Janus Capital Plays Up Outflows

With every announcement, Janus Capital's ( JNS) new CEO is trying to put as much daylight as possible between the company and its role in the mutual fund scandal. Unfortunately, skeptical investors and analysts don't appear to have a short memory.

After the Denver-based company reported a 0.3% month-over-month decrease in assets under management in June and long-term net outflows for the month at $1.4 billion late Monday, Janus' chairman and CEO Steve Scheid put a positive spin on the results, saying that the equity outflows have now been reduced "to the best level we've seen in the last 10 months."

He also said that Janus' fund performance was strong in June, with nearly 70% of the company's retail funds in the top half of their Lipper categories on a one-year basis and 55% in the top half of their Lipper categories on a three-year basis based on total returns.

The fact that Janus' outflows are moderating and fund performance is comparatively strong is good news for the company, but many analysts feel that more dramatic results will be needed to overcome the negative press created by the firm's involvement in the mutual fund scandal.

"Despite steps management has taken to address its problems, we believe that the company will continue to struggle vs. its peers and that its valuation of 19.7 times 2005 earnings is too rich to justify its struggling sales, high redemptions and considerable operating risk," writes Matt Snowling, analyst at Friedman Billings Ramsey. (FBR says investors should assume it seeks investment banking business and hold equity positions in the companies it covers.)

Influential fund-tracking firm Morningstar upgraded its rating on Janus funds to "proceed with caution" in May, but has yet to give investors an all-clear sign.

Janus releases second-quarter financial results before the market opens Thursday, July 22. Analysts are expecting the company to earn 17 cents for the quarter, down from 22 cents a year ago. The consensus revenue forecast is $264 million, a 5.5% increase from last year's $250 million.

Janus was one of the first mutual fund companies to come under regulatory scrutiny in the market-timing investigation begun last summer by New York Attorney General Eliot Spitzer. Regulators investigating the $7.6 trillion mutual fund industry found evidence that Janus had permitted a number of select investors, including the now infamous Canary Capital Partners hedge fund, to engage in market-timing.

Market-timing, or frequent trading, in mutual fund shares can erode the value of a fund's assets. It is one of the main trading abuses uncovered by regulators during the far-reaching inquiry that has touched many corners of the mutual fund industry.

It was not until Scheid replaced Whitson in April that the company could complete a $225 million settlement deal with regulators from New York, Colorado and the Securities and Exchange Commission. Under that deal, Janus agreed to pay $50 million in restitution, $50 million in fines and $125 million in fee reductions for its role in the market-timing scandal.

However impressive the sum of the settlement, the damage to Janus had to a certain extent already been done. In June the company said they have $134.5 billion under management, down from over $147 billion last year.

Conversely, investment manager Franklin Resources ( BEN) said assets under management rose to $350.8 billion at the end of June from $345.0 billion at the end of May.

Franklin saw its domestic equity funds increase $1.5 billion, or 2.3%, to $66.3 billion, ahead of the S&P 500's return of 1.8% over the same period. International equity funds totaled $128.6 billion, an increase of 2.6% from the prior month.

Franklin reports fiscal third-quarter earnings after the market closes on Thursday, July 22. Analysts are expecting the company to earn 75 cents for the quarter, 44% higher than last year's 52 cents. Revenue is expected to increase 28% to $877 million.

Franklin's asset-gathering success could be attributed to its lower profile during the scandal. Franklin was not charged with wrongdoing by the SEC or Spitzer's office. Only Massachusetts regulators are taking aim at the firm, saying it allowed a wealthy investor to market-time millions in Franklin mutual funds in exchange for a "sticky asset" investment in a Franklin hedge fund.

Morningstar also carries a "proceed with caution" rating on Franklin. Says Morningstar's February report: "Franklin stands accused of disconcerting behavior, but based on what we know so far, its actions were not as egregious as those of other families caught up in the controversy."

Snowling says he continues to favor shares of Franklin over Janus due to the company's "strong relative fund performance, its ability to attract new assets across various cycles and its war chest of cash on the balance sheet."

Shares of Janus last traded down 18 cents, or 1.17%, at $15.18. Franklin Resources shares are up 74 cents, or 1.56%, at $48.20.

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