STOCK WATCH


Janus: On the Road to Improvement

Bob Frick

Despite an exodus of managers, this mutual fund firm is bouncing back from bad years -- and its shares look appealing.



Another key manager at the Janus funds has resigned, bringing to five the number of top crew members who have jumped overboard in the last two years.

Janus Capital (symbol JNS) has been undergoing a substantial change in culture that may not suit many in the old guard. But the company has been performing well and its stock, although expensive, could continue to advance with any sort of cooperation from the overall market.

All of the departing managers lived through dark times at Janus. Many fund families landed hard when the tech bubble bust, but Janus was the poster child for irrational exuberance.

Too many managers threw too much money at too few tech stocks in the late 1990s and 2000 and were caught holding the bag when the long bull market ended and gave away to the catastrophic 2000-02 bear market. For example, Janus Twenty, which soared 65% in 1999, dropped 69% during the 2000-02 down period.

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But the company took important steps to improve performance, and it has bounced back strongly. Among other things, it deepened its bench of managers and analysts, sought to ensure that funds don't overlap too much, insisted that portfolios be better diversified and instituted a team approach to managing a number of Janus funds.

Have these controls rankled fund managers? Maybe.

"Janus managers of old had carte blanche," says Morningstar stock analyst Rachel Barnard. "Having (their) wings clipped a bit would have to be difficult." But Barnard also points out that managers from brand-name shops often leave to run hedge funds or launch their own fund companies.

Janus Chief Executive Gary Black, who engineered many of the changes, says, "We've evolved as the industry has evolved." He also says that compensation for portfolio managers is up "sharply" from the year before, so managers aren't leaving because they're not being paid enough. "As long as performance is strong, they're going to do very well."

Still, Black obviously isn't happy that a succession of resignations is making headlines. In early November, before the announcement of the latest defection (that of Minyoung Sohn, manager of Janus Balanced), Black told Kiplinger's: "I hope we don't have additional turnover."

Oh well. The good news for those who own Janus funds is that the bench building that began in 2000 has left a talented pool of portfolio managers and analysts who can assume the vacant seats. And the good news for owners of Janus stock is that while portfolio managers may be leaving, money keeps entering Janus funds by the bushel.

The numbers that count all look good. In the third quarter, the company had net inflows of $700 million. Janus also continued its buyback of company stock, repurchasing $184 million worth of shares (Janus Capital has a market value of $6 billion). And cash should keep flowing in, given that two-thirds of the company's retail funds beat their benchmarks over the past five years.

Given that Janus retail funds are almost all about growth stocks -- and growth has finally assumed the limelight from value after seven years of lagging miserably -- the future looks bright. "We've had this huge headwind," says Black.

And Janus Capital is more than just the Janus funds. Its Intech investment business, which manages money for institutions, has been growing strongly for years and now accounts for one third of Janus's assets.

Janus's stock is not cheap. It closed November 9 at $35, down 3.3% for the day. At that price, it trades at 24 times estimated 2008 earnings of $1.47 a share, a figure that represents an expected 37% jump over 2007 profits.

By contrast, T. Rowe Price (TROW), a highly regarded fund shop with a growth-stock bent, trades at just 21 times estimated 2008 earnings.

Still, given that Janus has exceeded earnings estimates by a couple of pennies a share the past two quarters, it appears that the company now has a tailwind at its back. And that should help propel Janus's stock.



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