Janus Stock Funds at a Crossroads

Janus, the Denver-based mutual fund giant, takes its name from the Roman patron god of beginnings and endings. The firm’s shareholders lately are hoping that the company’s glory days haven’t come to an end.

After a deep slump in 2000 and continued losses in most Janus stock funds this year, there is widespread debate over whether the firm has merely fallen temporarily out of sync with a fickle market or perhaps gotten too big--and stayed too narrowly focused in its investing--for its own good.

The company, known for its shrewd and aggressive stock-picking and its fierce independence from faraway Wall Street, mushroomed from just $3 billion in assets to a peak of more than $300 billion during the growth-stock boom of 1990 to 2000, fueled by massive cash inflows and stunning portfolio gains.

Now, some analysts say, the fifth-largest U.S. fund company is at a crossroads as it grapples with several key questions, including:

* Is the firm’s huge asset base now a liability for its investing style? “When all of a sudden you have very big funds the challenge becomes, how do you run them in the aggressive style you used to?” said Russel Kinnel, head of fund analysis at research firm Morningstar Inc. in Chicago. “It’s hard to maintain an entrepreneurial culture and a free-spirited operation when you are that much weightier.”

* Has the company attracted too much “hot money”? While many longtime Janus shareholders have ridden out past slumps and seen their patience rewarded, some performance-chasers who jumped aboard in the funds’ tremendous rally of 1999 and early 2000--when Janus cash inflows hit a crescendo--now appear to be bailing out.

If redemptions rise further they could cause trouble for Janus managers and penalize investors who stay put in the funds, analysts warn.

* Do overlapping holdings and the firm’s famous preference for “growth” stocks over “value” stocks leave its investors more vulnerable than they may realize? If history is any guide, value investing could stay in style for a while, which could hurt all growth-oriented funds, not just Janus’.

* Is the company at risk of manager morale problems or defections in the wake of the acrimonious spinoff last summer from former parent Kansas City Southern? In the spinoff, Janus was lumped together with two other money-management firms as Stilwell Financial rather than set free as a stand-alone entity, which is what Janus executives wanted.

For many Janus investors, the focus now may be less on the firm’s challenges than on the bottom line: After leading the industry in their categories in 1998 and ‘99, most Janus stock funds performed near the bottom of their categories in 2000.

In other words, while most growth-stock funds slumped last year as Wall Street slammed the stocks--particularly technology issues--Janus’ portfolios fell much harder than others.

So far this year, the majority of the firm’s established funds--those at least 2 years old--also are underperforming industry category averages, as compiled by Morningstar.

Janus Chief Executive Tom Bailey, who founded the firm in 1969, insists it will continue to succeed long term by sticking to its forte: a tradition of exhaustive research to pick out the most successful U.S. and foreign companies for the long run. But along the way, slumps are inevitable, he said.

Baseball’s Alex Rodriguez “may be the $250-million man, but he doesn’t get a hit every time he goes to bat,” Bailey said at a year-end meeting Janus managers and analysts held with the media in December. “We don’t get a hit every day we walk into the office.”

Although Janus has long been known for a devoted shareholder base, many investors poured into its funds as a way to play the market “momentum” game in 1999 and early 2000. Those latecomers now may be a big reason the firm has seen net outflows from its retail funds from September through January.

The funds had net redemptions of $2.1 billion in the fourth quarter, according to Financial Research Corp., which tracks fund data. Retail outflows continued in January, Janus said, but at a slower pace.

When a mutual fund suffers net cash outflows the fund manager can be hamstrung, unable to buy promising new stocks and forced to sell current holdings before they realize their potential. Asset sales then can trigger large taxable capital gains distributions for shareholders who stay put.

“You just don’t want to be in a fund with a declining asset base,” said Jonas Ferris, editor of the Web site Maxfunds.com, which covers the fund industry. “Taxable distributions and dividends can go up dramatically.”

Ferris said that although Janus shareholders have a higher pain threshold than the typical investor, who may sell after a 20% drop, their limits are being tested as the funds continue to lose value.

Bailey said Janus’ retail cash flows reflect that, for its closed funds, the door swings only one way.

To Janus’ credit, it has been diligent about closing popular funds in recent years to protect existing shareholders, Morningstar’s Kinnel said. Indeed, eight of the 17 Janus stock funds now are closed to new investors, including five that were shut in 2000.

Janus says that shows it isn’t interested in attracting more money just for the sake of boosting its management-fee take.

Manager Scott Schoelzel, whose Janus Twenty fund sank 32% last year and is down 8.6% this year after gains of around 70% in the previous two years, noted at the year-end round-table that Janus’ cash flows have been “remarkably stable” overall, as institutional investor inflows have offset retail outflows.

Nonetheless, high cash holdings as a percentage of assets at many Janus funds at year’s end suggest the managers might have been concerned about rising redemptions, though the managers also could argue they were making market-timing moves.

High cash levels can buffer a fund if the stock market continues to slide. But they also can mean that shareholders lose out if the market suddenly rockets.

The sheer size of Janus’ funds also has become an issue. Despite closures, the funds overall are far larger than they were even two years ago--which raises questions about the managers’ ability to stay nimble as stock pickers.

Kinnel said the risk to any stock fund is that, as assets balloon, the fund’s performance can begin to more closely align with market indexes. “I know they [Janus] don’t want to be index-like, and they’re going to go kicking and screaming if they change their style at all,” Kinnel said.

But Janus’ hard-core growth style, its concentrated portfolios and ownership by many Janus funds of the same highly valued stocks have highlighted the risks for investors of owning multiple funds in the same family.

In 2000, common tech and telecom holdings such as wireless phone giant Nokia and cable TV firm Comcast hurt several Janus funds when those stocks got clocked.

“I truly believe that Janus is the team to beat in ‘growth,’ but this past year they were caught sleeping when the market started to shift, and I think that they held on too long to some stocks,” said Janus investor Shannon Hilliard of Mountain Home, Ark.

Hilliard, who owns four Janus funds, said she was particularly dismayed with Schoelzel’s bets on dot-com stocks, such as WebMD, which has plunged from $100 in 1999 to $10 now. “Those kind of stock picks did make me rethink how he was managing Janus Twenty. It was like he was throwing darts with my money,” she said.

Schoelzel, who has a long-term record of beating the Standard & Poor’s 500 index both at Janus Twenty and in his previous stint at Janus Olympus, acknowledged at the year-end review that his missteps in managing the portfolio probably cost the fund 5 to 7 percentage points worth of performance in 2000.

But he said the fund was bound to finish the year in the red “almost no matter what I did,” and that the gains of the late-’90s were simply not sustainable.

Olympus Fund manager Claire Young said overlapping holdings are inevitable at a firm like Janus.

“The fact that we communicate a lot really means that our shareholders get the benefit of experience across all of the Janus portfolio managers,” she said. “In this case 50 heads are better than one when you’re trying to make sure you’ve covered every aspect of the stock story.”

Some analysts have raised concerns that Janus’ close-knit fund managers could be suffering morale problems as performance has waned and because of the way the firm’s spinoff was handled from Kansas City Southern.

Veteran Janus manager Jim Craig left last August to start a charity. Speculation has centered on whether star manager Helen Young Hayes, who runs the Janus Worldwide and Janus Overseas funds, will remain with the firm--though so far analysts say there is no indication she is unhappy.

Though Bailey said he still believes it would have been better to maintain a pure Janus brand to reward and create incentives for the entire team through equity ownership, he called the spinoff spat a thing of the past.

“I’m 63. I don’t need to be here,” he said. “But I enjoy it every day.”

Bailey recently sold half his stake in Janus Capital Corp. to parent Stilwell, a deal he called part of his “long-term financial plan,” but said he has no plans to reduce his role at the firm any time soon.

“This is sort of a rough period, but we’re still trying to do the same thing: buy the best financial and business models that we can find, because we believe over a long period of time if you invest in those companies you’re going to make a ton of money. And that’s what Janus is about,” he said.

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Josh Friedman can be reached at josh.friedman@latimes.com.

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A Hot Fund Manager ...

Assets at Janus Funds surged during the 1990s, fueled by huge cash inflows and stellar fund performance. ... Cools Down

Amid hefty losses for many Janus funds last year, the firm’s cash inflows have turned to outflows.Total assets under management, in billions, at the end of each year

2000: $251 billion Net cash inflows into Janus’ retail mutual funds, in billions, by quarter

Fourth quarter 2000: --$2.1 billion*

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Sources: Financial Research Corp., Janus Capital Corp.

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Taking Stock of Janus’ Funds

Here’s a look at how Janus stock funds that are at least 2 years old performed over the last few years, and their year-to-date returns. Also shown for 1998 through 2000 is each fund’s percentile performance ranking within its Morningstar sector category, with 1 being the top percentile ranking and 100 the worst.

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Morningstar categories: LG=large growth; MG=mid-cap growth; H=health; T=technology; FS=foreign stock; SG=small-cap growth; WS=world stock

Source: Morningstar Inc.

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Stashing Cash at Janus

Several Janus funds held substantially higher portions of their assets in cash or cash equivalents as of Dec. 31, compared with year-end 1999. That could reflect managers’ concerns about redemptions--or simply amount to market-timing moves.

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Sources: Janus Capital Corp., Investment Company Institute