Funds Manager Wins With Big and Little Issues
Jim Craig doesn’t like the idea that big stocks and small stocks should be an either/or proposition for a mutual fund manager. His employer, Denver-based Janus Group, solved that problem: They gave him both types of funds to run.
So far, Craig’s shareholders can’t complain about his split personality.
Both his big-stock Janus Fund and small-stock Janus Venture Fund boasted total returns in excess of 90% in the five years ended June 30--far surpassing the 49% return of the average U.S. stock fund, according to fund tracker Lipper Analytical Services.
He may be a tough act for himself to follow, but the investing traits that brought the 35-year-old, Decatur, Ala.-born Craig this far still seem like good qualities for the ‘90s: a sharp eye for growth companies, a willingness to hunt internationally and a strict sell discipline designed to weed out overvalued stocks.
His formula has worked so well, in fact, that his company is now facing a sort of embarrassment of riches. The Janus Venture Fund’s assets have ballooned to $940 million from just $58 million in 1989, and Craig thinks that’s a little much for a fund that’s supposed to concentrate on a select group of small stocks.
So on Sept. 30, Janus Venture will stop accepting new investors. (The $2.2-billion Janus Fund will stay open, however.)
Craig’s competitors might call him chicken for saying no mas to money, but he hardly needs to defend his decisions of the last few years:
* While the average stock fund slumped 6.3% last year, Craig held Janus Fund to a mere 0.7% loss and Janus Venture to an even smaller 0.4% loss. He did it by exiting many stocks well before they collapsed in the late summer of ’90.
* So far in this year’s bull market, Craig’s two funds have again far outpaced the average fund. Janus Fund was up 29% through late August, and Janus Venture was up 32%. The average stock fund’s gain: 24%. Timing again was the key, as Craig moved heavily back into stocks months before the Persian Gulf War exploded in mid-January.
The events of the past year provided a key test of one of Craig’s guiding principles--which is the knowledge that “I have to preserve capital because our client base cannot stand to lose money.”
That is by design: Low volatility and controlled risk have been advertised hallmarks of the no-load Janus funds since the company was founded by the unflashy Tom Bailey in Denver in 1970.
The company has since grown to seven funds with a total of $6.3 billion in assets.
Craig, a Wharton School graduate who trained as a stock analyst at Trust Co. of the West in Los Angeles, bought into Bailey’s investment philosophy when he joined Janus Group in 1983.
By the mid-’80s, Craig had taken the reins of both the big-stock Janus Fund and small-stock Janus Venture.
Many money managers would argue that you should specialize in either big or small companies but not both.
But to Craig, doing both makes perfect sense. “As a money manager,” he says in his light Southern drawl, “often when you look at one type of stock, you end up getting an idea about another.”
The Janus Fund concentrates on major companies for investors who want growth in the form of household names--such as Wal-Mart Stores, Pepsico and Merck & Co.
Janus Venture mostly goes after smaller stocks that most investors are less likely to recognize but that should have faster growth prospects than bigger companies. The fund’s holdings now include biotech firm Synergen, Southern California grocery chain Vons Cos., British environmental-cleanup firm Shanks & McEwan and a German retailer called Hornbach, which has copied the wildly successful U.S. retailer Home Depot “right down to the store colors,” Craig says.
In some cases, Craig is happy to own the same stock in both funds--Thousand Oaks-based biotech leader Amgen Inc., for example.
Names like Wal-Mart, Amgen and Merck have been the right stocks to own over the past couple of years, of course, as investors have desperately chased the narrowing field of companies sporting strong earnings growth in a struggling economy.
The big question is whether those classic growth stocks now are way overpriced. While some fund managers are forever reluctant to let go of their favorites--that’s when “long-term investing” becomes an excuse rather than a strategy--Craig believes that when it’s time to get out, you get out in a big way.
Generally, he says, “I sell when a stock’s price-to-earnings ratio gets above its growth rate”--typically using the P-E on estimated earnings 12 to 24 months ahead.
If company X’s stock is selling for 20 times earnings per share but those earnings are growing 25% a year, you’re getting growth at a discount, Craig figures.
However, if the P-E jumps to 30 while growth stays at 25%, the math suggests that you’re paying too much.
The numbers can turn against you in one of two ways, Craig notes--either stocks get too high or earnings growth drops.
In the summer of 1990, he started selling even before the Kuwait invasion, he says, because “I had a lot of growth companies that suddenly weren’t showing us the growth we had counted on. . . . Whenever I hear companies start telling analysts, ‘Your earnings estimates are too high,’ you know stocks are going to do nothing but go down.”
By mid-October of last year he had raised the cash portion of the Janus Fund to a whopping 65% and that of Janus Venture to 62%.
Then he started to go shopping again--at what turned out to be the bear market bottom--because he felt stock values were compelling even though many other fund managers were paralyzed by the recession and the Kuwait crisis.
In recent months, that same kind of keep-your-eye-on-the-ball mentality has led Craig to start trimming again, selling such stocks as U.S. Surgical, St. Jude Medical and Limited when prices got too high relative to his earnings expectations. He sold too early on some of them, he admits, but his discipline rang the bell, and it was time to go.
Today, Janus Fund is 93% invested in stocks, and Janus Venture is 79% invested. So Craig, now father to a 9-month-old daughter, plainly is still bullish overall. But it’s harder to find good values in smaller stocks, he admits. And if stock prices soar outrageously without a coincident rise in earnings growth in the year ahead, Craig says he won’t have any trouble heading for the door again to preserve capital.
What if we return to the days of the Nifty Fifty stocks of the early 1970s, and Wall Street’s favorite growth stocks soar to P-E multiples never before seen in history?
“That could be a real problem for me, with my sell discipline,” Craig admits. He could end up leaving a lot of profit on the table, he figures.
On the other hand, he says, “A lot of those (Nifty Fifty) managers went out of business real quick.”
Jim Craig’s Favorite Stocks--Big and Small
Here are the top 10 stock holdings in the Janus Fund and in the Janus Venture Fund, two standout no-load stock mutual funds run by money manager Jim Craig. For information on Janus, call (800)-525-3713.
JANUS FUND (BIG STOCKS): Pct. of fund Wal-Mart (discount retail): 5.1% Glaxo Holdings (drugs): 4.8% Amgen (biotech): 4.4% Philip Morris (food, tobacco): 4.4% UAL Corp. (United Airlines): 4.2% Microsoft (PC software): 4.0% Merck (drugs): 3.7% Pfizer (drugs): 3.3% Pepsico (soft drinks, snacks): 3.0% Duracell (batteries): 2.9% Total number of stocks: 52
JANUS VENTURE (SMALL STOCKS): Pct. of fund Amgen (biotech): 3.5% Vons Cos. (supermarkets): 2.7% Service Mdse. (catalog retail): 2.6% Synergen (biotech): 2.4% State Street (banking): 2.3% Smith’s Food/Drug (supermarkets): 2.2% Staples (office supply retail): 2.0% Shanks & McEwan (environmental): 1.9% Glaxo Holdings (drugs): 1.8% Magna Intl. (auto parts): 1.6% Total number of stocks: 113 Source: Janus Group
