Beleaguered investment firm
said Wednesday that it swung to a profit but that the news would likely get worse in the coming weeks.
Janus reported third-quarter net earnings of $50.9 million, or 22 cents per share, compared with a year-ago net loss of $131.2 million, or 59 cents per share, which included tax and restructuring charges. Wall Street estimates were for earnings of 26 cents per share, according to First Call. The reported earnings include a $9 million preliminary charge to account for costs related to the ongoing investigation into illegal mutual fund trading practices.
But that $9 million figure -- and subsequently the entire quarterly earnings report -- will likely be restated once auditor Ernst & Young completes its assessment of what this investigation will cost, Janus said. As new lawsuits are filed against Janus and the full cost of making good to investors still remains something of a mystery, Ernst & Young will likely arrive at a figure higher than the $9 million, analysts say.
Janus has been targeted by New York Attorney General Eliot Spitzer for allowing Canary Capital Parnters, a New Jersey hedge fund, to perform market-timing trades, which clearly flouted rules published in documents submitted to the
Securities and Exchange Commission
, in exchange for parking huge amounts of cash under Janus management.
While not explicitly illegal, the churn caused by market-timing adds to the cost of owning funds, and directly skims profits off the top of funds also owned by long-term investors. Most fund firms -- including Janus -- state in their public documents that they actively discourage such behavior, and even institute redemption fees to prevent market-timing.
Within days of Spitzer's announcement, Janus promised to return all management fees the company received from these frequent-trading arrangements. But the $9 million figure includes just $1 million in management fees -- $5 million is budgeted for the return of waived redemption fees, and $3 million is attributable to legal fees.
"When you dig through those numbers, there's still a lot of uncertainty," says Matthew Snowling, an analyst with Friedman Billings Ramsey. "In a few weeks their net income number will certainly be lower."
The investment firm reported third-quarter revenue of $256.6 million, up from $245.5 million last quarter and $252.7 million in the third quarter of 2002. Revenue will likely be pinched in the future, though, as Janus funds are still likely to suffer more redemptions and greater challenges in new sales. Redemptions have been huge thus far, but largely limited to retail investors, according to CEO Mark Whiston.
In September alone -- in the midst of a rally in equities -- Janus growth stock funds lost $2.4 billion in outflows, $4.4 billion overall. As the typically slow-moving institutional investors watch the fallout of the investigation and rethink the relationship they want to have with Janus, redemptions likely will increase.
Meanwhile, the funds are not making inroads with new investors. Janus suffered a 28% decline in assets over last quarter due to a decline in sales of funds.
"Their assets under management are shrinking, which is why they didn't get a bump from the good market this quarter," said Morningstar stock analyst Rachel Barnard. "And revenues next quarter will likely be much lower."
The complex tax-avoidance transaction Janus has struck with subsidiary DST Systems, a financial services back-office software provider created by Janus, seems to be proceeding apace. Essentially a stock-for-cash swap, Janus will trade its shares in DST to the formation of a new subsidiary, a printing company, for $1 billion in cash. That money will still be tied up in the subsidiary, though, and won't be able to immediately offset any of Janus' debt, although it will save some $40 billion in capital gains taxes Janus would owe if it had sold DST outright.
In recent trading, Janus Capital was up 54 cents at $14.08.