Closing Time! Shuttered Flagship May Affect Janus Fund Investors

Close a big fund to new investors and you're a hero. Close a fund but announce a clone, and you're going to raise some eyebrows.

On Wednesday, Janus shuttered its eponymous and mammoth $50 billion flagship fund to new investors and announced plans to launch a similar Janus 2. Whether you own shares of the (JANSX)Janus fund or a Janus fund, the move could have repercussions. Janus watchers say if the funds are too similar, Janus fund shareholders could end up with little if any added flexibility and maybe even a tax headache. And if you own a Janus fund that's open, even more cash than usual might start flooding in the door now that another Janus fund is closed.

The Denver growth shop, this year's top-selling firm, has now closed half of its 16 direct-sold stock funds. The closings are due to unprecedented in-flows following hot returns -- the average Janus stock fund posted an 81% return last year. However, the firms' inflows have slowed lately due to dipping returns for several Janus funds. Through Tuesday's close, most of the firm's direct-sold stock funds were trailing their average peer and/or the S&P 500.

Not-So-Good Beginnings Only four of the 14 direct-sold Janus funds started before Jan. 1 are beating their average peer and the S&P 500 this year.
Janus Fund	YTD Return	YTD Rank in Category(1%-best, 100%-worst)
(JAGLX)Global Life Sciences*	28.5%	73%
(JASSX)Special Situations	6.7	73
(JANSX)Janus*	5.8	37
(JAGTX)Global Technology*	4.7	50
(JAENX)Enterprise	2.4	82
(JAGIX)Growth & Income	1.8	63
(JABAX)Balanced	1.8	80
(JAWWX)Worldwide*	1.5	25
(JAEIX)Equity- Income	1.2	67
(JAOLX)Olympus*	0.2	71
(JAOSX)Overseas*	-0.3	9
(JAMRX)Mercury	-0.4	75
(JAVLX)Twenty*	-5.9	92
(JAVTX)Venture*	-18	100
S&P 500	2.5	--
Source: Morningstar. *Closed to new investors. Performance through Sept. 12.

Still, investors' appetite for Janus funds shouldn't be taken lightly: The firm is easily this year's top seller and its (JSVAX)Strategic Value and (JORNX)Orion funds, launched within the past seven months, already have combined assets topping $4 billion. The average U.S. stock fund has some $400 million in assets, according to Morningstar.

If You Close It, They Will Come Even though Janus has shuttered many funds, it still had taken in more money than any other firm through July.
Firm	YTD In-Flows (billions)
Janus	$36.5
Putnam	13.3
AIM	8.7
Vanguard	8
Invesco	7.3
Source: Financial Research. Data through July 31.

For Janus fund shareholders, the closing looks like a good idea because it will help keep the fund from becoming too inflexible due to its massive asset base -- the fund is this year's 10th best-selling fund through July with $3.6 billion in fresh cash. For those shut out of the fund, Janus 2 might be a way to invest in a similar fund without worrying about a fat tax bill due to the fund's years' of big gains. But some say closing one fund and opening a clone make the original less nimble anyway.

"It's clearly a good thing that it's closing, but if the sequel fund is similar it's a shaky idea that might be snowing people," says Morningstar's Russel Kinnel. He believes opening a clone can defeat the purpose of closing a fund, because both funds end up buying and selling the same or similar funds in massive amounts.

"You end up with all the symptoms of the big fund still being open: high trading costs and limited flexibility," he says. Others concur.

"The real question is why Janus 2? If it's not going to be different, there's no reason to close the Janus fund," says Phil Edwards, managing director of Standard & Poor's funds unit.

Edwards expects the two funds to be different, but early indications imply otherwise. The two funds, which will share the same broad mandate and co-manager John Schreiber, may be as similar as their names.

"It will be a clone, I don't think there's any question about that," says Philadelphia-based fund consultant Burt Greenwald. He adds, however, that their similarity won't be a detriment, since the original and "son of Janus" probably focus on liquid, large-cap growth stocks.

Beyond trading issues, others wonder if a clone fund without the imbedded capital gains of the original will, inadvertently, lead to tax headaches for the original's shareholders.

Morningstar's Kinnel thinks if Janus 2 is a clone, "It might hurt Janus fund's tax efficiency" because investors would flock to the newer version where they can buy the same strategy without worrying about years of imbedded capital gains. The Janus fund has some 40% of its assets invested in stocks that represent realized or unrealized gains, more than the average large-cap growth fund, according to Morningstar. Stock sales to meet redemptions, combined with a declining shareholder base could lead to big tax bills.

There also might be some shock waves felt by Janus investors who don't own the Janus fund. Over the past year, as Janus has aggressively closed funds to keep them from buckling under too much cash, it's inadvertently put some pressure on those Janus funds still open.

"You can see that when one fund closes, others' inflows tick up," says Kinnel. He wonders if other Janus funds like (JAENX)Enterprise and (JAMRX)Mercury might also close if inflows become too much.

Oddly, the firm's commendable refusal to launch new funds simply to capitalize on demand when they don't have a worthy, often home-grown, manager or analyst to run them, could compound the problem.

Historically, the firm hasn't launched more than one or two funds in a year. Over the past 12 months they've launched Strategic Value and Orion. With Janus 2 on the way and the recent departure of Chief Investment Officer Jim Craig, it might be a challenge for Janus stock pickers to manage their funds and the firm's growth as well as they have in the past.

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