Investors watching while Janus heals

OVER THE PAST three years, investors have fled the Janus funds as if they were running for their lives.

Bloodied by the bear market, marked by scandal and beset by management changes, investors have pulled money from Janus in 35 of the past 36 months.


But throughout the company's troubles, some 4 million investors have stayed put, keeping $135 billion in assets with the Denver-based fund firm.

This column is for them, the ones now trying to decide what to do with the new Janus, the one with new leadership, and mostly the same fund managers trying to heal old wounds.


At a recent Morningstar Investor Conference in Chicago, Janus' new president and chief investment officer, Gary Black, sat down for an interview to discuss the future of the company's funds. Black, who joined Janus in March from Goldman Sachs, said he believes his new employer has "been humbled. ... Nobody wants to go through what we went through a few years ago, and our job now is to make sure that it never happens again."

Behind those brave words, Janus is expanding its research capabilities and analytical staff, a move that will expand the universe of companies the firm follows from about 650 when the market was peaking to more than 1,000 now.

That expansion will help Janus avoid some of the overlap problems that beset the funds during the bull market, where owning two sister funds barely provided any diversification benefits.

Part of that rush to own the same hot stocks also came from the incentive structure for Janus managers, who were rewarded mostly for short-term performance and for the growth of assets in their funds.

That second criteria is a big deal for the management company, but it's not such a good thing for investors, as paying a manager based on how much money the fund holds tends to lead to decisions that make a fund popular right now and losing focus on the long term.

Black can't just overhaul the pay system at Janus, as the portfolio managers have contracts and will have to acquiesce to the new leader's plans to tie incentives much more closely to competitive performance, and to ensure that much of that pay revolves around superior long-term results.

Virtually all of the manager contracts will be renewed by next March, meaning that there is the possibility of some management turnover at Janus funds in the interim. Black also recently showed that he won't shy away from making management changes, dropping Lawrence Chang from Janus Worldwide and replacing him with Jason Yee of Janus Global Opportunities.

What Black says will not be changing is the company's investment approach - which is growth-oriented and focused in a few names. With Janus funds, the idea has never been to stay close to an index, but to run away from them.


"We're not going to make products that are more benchmark-sensitive," Black said. "That's not Janus."

Janus has always been about performance, and its recovery will come on the back of improved numbers.

Said Black: "In the last few years, we had performance that was lousy, we were not good actors in the mutual fund scandals, and we had manager turnover. ... We have to go back to providing the kind of performance that people expect from this company."

Here's my take on what investors should expect from Janus:

Better performance during downturns, but lower gains in good times.

Janus managers are paying more attention to stock valuations. There may be a bit less giddyup when the market is rising, but the pain should be less during corrections. It will take a complete market cycle to prove this, but if Janus can't make it happen, you can mark Black's efforts as a failure.


It remains possible to own too many Janus funds.

While overlap has been reduced, almost all Janus funds still swim in the same stock pool, and owning more than two from within the family is likely to create a false sense of diversification. That's a good way to get hammered if Black's machinations don't work.

One more year of changes.

By next March, the managers who don't like the new incentive structure will be gone, and Black will have had a year on the job.

If performance continues to improve, Janus will get through the changes and come out a better company. Investors who are waiting to get back to break-even before bailing - and there are sure to be many of those among the millions of shareholders - would be making a mistake to bail out during the transition phase.

No savvy investor will take Janus off the watch list until Black's first year is over. But if Janus doesn't change its stripes and deliver continued results, investors might want to take the firm off the watch list by kicking it out of their portfolio.