Is Janus on the Mend?
This fund company is trying to right the ship.
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 C. What follows is Morningstar's analysis of the firm's corporate culture, for which Janus receives a D. 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).
Known as a growth-investing powerhouse through the 1990s, Janus has endured ups and downs in the 14 years since the tech-media-and-telecom bubble burst in the early 2000s--an event that took the fund family's superior track record at the time and reputation down with it. To the firm's credit, it has strengthened its research organization and diversified its mutual fund lineup--something that can't be said of all the growth-equity shops of the 1990s.
But change has since been a near constant at Janus for more than a decade, and while evolution can be a good thing, it takes time for fund shops to establish a comfort level with investors in relation to organizational stability and investment excellence. While the firm has expanded its investment repertoire to include various equity styles, more fixed income, quantitative investing, and a slowly growing liquid-alternatives group, it is still most readily recognized as a growth-equity shop. That some of Janus' larger funds have posted middling returns over the past several years makes the firm as a whole a tough sell, despite encouraging performance and asset growth in its fixed-income funds.
Some of the change the firm has endured is not of the good kind, and bouts of investment-personnel turnover concurrent with multiple CEO changes suggest the firm's corporate culture is not working well enough to encourage good investment managers to stick with the firm for the long haul. True, the September 2013 addition of Enrique Chang as the firm’s new equity CIO has resulted in a few changes (described below) that may result in greater personnel stability and more-consistent investment performance. But Chang and others need more time in service before it’s clear the organization has stabilized, and it’s too soon to say how effective those changes will be. As a result, Janus' Corporate Culture grade remains a D, reflecting its deficiency compared with industry peers.
An Unfortunate Pattern
In May 2013, three managers tendered their resignations. Ron Sachs, who had been with Janus since 1996 and who had most recently run Janus Twenty (JAVLX) and Janus Forty (JACTX), left the firm, as did Brian Schaub and Chad Meade. While Sachs had been struggling near the end of his tenure, he was successful in a 2000-07 stint at Janus Global Select (JORNX). Meanwhile, Schaub and Meade's charges, Janus Triton (JATTX) and Janus Venture (JAVTX), had been bright spots in an equity-fund lineup that had struggled over the past five-plus years. In fact, Triton and Venture were at that time the only two diversified U.S.-equity funds run by in-house Janus managers that landed in their categories' best quartiles. Most of the others landed in their categories' worst quartiles.
Schaub and Meade, who had joined Janus in 2000 and 2001, respectively, left Janus to join Arrowpoint Partners, an investment firm founded by former Janus portfolio managers David Corkins and Karen Reidy in 2007. (Corkins and Minyoung Sohn, another Arrowpoint manager and former rising star at Janus, left Janus in late 2007, while Reidy left in 2005.) Arrowpoint has primarily managed money for institutions but has since made a move into the mutual fund world.
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 the 2013 wave of manager defections came amid a steady trickle of one-off departures during the past decade raises concerns about Janus' ability to keep investment strength in-house for the long term. It also raises questions about Janus' succession planning and is consistent with the revolving door to the CEO office since Janus' founder Tom Bailey left the firm in 2002.
More specifically, Janus has employed five CEOs since Bailey's retirement, not including the six-month period between July 2002 and December 2002 when Janus' executive management committee was in charge. Each CEO brought a different perspective and style to the firm. Mark Whiston, for example, was a Janus sales and marketing veteran who had been part of the firm during some of its darkest days, when the tech bubble burst and Janus' involvement in the industry's market-timing scandal was revealed. Gary Black brought his investment background to the CIO job in April 2004, then was promoted to CEO in January 2006; he invested in (and improved) Janus' analyst team and emphasized a performance-driven culture that included changes to compensation. As a public company, the firm arguably faces more public scrutiny than many private asset managers do.
Janus' latest chief executive, former PIMCO veteran Dick Weil, came aboard in early 2010 and presides over a firm that is still trying to find its way in many respects. 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 selling the funds through advisor and institutional channels.
At the margins, according to Weil, there are other initiatives. For example, Weil brought in an alternatives team in 2012, and Janus Diversified Alternatives (JDATX) launched that December. It is clear he would like to launch more alternatives-based funds, but the Janus funds' board of trustees has advised the firm to move at a measured pace in this area. Overall, the firm appears to have put any further alts efforts on the back burner while placing a bigger emphasis on asset allocation (an area where Chang has significant experience). Indeed, the firm recently hired economist Myron Scholes to develop new asset-allocation strategies (and perhaps new vehicles for them). Ashwin Alankar (an AllianceBernstein veteran who worked on that firm’s allocation funds) was also brought in to comanage Janus’ three global allocation funds with Chang and to take over the role of chief risk officer from Dan Scherman (who is leaving for personal reasons). Weil also wants to sell more to financial advisors and reach out globally.
(For those who are wondering, Janus Capital Group's (JNS) then-chairman Steve Scheid served as CEO between Whiston and Black, and board member Tim Armour, a former Morningstar executive, ran the show during the seven-month CEO search that led to Weil.)
It's not unusual for a company's priorities to change along with its operating environment. However, this level of turnover among senior management has corresponded with turnover in the portfolio-management ranks and has muddled the firm's identity. Janus has worked to educate investors and financial advisors on what the firm has to offer, but although the fixed-income funds and a few equity funds have attracted investors, the firm continues to shed assets. In 2013, the funds saw a net $11.7 billion in redemptions--the most in a calendar year since 2004 following news of Janus’ involvement in the market-timing scandal. Outflows have since modestly slowed but are still quite substantial: A net $4.7 billion left in the first seven months of 2014.
Of note is that 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 August 2014. Thus, it's critical that Janus gets equities right in order to serve its fundholder base and to maintain and grow its business.
The Road to Recovery
In an effort to turn things around, Janus brought in Enrique Chang as the new co-CIO of equities. He started at Janus in September 2013, coming to the firm from American Century, which itself earned a Stewardship Grade of C at the time. At American Century, Chang oversaw a large lineup of funds that improved the firm's performance overall, and he also was successful in attracting advisors to the funds. That track record certainly appeals to Janus, which has struggled with consistency in equity-fund performance and has been trying to make inroads with advisors.
American Century's funds tend to use more-buttoned-down and defined investment styles, whereas Janus' portfolio managers historically have been more flexible in their approaches. Chang has made some moves that have modestly tilted Janus’ equity funds toward the American Century profile. Each fund’s manager was required to write an investment policy statement outlining its entire process, including research, portfolio construction, and trading. Chang has 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 has 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 regularly has lost the fund managers with the best records, suggesting that they see brighter futures for themselves elsewhere. This also raises 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, remain 91% and 92%, respectively. But those figures land in the bottom half among similarly sized fund families. The firm has 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 Global Select); 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. While this open-mindedness can be an attribute, it also suggests limited portfolio-management depth at the firm. Thus far, Kozlowski has posted solid returns, while Yoh's and Maris’ records are mixed and Rao has been at the helm for less than 15 months.
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 be able to pull the trigger on the one or two sectors they cover. These include Cody Wheaton at Enterprise, Nick Schommer at Forty, Scott Stutzman at Triton, Julian McManus at Global Select, Andy Summers at Janus Contrarian, and Jean Barnard at Janus Fund. Each one spends 10%-20% of his or her time on these duties except for Schommer, who spends 40%. Also, Maneesh Modi was promoted to comanager on Venture when Jonathan Coleman took over that fund in 2013, and Jeremiah Buckley was named a comanager of Janus Growth & Income in July 2013—he also serves as the assistant manager on manager Marc Pinto’s other two funds, Balanced and Twenty.
The Fixed-Income Fix
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 (JAFIX), Janus Short-Term Bond (JASBX), and Janus High-Yield (JAHYX), have generated consistently solid returns, earn a Morningstar Analyst Rating of Silver or Bronze, and have attracted steady and sizable inflows. That team's assets under management have grown from less than $7 billion in 2008 to roughly $35 billion today.
Janus has made considerable investments in its fixed-income business along the way. That includes building up a proprietary risk-management system that has since been expanded to the equity platform and upgrading 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 Janus Unconstrained Bond (JUCAX) have been launched during his tenure. 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.
Asset growth in fixed income wasn't unique to Janus, as investors still fearful after horrific experiences in 2008 continued to flock to bond funds through 2012. But Janus’ fixed-income funds have continued to draw inflows even as inflows across the bond world have moderated due to equities’ strong rally. This may reflect a respect for Janus’ bottom-up approach to bonds.
A Distinguished Value Boutique Grapples With Challenges
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 brothers Robert and Thomas Perkins, 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--when their asset bases grew hefty.
The compact but stable team is going through an extended performance slump right now, but it has been in slumps before (albeit less lengthy ones) and come through. Chang has lately nudged this team into a couple of changes, including limiting their 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. However, Janus CEO Dick Weil believes the next generation is prepared to succeed, and Morningstar's fund analysts agree.
Janus' Quant Arm May Be on the Mend
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 thirds over the past three years. There has been personnel turnover along the way as some of the leaders have returned to academia or left for other firms.
Janus continues to have some feathers in its cap. Its fixed-income team, which has been strengthened over the past eight 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 very high; 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 being said, Janus' in-house equity team manages the lion's share of the firm's mutual fund assets, and the latest wave of manager defections and subsequent new hires warrant caution for now. And while Chang’s initial changes could have a positive 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 importantly, 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. Click here to see Morningstar's Stewardship Grade methodology.
Greg Carlson does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.