern Trust to run Janus Worldwide in 2011 (he now manages Janus Global Select (JORAX)), former Janus analyst Dan Kozlowski was hired from a hedge fund in 2011 to run Janus Contrarian (JSVAX) when longtime manager David Decker left, Hiroshi Yoh was hired from the outside to run the newly launched Janus Asia Equity (JAQTX) in 2011, and in June 2013 Douglas Rao, who had worked at Marsico Capital Management between 2005 and 2012, was hired to manage Janus Forty (JARTX). While this open-mindedness can be an attribute, it also suggests limited portfolio-management depth at the firm. Thus far, Kozlowski posted solid returns before struggling mightily thus far in 2015, Maris’ performance has improved after a slow start, and Yoh’s record is mixed. Rao has been at the helm for just 2.5 years.
To combat this problem, Chang has promoted a number of analysts to assistant portfolio manager roles, with the idea that they’ll become comanagers down the road and thus able to pull the trigger on the one or two sectors they cover. These include Cody Wheaton at Janus Enterprise (JAENX), Nick Schommer at Janus Forty, Scott Stutzman at Janus Triton (JATTX), Julian McManus at Janus Global Select, Andy Summers at Janus Contrarian, and Jean Barnard at Janus Fund (JANSX). Each one spends 10%-20% of their time on these duties except for Schommer, who spends 40%. Also, Jeremiah Buckley was named a comanager of Janus Growth & Income (JAGIX) in July 2013--he also serves as the assistant manager on manager Marc Pinto’s other two funds, Janus Balanced and Janus Twenty (JAVLX). Maneesh Modi was promoted to comanager on Janus Venture (JAVTX) when Jonathan Coleman took over that fund in 2013, but he left the firm in February 2015 to join former colleagues Chad Meade and Brian Schaub (who had comanaged Janus Triton and Janus Venture until May 2013) at Arrowpoint.
One notable holdout to naming an assistant or comanager has been Janus Overseas (JAOSX), where longtime skipper Brent Lynn has struggled mightily as bets on emerging markets and individual stocks have turned sour. Lynn announced in early November that he would retire at the end of the year; Janus Global Select’s Maris will then take the helm. Lynn, who had managed the fund solo since mid-2003, has arguably the most flexible approach to portfolio construction at the firm, while Maris tends to take much more measured bets against his benchmarks. We don’t think the departure of Lynn, a 24-year Janus veteran, will trigger another wave of departures from the firm. Lynn has been an outlier at the firm lately both in terms of his bold approach and deep, lengthy performance slump.
It’s also worth noting that in December 2014, Jim Goff--head of research since 2002 and a portfolio manager for the decade prior to that--retired. Taking his place is Carmel Wellso. While she has just a fraction of the tenure Goff had--she joined the firm in 2008--she made strong calls in the financials sector and spent two years in the firm’s Singapore office mentoring analysts.
A Solid Bond Shop
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, Janus Short-Term Bond (JASBX), and Janus High-Yield, have generated consistently solid returns, and Janus Flexible Bond earns a Silver Morningstar Analyst Rating while Janus High-Yield earns a Bronze. (Above-average fees make Janus Short-Term Bond a Neutral.) These funds have attracted steady and sizable inflows. The team also runs a sizable chunk of Janus Balanced--typically 30%-45% of that $13.3 billion fund. Thus, that team's assets under management have grown from less than $7 billion in 2008 to more than $30 billion today.
Janus’ fixed-income assets looked like they might increase quickly when Bill Gross was hired in September 2014. Indeed, the announcement that Gross was moving to Janus from PIMCO caused Janus’ stock price to soar roughly 40% that day. He took over Janus Unconstrained Bond, which was launched in May 2014 as a vehicle for Smith and his team, on Oct. 6, 2014, and the word “Global” was added to its name (reflecting an even wider mandate than it previously had).
Inflows to that fund turned out to be smaller than expected--the fund now has $1.4 billion in assets. But the fund’s fundamental underpinnings have arguably improved in recent months. Gross originally headed up a tiny team in a separate office in Newport Beach, California (he reports directly to Weil rather than to Smith), and we wondered if the fund had sufficient analytical and operational resources to handle Gross’ strategy, which makes liberal use of derivatives. But in July 2015, Janus acquired Australia-based Kapstream Capital, which is headed by former PIMCO portfolio manager Kumar Paighat. Paighat joined Gross as a comanager on Janus Global Unconstrained Bond (JUCTX) and thus may be a successor if Gross (in his early 70s) retires in the near future. In addition, the managers will make use of the rest of Kapstream’s investment team for research (at least one member is already based in Newport Beach), and Kapstream’s trading and other operations team members will support the fund as well. The support of Kapstream may also boost the performance of the fund, which has trailed two thirds of its unconstrained bond peers over the 12 months ended Nov. 12, 2015.
Meanwhile, Gross’ presence has not had an impact on the approach of Smith’s team; the two teams very rarely interact. The separation makes sense: Gross’ strategy is based largely on a top-down, macroeconomic point of view. That’s the virtual opposite of how Smith and his team build portfolios; they typically select securities using bottom-up analysis and typically own big stakes in corporate credit.
Given Janus’ substantial investments in Gross and Kapstream, it’s fair to wonder whether that operation could one day combine forces with Smith and his team. But there’s no evidence that that is in the works at present. Janus has also made considerable investments in the fixed-income business run by Smith in recent years. It has built up a proprietary risk-management system that has since been expanded to the equity platform and upgraded 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; four fixed-income funds, Janus Global Bond (JHBTX), Janus Real Return (JURTX), Janus Multi-Sector Income (JMUAX), and the aforementioned Unconstrained Bond have been launched during his tenure. Janus Real Return 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.
A Venerable Value Firm Copes With Changes
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 in 2013 bought the last 20%, which was "put" to them as part of the original agreement.) Founded in 1980 by Robert Perkins, whose brother Thomas joined the firm in 1998 and now serves as CEO, 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)--Janus' third-largest offering at the time--when their asset bases grew hefty.
The compact team has gone through an extended performance slump—which it may be emerging from now--but it has been in slumps before (albeit less lengthy ones) and come through. (Perkins Mid Cap Value suffered large outflows and has since reopened.) The team has lately made a couple of changes, including limiting its cash stakes (which regularly hit double digits in the past), but it’s too soon to judge their impact. The team may face another challenge: Its first generation of investors may retire sooner rather than later, particularly since they've now sold their last ownership rights to Janus. The team has also lately seen some turnover, as CEO and CIO Jeff Kautz (who was also one of the managers of Perkins Mid Cap Value) left in early 2015 and a couple of underperforming analysts have been let go. Greg Kolb, who joined the firm from Janus in 2010 to lead an expansion into international investing (he serves as the lead on Perkins Global Value (JGVAX)) now serves as CIO. Janus CEO Dick Weil believes the next generation, which includes Kolb and Perkins Mid Cap Value comanagers Kevin Preloger and Justin Tugman, is prepared to succeed.
Janus’ Quant Division Has Bounced Back
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 exceeds $700 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: Most of its funds land in their categories' top halves over the past one and five years. There has been personnel turnover along the way as some of the leaders have returned to academia or left for other firms. But the current leaders include 13-year INTECH veteran Adrian Banner (CEO and CIO), deputy CIO Vassilios Papathanakos (who joined in 2005), and portfolio manager Joseph Runnels, a 17-year veteran.
More Work Remains
Janus continues to have some feathers in its cap. Its fixed-income team, which has been strengthened over the past nine 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. Janus portfolio managers' ownership in their funds remains substantial; in fact, Janus has always been an industry leader on fund-share ownership. Its central equity research team is fairly tenured, and the firm's research-run mutual funds have above average-performance records, indicating some stock-picking skill.
That said, Janus' in-house equity team manages the lion's share of the firm's mutual fund assets, and the 2013 wave of manager defections and subsequent new hires still warrant some caution. And while Chang’s changes could have a positive long-term impact, it's clear that Janus still has some work to do in nurturing its culture on the equity-fund side.
It will take some time--and more important, continued strong performance and organizational stability--before Janus can stake its claim as a premier investment shop again.
This article is the Corporate Culture portion of the Morningstar Stewardship Grade for funds for this fund family. Visit our corporate website to see Morningstar's Stewardship Grade methodology.
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Greg Carlson does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.