JDBAX), Janus Overseas ( JDIAX) and Janus Triton ( JGMAX). Among the most notable outperformers is Janus Research ( JRAAX), which returned 6.1% annually during the past five years, outdoing 90% of large growth funds, according to Morningstar. Another standout is Janus Global Research ( JRGAX), which returned 6.8% annually and topped 95% of world stock funds. The two research funds are run by analysts -- not portfolio managers -- and the strong showing is a testament to the changes made in the Janus investment process during the past decade. In the bull market of the late 1990s, Janus ranked as the hottest fund family. Delivering top returns, Janus Twenty ( JAVLX) and other funds attracted huge inflows. The portfolio managers focused on paying top prices for fast-growing technology and health stocks. Many Janus funds owned the same names. Popular holdings included tech leaders Dell ( DELL), Cisco ( CSCO), and EMC ( EMC). When the crash finally came, Janus funds collapsed. The job of picking up the pieces fell partly to Jim Goff, a Janus portfolio manager, who was promoted to research director in 2002. Goff's first task was to rebuild the analyst staff. In the 1990s, most Janus researchers were young people who had been hired straight out of college. But Goff began recruiting experienced analysts who had been through market cycles and would not be caught up in the frenzy of bull markets. "When I became research director, the average analyst had three years experience," says Goff. "Now the average analyst has 11 years experience." Goff insisted on a more cautious approach that sought to avoid overpaying for stocks. Analysts began putting considerable time into estimating the fair values of stocks based on their expected future cash flows. Under the new system analysts can only recommend stocks that sell for less than their intrinsic values. When stocks become overvalued, portfolio managers must sell. Janus also installed a risk committee that reviews holdings and makes sure that the different fund portfolios don't all focus on the same handful of names.
To assess the analysts, Goff began tracking the performance of each recommendation, whether or not a portfolio manager bought the recommended stock. He noticed that the analyst recommendations were outperforming many funds. To showcase the analyst talent, Janus began its research funds. For Janus Research and Janus Global Research, teams of analysts deliver their best ideas. Goff coordinates the effort, but the picks all come from the analysts. The analysts try to find companies that will grow faster than the market expects. Many businesses in the portfolio are undergoing changes that will result in improved earnings. The analysts give more weight to their best picks, but the assets are spread evenly among about 120 names. The largest stock in Janus Research is currently International Business Machines ( IBM), which accounts for 2.8% of assets. The analysts cannot place big bets on technology or any other sector. For the research funds, the industry sector weightings must match the figures for the fund benchmarks. The idea is to outperform the market by picking undervalued stocks, not by making sector calls. Holdings in Janus Research include Roche ( RHHBY), the drug giant. Janus analyst Andy Acker argues that pharmaceutical companies have become too cheap. The stocks have been stagnating because investors worry that too many drug patents have been expiring. That will cut down sales as patients turn to generics. But Acker says that the patent expirations will peak next year. After that, the damage from generics could be less severe, and the big drug companies will continue generating steady cash flows. "The health stocks have underperformed for seven of the last eight years," says Acker. "Now shares are down, and the dividend yields are at 15-year highs." Another holding is Express Scripts ( ESRX), a pharmacy benefit manager. The company's sales will grow as demand for generics increases and more people are covered by health insurance.