Stephen Schurr

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Janus Plans Reimbursements for Money Lost to Market Timing

Stephen Schurr

"Janus Apologizes" is a phrase that merits comparisons to "Garbo Laughs!" Janus was the fund shop that made no apologies for its aggressive-growth approach to investing that led to explosive returns in the 1990s and an implosion during the bear market.

Well, it's been a topsy-turvy week for Janus Capital Group(JNS) after New York Attorney General Eliot Spitzer named Janus as one of the fund firms that enabled hedge fund Canary Capital to make money in its funds at the expense of individual fund holders. The unofficial "no apologies" policy was shelved as the company acknowledged that it allowed market timing in some of its funds and announced measures to address the issues raised by Spitzer.

In a news release late Friday, Janus said it has hired an outside firm to evaluate whether there was a monetary impact to any funds in which Janus permitted "discretionary market-timing arrangements." If investors in the funds lost any money due to these arrangements, Janus will provide restitution, the news release said. The Denver-based shop also said it will return to shareholders in the affected funds all management and advisory fees it received from market-timing activities, which represent less than one-half of 1% of Janus' $150 billion in assets -- or less than $750 million.

"Our business is built on trust, and I personally apologize for any concerns we've caused our investors," said Mark Whiston, chief executive of Janus Capital.

Janus also said it is cooperating fully with state and federal authorities to resolve this matter. Also, the firm said it would work with regulators and would support uniform rules to regulate and restrict market timing. The firm didn't say which funds were involved, but Mercury and High-Yield were the two funds named in Spitzer's complaint.

'An Industrywide Problem'

The measures represent a sweeping attempt by Janus to acknowledge its behavior, make amends with fund holders and quickly head off a potential scandal that threatens the firm's livelihood.

Janus was also quick to note that market timing wasn't a Janus-only issue. "We've long viewed market timing as an industrywide problem involving both mutual funds and the many intermediaries with whom investors work," Whiston said. "Regardless, we have to do what's right for our fund shareholders."

Later in the release, Janus said for any efforts to restrict market timing to be effective, "these rules must apply to all mutual funds and intermediaries, as well as to the unregulated hedge fund industry."

Indeed, market timing is a rampant problem in mutual funds that steals money out of fund investors' pockets -- costing U.S. funds an estimated $4 billion a year. "There are managers out there who make their living on market timing," said Mercer Bullard, founder of fund-investor advocacy group Fund Democracy. When a hedge fund or some other investor tries to market time a fund, they exploit a loophole in the way funds are priced. Since a fund's net asset value, or NAV, is calculated once a day, traders can move in and make free money off the static NAV. (Click here for a story explaining the details of how this works.)

The key difference between the actions of the four companies named in Spitzer's complaint -- Janus, Bank One(ONE), Strong and Bank of America(BAC) -- and much of the mutual fund industry is that market timing is an industrywide problem that firms try to combat.

Many firms put systems in place to block market timing -- such as redemption fees, fair-value pricing and imposing trading limits. Other fund firms don't police market timing as aggressively. A handful of others, such as Janus, have opted to cut deals with market timers in which both sides profit. What did the fund firms get? Money from Canary parked in money-market funds, which means fatter fees paid to the firms.

These market-timing arrangements were never disclosed by Janus -- until the news release Friday night, two days after Spitzer's complaint.

"It's our hope that the measures we're announcing today will help resolve this situation in a way that recognizes the importance of the matter," Whiston said in the statement. "Most of all, we hope this action demonstrates that Janus is committed to living up to the high ethical standards that our shareholders expect of us."