How This Contrarian Mutual Fund Beats Its Peers

Fund Watch

How This Contrarian Mutual Fund Beats Its Peers

Janus Contrarian looks for undervalued companies that are changing for the better.

Dan Kozlowski says the approach suggested by his fund’s name, Janus Contrarian (JSVAX), means “pushing aside the hot stock du jour bantered about on CNBC” and turning toward less-appreciated segments of the market. His bets on turnarounds—such as Canadian Pacific Railway, which is being revitalized by a chief executive who came on board in 2012—have paid off. Since Kozlowski took over as manager in mid 2011, Contrarian has returned 16.4% annualized, beating its peers (funds that invest in large companies with a blend of growth and value attributes) by an average of 3.0 percentage points per year.

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Kozlowski zeros in on firms with clean balance sheets and strong cash flow that are on the cusp of positive change, such as a shake-up in management, a spinoff or a merger. But he doesn’t buy at just any price. He values stocks based on what he thinks a company will be worth in 20 to 30 months, creating best- and worst-case scenarios. If a stock trades close to his worst-case estimate, he buys. That way, if he’s wrong and the company’s rebound doesn’t pan out, there’s less to lose. If, by contrast, Kozlowski is right, the stock typically soars. He’s disciplined about selling, too: When a stock hits his price target, he pulls the trigger.

Although Morningstar calls Contrarian a large-company fund, about half of its assets are in small and midsize firms. Many, Kozlowski says, are “ripe for takeovers.”

* Annualized for three and five years. @ Rankings exclude share classes of this fund with different fee structures or higher minimum initial investments.