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Are Things Looking Up Again at Janus?

Ian McDonald

There's not usually much reason for fund investors to peruse their fund company's earnings report, but that might not be the case if we're talking about Janus.

Rattled shareholders of Janus funds might be somewhat calmed by Wednesday's earnings results from the firm's parent, Stilwell Financial(SV Quote), even though the Kansas City, Mo.-based company missed Wall Street analysts earnings estimates by a penny.

If you own Janus funds and your palms are a little damp, I can't blame you. After Janus' tech-heavy funds gained more than 80% on average in 1999, they averaged a 36% loss between the Nasdaq Composite's March 10 peak and the end of last year. Couple that with influential chief investment officer Jim Craig's departure, the news of continuing outflows from the Denver shop's tech-heavy funds, an unflattering Fortune profile of Janus and firm chief executive Tom Bailey and the chilly relationship between Janus and the folks at Stilwell Financial, and yes, you might be a little skittish.

But a look at the Stilwell's Wednesday earnings statement and Janus stock funds' returns so far this year could be a modest shot in the arm. Stilwell's report shows that Janus weathered last year's storm reasonably well. It also indicates that there's both incentive and some means to keep Janus' fund management teams intact -- ostensibly a key part of the funds getting back on track.

First, the incentive. Stilwell is a holding company that railroad shop Kansas City Southern used to bundle and spin off its financial subsidiaries, including Janus, Berger Funds, Nelson Money Managers and financial record-keeper DST Systems. Janus is clearly the portfolio's star. Last year, Stilwell reported net cash inflows of $68.4 billion to its fund shops and Janus accounted for nearly $67 billion of that money.

And despite last year's ugly second half, Janus' star didn't dim much. Despite a series of fund closings and outflows in recent months, Janus still took in more money than any other fund shop last year. Though Stilwell's assets under management dropped 18% in the fourth quarter, according to Stilwell's earnings report, most of that was due to market performance.

Observers often predicted massive outflows from Janus funds when 1999's frothy market came back to earth -- the idea being that investors buying no-load funds on their own tend to vote with their feet when hot funds cool off.

But it appears, at least so far, that the gush of outflows hasn't materialized. Yes, there have been redemptions but Stilwell reported less than $1 billion in net outflows -- not too much considering the firm's cumulative $257.4 billion asset base. That's put a big dent in the argument that Janus' outflows were adding selling pressure to the tumbling tech sector.

"The outflows have been minor in the big picture," says Christine Benz, a senior fund analyst at Morningstar. "People were suggesting that Janus was single-handedly keeping tech stocks down, but these couldn't have been responsible for the selloff."

It may have helped that Janus is less dependent on do-it-yourselfers these days. Between 1997 and 2000, Janus' assets from direct-sold retail investors have dropped from 56% to 33%, according to data on Stilwell's Web site. A higher dependence on sales through advisers and retirement plans -- called "sticky money" by fund marketers because there tends to be less trading in these accounts -- could lend some stability to the firm's asset base, particularly if new funds like Janus Orion and Janus 2 can win investors' hearts.

Now, let's talk about the means to keep Janus' managers on board -- beyond paying big salaries. Last Thursday, Stilwell announced plans to pay $610 million to CEO Bailey for 6.2% of Janus common stock, representing about half of his Janus stake. There's not a ton of this pure Janus stock around following Janus' bundling with its less impressive Stilwell shops. Janus execs publicly and successfully lobbied for a spinoff on their own, seeing its peers under the Stilwell banner as a drag on returns, but Stilwell officials say they'll use these shares to try to keep current portfolio management talent intact.

And Janus funds' performance shows that's worthwhile. Despite a difficult 2000, only one of the firm's 12 direct-sold funds with three-year records, (JASSX Quote)Janus Special Situations, trails its average peer over that period. Now that tech and telecom stocks are bottoming and heading north, Janus' stock funds are following suit, which indicates that Janus managers have stuck to their guns.

"They've bounced just as you'd have hoped they would so far this year," says Benz. "You don't want to get too excited about such a short time period, but it's encouraging."

Of course, there are real concerns for which there isn't a magic bullet. Some wonder if the firm's managers will at least initially miss a beat in Craig's absence; only time will tell us if that's the case.

Also, the firm's direct-sold stock funds' girth might weigh them down. The funds averaged more than $10 billion in assets at the end of last year, compared with $507 million for the average U.S. stock fund, according to Morningstar. A spate of closings and dipping performance have obviously stemmed the tide of greenbacks, but these funds' big stakes in relatively few stocks could easily hamper their flexibility and returns down the road -- a point made by fund guru Ken Gregory in a recent 10 Questions interview.

Stilwell Financial shares also might not be enough of a carrot to keep Janus managers loyal over the long term. These folks no doubt field many job offers and without the ability to own more stock in their own firm, they might see less reason to stay.

And rumors of mergers and manager defections swirl around Stilwell, leading some to wonder if Janus managers will want to stick around or choose to work at a lower-profile shop. The upshot for most investors is probably that they don't need to invest more money in Janus funds, but this earnings report indicates that they shouldn't believe every gloomy prediction they hear.