Janus Guys Stick to Their Guns

After another tough year, a few Janus fund managers told reporters they're not changing their research process, though they are trying to look more closely at the companies they own.

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On Thursday morning a gaggle of folks from the Denver fund shop met with reporters in midtown Manhattan, including veteran portfolio managers Scott Schoelzel (JAVLXTwenty) and Warren Lammert (JAMRXMercury). They didn't dismiss the past year's drubbing or proclaim the pain over, but they did say they aren't changing their stripes.

"Needless to say, it's been a difficult 15 to 18 months, but we haven't been knocked off our game," said Schoelzel, whose Twenty fund is down 38% over the past year. "We will be back, I guarantee it," said Janus chief executive and founder Tom Bailey.

Most of the Denver firm's tech-heavy stock funds' returns rose and fell with the Nasdaq bubble, taking millions of individual investors along for a ride neither pleasant nor profitable. Most of the firm's stock funds still boast solid long-term track records, but many investors bought their shares in the past three years and have been in the cross hairs of a sluggish economy and stock market. Among Janus' 10 biggest stock funds, just one is beating its average peer (JAGIXGrowth & Income) and just one is beating the S&P 500 (JABAXBalanced).

The firm's research style, depicted in numerous television and print ads, blends number crunching with grass-roots investigation. Managers and analysts typically sift the market for companies that are growing quickly and look cheap today relative to the amount of free cash flow they'll churn out in the future. Then they use interviews with a company's management, customers and competitors to develop a broader sense of a business' strengths and weaknesses. On Thursday, Schoelzel mentioned an analyst covering Walgreens who worked in a store for a week.

Despite this pragmatic and holistic approach, the firm's funds still took a worse beating than the market and most of their growth-oriented peers. Of the 14 direct-sold Janus funds launched before the start of last year, many of which are closed to new investors due to the record gush of cash they took in over the past three years, only three beat the S&P 500 in 2000 and even fewer are doing so now.

While most Janus funds still top their peers and the S&P 500 over longer time periods, the past two years have tarnished some three-year records. The JAENXEnterprise and Twenty funds, for instance, both trail more than 70% of their peers over the past one and three years, according to Morningstar, a Chicago financial research shop.

What Have You Done For Me Lately? Big Janus funds trail peers over a year
Janus Fund	YTD Return	Percentile Rank in Category (1=Best, 100=Worst)	Three-Year Return	Percentile Rank in Category (1=Best, 100=Worst)
JAENXEnterprise	-40.4%	93%	1.6%	79%
JAOLXOlympus*	-33.5	89	6.5	10
JAMRXMercury	-29.7	77	7.3	8
JAVLXTwenty*	-28.8	75	-3.3	70
JANSXJanus*	-25.9	64	1.3	37
JAOSXOverseas*	-25.5	66	6.4	11
JAWWXWorldwide*	-24.4	73	3.6	39
JAGLXGlobal Life Sciences*	-18.7	73	N/A	N/A
JAGIXGrowth & Income	-15.3	17	7.5	8
JABAXBalanced	-5.1	56	7.4	10
S&P 500	-12.2	N/A	3.9	N/A
Source: Morningstar. Returns through Dec. 4.

While the firm's distinctive research and idea sharing did lead to outsize positions and profits in longtime holdings like AOL Time Warner AOL and Nokia NOK, two stocks Schoelzel endorsed in Thursday's briefing, it has misfired as well. Firmwide, Janus funds owned 178 million shares of networking titan Cisco CSCO on March 31, 2000. They still held 107 million shares a year later, with the stock down more than 80%. By Sept. 30, the position stood at 40.7 million shares, according to regulatory paperwork, but Schoelzel admitted the firm loved the company's story and management a bit too much.

And more recently the firm was maligned for being one of the largest institutional shareholders of buckling energy trader EnronENE. A Janus spokeswoman noted that the position was liquidated by the middle of last month, and Schoelzel said its total losses added up to just 0.12% of assets, because the firm had owned the stock for more than two years. While misses like these point to a blind spot, Janus heads say it's just part of investing.

"We make some mistakes, and we get some things right," said Warren Lammert, whose Mercury fund is down 35% over the past 12 months. "In this business you forecast earnings, and it can be humbling. Our record shows we get it right more often than we get it wrong."

Misses Stocks that Janus took a beating on
Stock	Shares Held March 31, 2000, in Millions	Shares Held March 31, 2001, in Millions	Return Over Those 12 Months
Cisco Systems	177.9	107	-80.5%
Sun Microsystems	151.9	67.1	-67.6
EMC	68.4	64.7	-52.1
Texas Instruments	75.5	33.4	-64.6
Enron	67.1	51.9	-24.4
Sources: Lionshares.com and Baseline/Thomson Financial.

While the past two years' losses haven't driven Janus managers to change their approach, it has made them more wary of valuations and the risks of betting too heavily on one sector of the economy.

"We have always paid attention to valuations, but our experience has sharpened our attention," said Lammert. As for sector concentration, he added that it seemed natural to have a third or more of a fund in tech stocks because they comprised that much of the market's capitalization, while admitting that "the severity of the downturn did catch us by surprise."

To founder Bailey, who said, after selling his stake in Janus Capital earlier this year, that he has no plans to leave the firm, questions about the firm's process will stop when the funds come back to life, which he promises will happen.

"We have to get the numbers up," he said when asked what it will take to restore shareholders' confidence. "We have to have first- and second-quartile funds. None of us are happy with our funds over the past two years, but we believe in the process and we will have better numbers."

Faves Top firmwide stock holdings on Sept. 30
Stock	Percentage of Company Owned	One-Year Return
AOL Time Warner	5%	-16.3%
Nokia	3.9	-44.5
Comcast	10.5	2.9
General Electric	0.9	-26.8
Viacom	5.1	-17.9
NTT DoCoMo	2.1	-49.7
Tyco International	2.7	8
Pfizer	2.1	-0.1
Citigroup	1.1	-2.3
Microsoft	0.7	16.6
S&P 500	N/A	-13
Sources: Lionshares.com and Baseline/Thomson Financial. Returns through Dec. 4.

Apparently, shareholders agree. Despite the funds' tumble, redemptions have been relatively light. Outflows from the firm's retail stock funds outpaced investments by some $11.2 billion through Oct. 31, according to Boston fund consultancy Financial Research. A month earlier, the firm's stock holdings added up to more than $127 billion, according to Lionshares.com.

Despite promises of better performance, the portfolio managers weren't too sunny when they surveyed the market.

Schoelzel reiterated his faith in the firm's favorite areas: pharmaceuticals, biotech, technology, media and financial services. But he also admitted that the economy was only starting to show signs of recovery. Both David Corkins, manager of the Janus Growth & Income fund, and John Schreiber, manager of the JTWOXJanus 2 fund, said they were "cautiously optimistic" and called next year "a stock-picker's market" with plenty of volatility.

No one proclaimed the current Nasdaq rally sensible, and no one said they'd found the next Cisco. Perhaps the most insightful comment came from Corkins. Asked if this market was cheap or expensive, he said: "Both."