The Changing Tide at Janus

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New York, NY – Two related trends that the team at Integrity Research has identified as major demand drivers of certain types of alternative research has been the buy-side’s increased research coverage and the growth in the number of buy-side research analysts.

The following article, published by the Denver Post, supports our view. This article discusses the numerous changes that have taken place at Janus Capital Group in recent years. This includes a sharp increase in the number of companies under coverage (from 500 to 1,250 experienced over the past five years) and a more than doubling in the number of research analysts and associates employed by the firm (from 27 to 56) since 2000.

New challenges at retooled Janus

Denver money manager defending moves some claim led to loss of big-name players

By Aldo Svaldi
The Denver Post

Janus Capital Group, Denver’s largest money manager, is better prepared to handle the current market decline than it was when a bear market mauled it in 2000.

But it must weather this downturn with several new managers running its portfolios after suffering heavy turnover the past two years.

“Folks will judge us by whether we will keep up the strong performance,” said Janus chief executive Gary Black.

Of the 25 fund products, only three — Overseas, Contrarian and Venture — haven’t seen a change in leadership in recent years.

High-profile departures last year included Scott Schoelzel, manager of the top-ranking Janus Twenty fund; Dave Corkins, who engineered a turnaround at the flagship Janus Fund; and Ron Speaker, a 21-year veteran on the bond side.

Some analysts trace the turnover in portfolio management to changes made after Steven Scheid and Gary Black took the helm in 2004 following a market-timing scandal.

“The new Janus may not be exactly what they (portfolio managers) signed up for,” said Rachel Barnard, an equity analyst with Morningstar in Chicago.

The firm has faced pressure from large shareholders who wanted tighter control on costs. In particular, a change in compensation last year upset many portfolio managers. Two have filed lawsuits.

Janus is defending itself against the suits.

Even with the perspective of hindsight, Black said the changes to portfolio manager compensation were correct.

“We did tie the overall compensation to the overall business model,” he said.

The changes weren’t primarily about cost savings, he said. Portfolio manager compensation actually rose in 2007 over 2006 and remains at the top end of the industry, he said.

More of a Janus portfolio manager’s discretionary pay is now tied to subjective measures: Are managers mentoring younger staff? Are they driving the research debate? Are they working with the sales team?

In the wake of the high-profile departures, Janus has made retention a goal, setting aside $21 million to keep its analysts on the roster.

The debate is not unlike one that faces sports teams, Barnard said.

Is it better to invest in the up-and-coming, lower-cost players — the analysts — or pay high salaries to keep the stars — the portfolio managers — who draw in the fans?

Barnard argues that moving away from a star-manager system represents a maturing of Janus, even though it may contribute to more turnover in the short run.

Most of the fund group’s money now comes from financial advisers who guide individual investors and institutional sources, not the individual investors. Advisers aren’t as enamored of personalities as they are of process and systems.

“In the long term, I think it is the right choice for Janus if they want to be around five or 10 years from now,” she said.

Mutual-fund marketing consultant Dan Sondhelm, a partner at SunStar in Alexandria, Va., isn’t as certain.

Known and proven performers can set a money-management firm apart in what is increasingly a commodity business.

“Investors and financial advisers don’t necessarily want a star, but access to a face, a name, a voice, somebody who is in control of the ship,” he said.

More savvy firms are eliminating the distance between portfolio managers and shareholders — with podcasts on the Internet, presentations to investors and news in the media.

Black prefers to describe the Janus model as a hybrid.

Most funds will continue to be managed by a single portfolio manager, but some will have co-managers and a few will be run by teams.

So far, it appears that Janus customers are taking a wait-and-see approach to all the changes.

Mark Salzinger, publisher of The No-Load Fund Investor newsletter, called the departures a cause for concern but told his readers he wouldn’t pull his money unless the new managers failed to deliver on performance.

“Most of the advisory clients are giving us some room,” Black said. “We didn’t lose any major clients.”

The wave of turnover isn’t the first to hit Janus. How the fund family fares in this difficult market should prove once and for all whether its success is about the individuals who managed the funds or the research process supporting them.

Many of the reforms undertaken at Janus over the past five years are designed to avoid a repeat of the horrific beating its funds took during the 2000-02 bear market.

A blow to Denver’s status as hub

Assets in the fund group, which briefly topped $300 billion in 2000, sank to $133 billion by early 2003, damaging Denver’s status as a money-management hub.

Of the firm’s 1,137 employees, 947 are based in Denver.

Janus has since boosted the universe of stocks it researches from 500 to more than 1,250, said Jonathan Coleman, a co-chief investment officer and portfolio manager of the Janus Fund.

Giving managers a larger menu of stocks to choose from has greatly reduced, though not entirely eliminated, the overlap in holdings among the funds, a major criticism in the past.

The firm brought in more experienced stock analysts, providing deeper coverage in areas such as energy and industrial companies. From 27 equity research analysts at the end of 2000, Janus now has 56 analysts and research associates, even though it is managing less money.

“We have the deepest and broadest analyst team we have ever had,” Coleman said. An effort to fill eight junior analyst positions resulted in 600 resumes.

Analysts who want to stay analysts now can pursue that option.

“We have moved away from an up-or-out culture,” said Brian Demain, who took over as portfolio manager of Janus Enterprise in November.

Risk team proving valuable

Compared with 2000, Enterprise is much less concentrated in terms of its top holdings and its stock picks spread across more industries.

“Monthly I get a risk report from our risk team that helps me understand what bets are being made in the portfolio, my vulnerability,” Demain said.

The risk team, while not overtly limiting what portfolio managers can do, has proved valuable, he said.

“As soon as the (credit) problems surfaced in the summer, we made some quick decisions,” said John Eisinger, a financial and technology sectors analyst promoted to manage Janus Orion at the start of the year.

Since credit-market concerns sent stock markets churning in late July, Coleman said 85 percent of the Janus funds are beating their benchmarks.

The Janus Fund is off 10.2 percent from Oct. 9, when the S&P 500 peaked, to Jan. 31, ahead of the 11.9 percent decline in the index of blue-chip companies.

After the March 2000 market peak, the Janus Fund lost 43 percent over the next 12 months, nearly double the 22 percent decline in the S&P 500.

When fund-rating agency Morningstar looked at composite three-year returns for the 20 largest stock fund families, Janus ranked first, a turnaround Morningstar analyst Russel Kinnel called “remarkable” even as he warned that portfolio manager turnover would make it hard to replicate.

Part of that strong performance reflects a return to favor last year of the growth style of investing, which Janus is known for, after a six-year hiatus. But it also reflects Janus’ ability to perform well while value stocks were still in favor.

Investors are noticing. After bouncing around between $130 billion to just over $155 billion for several years, assets under management took off in the fourth quarter of 2006 and ended 2007 at $206.7 billion.

“The overriding goal is to continue our performance,” Black said. “The new managers will prove themselves.”

Aldo Svaldi: 303-954-1410 or asvaldi@denverpost.com

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