Planned Spinoff Causes Much Grumbling, but Little Fumbling, at Janus

Janus Capital thinks its' getting railroaded by parent Kansas City Southern Industries (KSU), but there's probably no reason to panic if you own shares of a Janus mutual fund.

Last week, regulators and Kansas City Southern's board of directors approved the spinoff of the firm's financial-services firms from its rail transport business. The financial subsidiaries are being bundled together into a holding company, Stilwell Financial, named for the railroad's founder. Besides Janus, the companies include another Denver fund shop, Berger Funds, London-based Nelson Money Managers and DST Systems, a financial data-processing agency.

Stilwell shares will be distributed to Kansas City Southern shareholders on July 12. The new company will begin trading on the New York Stock Exchange under the ticker symbol SV by mid-July.

Janus had lobbied hard to be spun out on its own, and the unhappiness of its upper management at being bundled with the other firms has led to speculation that key money managers could jump ship. Industry observers say that's unlikely. And even though Janus officials make little attempt to hide their displeasure, it's unlikely that unhappiness will drag down the firm's stellar results, analysts say.

"It's like being paired with your dorky little brother -- you just have to bring him along," says Jim Folwell, an analyst with Boston-based fund consultant Cerulli Associates.

Janus accounts for more than 90% of Stilwell's earnings, and company officials believe being packaged with weaker performing firms will dilute the strength of the Janus' results.

"We see this as a suboptimal solution for unlocking Janus' value for shareholders," says Janus spokesman Stephen Stieneker.

But Janus' biggest beef is that Stilwell is a less attractive carrot for keeping key money managers than a pure Janus stock would be. Kansas City Southern owns more than 80% of Janus, but has sold some of its ownership back to the firm so Janus could offer top managers a direct stake in the company. Janus employees, however, will get Stilwell shares in their stock option plans, says Kansas City Southern Industries spokesman Michael Herley.

It's understandable that Janus would want to strut its stuff. The no-load growth specialist's stock funds posted an average return of more than 80% last year, and that brought in a ton of cash. Over the past 12 months, the firm's assets have more than doubled to $290 billion. Even though many of the firm's hottest funds are closed to new investors, it still has six of this year's top-10 sellers open, according to Boston fund consultant Financial Research. Janus funds took in more than $32 billion of fresh cash from Jan. 1 through April 30, lapping runner-up Putnam Investments three times.

In the first quarter Janus revenues were $523.1 million, compared with $16.8 million for Berger.

Kansas City Southern officials counter that splitting Janus out on its own could make the spinoff a taxable event for Kansas City Southern shareholders. The spinoff as currently structured, won't be a taxable event, says Herley.

The battle between Janus and its parent hasn't been pretty or private. Janus Chairman, Chief Executive and President Tom Bailey has been critical of the spinoff. And in its most recent annual report, Kansas City Southern asserted that the company could fire Bailey without sinking Janus' smooth-running ship.

But Kansas City Southern has backed off its statement and Janus appears to have grudgingly acquiesced to the plan.

"I think it's disappointing that the Kansas City Southern board has gone ahead with this plan, but we'll make the best of the situation and we'll keep working hard for our shareholders," says Janus' Stieneker.

Still the two firms' past fighting words ruffled some investors' feathers, making them wonder if Janus' corps of highly regarded stock-pickers might bolt.

"People have been calling and emailing about the worst-case scenario where managers might leave," says Christine Benz, a senior analyst at Morningstar. But she's been telling shareholders not to worry.

She doesn't anticipate a fund-manager exodus, but even if some mangers left, shareholders shouldn't panic because they'd probably leave behind solid portfolios in the hands of talented managers, she says.

Part of her confidence is driven from the firm's institutional approach to stock-picking, evidenced by the significant overlap of holdings among Janus funds. By working in teams and building a significant bench of analysts, Janus is less vulnerable to a single manager's departure than a shop built around one star's insights. Consider how well the firm handled the departure of Tom Marsico, who dropped the reins of (JAVLX)Janus Twenty and (JAGIX)Janus Growth & Income in 1997 to start his own firm across town. Over the past year, Marsico's old Janus funds are beating his new ones.

"They weathered Marsico's departure well. It could've been a big pothole, but it turned out to be a speed bump. Having a philosophy across the funds makes them less dependent on one or two gunslingers," says Folwell.

Still, if Helen Young Hayes, skipper of (JAOSX)Overseas and (JAWWX)Worldwide, or Scott Schoelzel, who now runs Twenty, jumped ship, "alarms should go off," says Burt Greenwald, a Philadelphia-based fund consultant. Until then it's "a wait-and-see situation," he says.

Janus' Stieneker says his company also is in a wait-and-see position. Stilwell will be run by executives moving over from Kansas City Southern. And though they promise to stay out of Janus' day-to-day management, Stieneker says he wonders whether they'll still give Janus the freedom it has had in the past.

"Historically they've given us a lot of autonomy though not 100%. Now they don't have a railroad to run anymore," he says.

One key issue to watch is board representation. Due to the Stilwell Financial's structure as a holding company, Janus, Berger and DST officials aren't allowed to be on the board. They can, however, nominate independent directors subject to shareholder approval, according to Herley.

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