Managers Tom Perkins and Jeff Kautz invest mainly in mid caps, but they also seek bargains elsewhere in the market. By Thomas M. Anderson, Contributing Editor January 15, 2007 Looking through the 3D glasses of the style box, you think it would be easy categorize a fund like Janus Mid Cap Value. It must be a fund that buys the stocks of midsize companies that its managers deem to be undervalued. While most of its portfolio does hew to this predetermined approach, the description does not reflect exactly what stocks managers Tom Perkins and Jeff Kautz prefer at the moment. "I don’t like being put in a box too much," says Perkins, who has managed the fund since its 1998 start. "I try to run the fund as flexible as possible with in the limits of the prospectus." The prospectus requires that 80% of the stocks they buy carry market capitalizations of between $700 million to $17 billion. But recently, the duo have found that the preponderance of bargains are among stocks of large companies. Because small caps and mid caps have beaten large-capitalization stocks for seven straight years, it is more difficult for Perkins and Kautz to find bargains in their usual stomping grounds. Last year, for example, they invested in Coca-Cola (symbol KO), hardly a stock you’d expect to find in a mid-cap fund. A review of the fund’s 2006 performance finds stocks of large companies contributed mightily. Among big large-company gainers last year were AllianceBernstein (AB), Berkshire Hathaway (BRK), Marathon Oil (MRO), Norfolk Southern (NSC), Waste Management (WMI), Deere (DE) and CVS (CVS). Perkins and Kautz seek stocks that trade at or near historically rock-bottom valuation levels. "We like to buy stocks that have low expectations, so if there are disappointments, you’re somewhat insulated," Perkins says. He and Kautz seek companies with little or no debt and a proven ability to generate more than enough cash to cover business expenses. Sure, they buy so-called value stocks, but their strategy also means they evaluate former high-fliers that have fallen to earth. Perkins labels this approach as buying "growth in disfavor." For examples, the pair bought shares of Southwest Airlines (LUV), the first airline stock the fund has owned, because they felt the stock was undervalued relative to the company’s long-term growth prospects. The fund has benefited from the frenzy of mergers and acquisitions. Among the takeover-targets it owned last year were Fairmont Hotels, Fisher Scientific, Western Gas, Stone Energy, Univision and Mercantile Bancshares. Perkins says the string of buyouts affirms his valuation methods and adds that he expects more M&A activity to help the fund this year. Not all of the duo’s calls panned out last year. An aversion to real estate investment trusts and large cash holdings, recently as more than 7% of the fund’s $6.5 billion in assets, caused the fund to lag its peers. "We got out of REITs way too early," Perkins says. Janus Mid Cap Value returned 15% in 2006. That was one percentage point below the average return of mid-cap value funds. The fund's long-term track record is commendable. From its 1998 start through the end of 2006, Janus Mid Cap Value gained an annualized 19%, an average of five percentage points per year ahead of the return of the average mid-cap value fund. It has suffered a calendar-year loss only once, dropping 13% in 2002. Perkins and Kautz don't let their winners run wild. When a stock hits their price target, they sell it. This strategy is reflected in the fund’s 86% turnover rate, which means that, on average, they sell nearly every stock within a year. For example, the managers have owned Legg Mason (LM) off and on since the fund’s inception, buying shares when they appear to be a bargain and selling when they seem overvalued. Perkins and Kautz generally cap a position in a single stock at about 3% of the fund’s assets. If you don't mind funds that roam a little from their style-box pens, Janus Mid Cap Value is worth a look. The fund (JMCVX; 800-525-3713) has a below average expense ratio of 0.92% and a $2,500 investment minimum.