The New Face of Janus

Back in the day, Janus Capital Group could proudly boast that its funds sold themselves. Individual investors paged through papers and magazines and feasted on ads describing the sizzling performance of its tech-heavy growth funds. Impressed, they sent their checks to the Denver-based fund manager. It became one of the top five fund families, accounting for 70 percent of industry inflows.

Until the tech wreck. When the market crashed, some of Janus' funds, such as Janus 20, lost more than half their value. Not surprisingly consumers started asking for their money back, and redeemed shares in droves. It got ugly: By October 2002, investor assets at Janus fell to $129 billion from a total of $325 billion in March 2000. Then, in September 2003, Janus was one of the first four companies named by crusading New York Attorney General Eliot Spitzer in the market-timing scandal with hedge fund Canary Capital Partners.

Over the last couple of years, in an effort to reclaim its reputation — and investor assets — Janus settled the regulatory problem (for $226 million), jettisoned old management and remade its business model. Instead of trying to capture the hearts and minds of retail investors directly, Janus has trained its sights on you, the financial intermediary. Although the company has been selling some of its funds through advisors quietly since 2000, it wasn't until 2004 that the company put a major push behind the effort. Over the last 14 months, the company has added more share class offerings and hired 20 wholesalers who have fanned out to spread the word.

That Janus is targeting advisors isn't particularly earth shattering (82 percent of funds are sold via financial advisors). But what is interesting is that despite the company's selling agreements with top brokerages and its new battle plan, the advisor channel has only reaped a miniscule $3 billion in assets during the last 14 months. And the firm, asset-wise at least, is still something of a shadow of its former size: As of November, the fund family had $139 billion in assets, unchanged from 2004, but down from $151 billion in 2003. Not only have retail clients punished the firm, but so have investors: Recently, its share price hit $19.24, a 52-week high, but still well below its all-time high of $54.50 in 2000, when it was still owned by Stilwell Financial. Janus' earnings and profit margins have disappointed, and the company is regarded by some rumormongers to be takeover bait.

Janus' humbling is an object lesson in reputation damage: Once tarnished, it's tough to win back. But Janus, having molted its old management, is now ready to apply a full-court press. “We're going to continue to invest to build out distribution on the intermediary side and add wholesalers,” Janus CFO Dave Martin, told investors on the company's third-quarter conference call in late October. “We are backing off on things like our mass-market TV advertising, as retail tends to be — especially direct retail business — less important to us.” That's quite a reversal for a company that spent $23 million last year to put its name on everything from Yankee games to the NBA playoffs.

If a Janus wholesaler hasn't paid a call on you, just wait. Janus intends to double its wholesaling force to 50 and will unleash them in the corridors of the largest 20 to 25 broker/dealers armed with new share classes (A and R shares). While the company's turnaround is still in its infancy, it seems to be gathering momentum. “We're ahead of our plan,” says Janus CIO Gary Black. “A year ago, we only had 10 wholesalers. It really took this year for all of us to recognize that we had to invest the time and money to have critical mass in that channel.” He says that its advisor business is now bigger than its direct-to-investors retail business at $51 billion, but that's counting the firm's 401(k) arm.

Janus' plan is to get its reps in to see advisors, but also to make its big shots available. Janus is holding quarterly gatherings at its Denver headquarters, where reps from across the country are brought in to meet with executives and portfolio managers. A two-day gathering in October drew around 85 brokers. And, like other fund families, Janus intends to win FAs over by helping them with their own businesses. Janus Labs, a new think-tank initiative, aims to provide practice-management support for financial advisors.

Clean Break

But what Janus has to sell is as important as how it sells it. And that is trust. Janus has indeed made a clean break with its troubled recent past. CEO Mark Whiston was taken out by the Canary trading scandal after less than 18 months at the helm. Founder Tom Bailey and many top portfolio managers left the firm, including Tom Marsico, Jim Craig and Helen Young Hayes. Steve Scheid, a former Charles Schwab executive, replaced Whiston as CEO, and promptly settled the trading scandal. In April 2004, Black, a former Goldman executive, was brought in to run the investment operations. In October, the company announced that Black will move up to CEO at the end of the year, and Scheid will remain as chairman. Just as important is the addition of Dominic Martellaro, a former managing director at Morgan Stanley, who oversees the firm's global advisory division. It is his job to see to it that Janus wins back some of the assets it has lost.

But let's face it: Martellaro can't do it without something good to sell. On that front, the fund managers — some old and some new — seem to be finding their footing. Over the past three years, close to 70 percent of Janus funds have been in the top half of their respective categories, according to Morningstar. Eight Janus funds were recently named “category kings” in the The Wall Street Journal's third-quarter report card. The Janus Adviser 40 fund, skippered by veteran Scott Schoelzel, ranks No. 1 in the large-growth category with a one-year trailing return of 21.8 percent. Further, the average return for Janus equity funds was 14.9 percent in the 12 months ended Oct. 31, and 15.2 percent for the last three years, according to Morningstar.

The company has made several significant reforms, including tying portfolio manager compensation to performance. The move was consistent with Black's pledge that the company would place greater emphasis on investor returns and less on revenue and assets under management. Known for having the highest paid fund skippers in the game, Janus was vilified when pay levels remained high despite anemic performance during the bear market.

In addition, managers eat their own cooking: They are required to maintain a certain level of their personal investments in Janus funds and are barred from owning the individual securities in those portfolios. More recently, the company instituted performance fees on 30 percent of its funds in an effort to “put our money where our mouth is,” Black said. In order to avoid duplicity in its offerings, Black has also warned its portfolio managers against overlap in their portfolios, one of the flaws that led to its precipitous collapse.

Building depth in its research department has been another key driver of improved performance and has helped mitigate risk, the company says. Black, once a top-rated tobacco analyst at Sanford C. Bernstein, made research a high priority when he first came on board. The company has upped the number of analysts from 26 to 44 and expanded the number of securities its covers from 500 in 2000 to 1,100.

Tough Sledding

But the turnaround is still very much a work in progress. While the company reported its best flows in five years, and its first positive flows in two-and-a-half years in its most recent quarter (that figure includes the Intech subsidiary, a fund family it acquired in February 2002), the Janus funds themselves continue to lose assets — $598 million was withdrawn in September alone, bringing the nine-month net outflow total to $9.8 billion, according to Financial Research Corp.

The new-look Janus is already selling its funds through all the major wirehouses, including Merrill Lynch and Smith Barney; major regional broker/dealers, such as Raymond James; independent firms, such as LPL; and financial planning firms such as Ameriprise. But getting shelf space does not mean moving inventory, as the $3 billion so far attests. “They're on a lot of platforms but they're not getting a lot of share,” says Franklin Morton, senior vice president and portfolio manager at Ariel Capital Management in Chicago, the largest holder of Janus stock.

There are challenges in the advisor channel, including being outgunned by huge marketing machines like American Funds, which has an army of 100 wholesalers — that and good long-term performance and reasonable fees. “Management is having a hard time predicting flows at Janus given how unresponsive their distribution platforms have been to what, in many instances, are good performing products,” writes Morgan Stanley analyst Chris Meyer in a recent research report. “Janus is a long way from becoming strong in the retail advisor and institutional channel and doesn't have the revenues currently to pay for growing this distribution.” (Morgan Stanley has an investment banking relationship with Janus; Meyer rates it underweight.)

Janus is not the only fund family putting a new focus on third-party distribution: Strong Financial, another headline-maker during the mutual-fund scandals, was acquired by Wells Fargo and is hitting the advisor channel. Oakmark Investments and Dodge & Cox switched to fund supermarkets like Charles Schwab and have enjoyed success. American Funds, Dreyfus and Scudder implemented commission-based pricing five years ago. Earlier this year, low-cost provider Vanguard began courting financial advisors as well.

Another hurdle for Janus in the broker channel is its lingering notoriety. That's particularly true in and around its hometown of Denver, where reps are reluctant to even bring up the name Janus with clients. “I'm not going to promote Janus because it's like pushing a boulder up a hill,” says Victor Di Leo, a Smith Barney rep in Denver with nearly $200,000 in production. “We're not seeing any penetration in our branch of 55 brokers,” he says.

But Janus executives say they are encouraged by the progress so far. “We are seeing some traction in the intermediary channel,” Scheid told investors during the company's third-quarter conference call.

For now, the company appears to be making all the right moves but it's too soon to be calling it a comeback. Stanching outflows and getting in the black without a boost from Intech will be crucial for Janus getting off the schneid. “A few consecutive months of positive flows will be the real proof that the fund shop has turned it around,” says Don Cassidy, senior analyst at Lipper. With each passing day, however, the company distances itself further from its painful past.

Heating Up