Janus' $150 Billion Problem

Vanguard founder John Bogle, one of the greatest advocates for the little investor that America has produced, had his own take on the situation. Bogle's firm, like Fidelity, Eaton Vance(EV), American Century and many other fund firms, put measures in place to deter market timers from profiting from arbitrage plays on their funds. Janus and the other firms Spitzer discussed made money from this activity.

"Well, it's obviously fair to say these funds aren't going to do it again," Bogle said. "On the other hand, it is a betrayal of trust. If I were a shareholder, I would be discouraged, disgusted and think long and hard about whether I want to remain invested with them."

This presents an enormous problem for Janus, in particular -- a $149.6 billion problem, in fact, based on its assets under management as of July 31. Strong Capital Management is privately held. Bank of America's Nations Funds have $134 billion in assets under management, and Bank One more than $100 billion, but the parents are diversified financial services firms that have too many tentacles -- they don't sink of swim on the basis of their funds. Janus is a pure-breed fund firm, charged only with serving one master: mutual fund investors.

The $149.6 billion is down from more than $300 billion at the peak of the market bubble, but it still represents an enormous amount of investor dollars, both individual and institutional. Janus is already reeling from a bad performance record, a brain drain of fund managers and a vacant slot at the chief investment officer's post. What would happen if the investors who have entrusted Janus with $149.6 billion decided to get out?

"I fear this news will have a major impact on their fund flows," said Matthew Snowling, an analyst at Friedman, Billings Ramsey. "You have a franchise that was already weakened because they are the poster child of dot-com growth funds. Now, the name Janus is going to be in the paper every day as Spitzer goes after them."

Vanguard's Bogle is right -- this won't happen again. However, the issue for Janus isn't about international fund arbitrage plays anymore; it's about trust. As Friedrich Nietzsche once wrote, "What upsets me is not that you lied to me, but that from now on I can no longer believe you."

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