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Coming up for air

Janus resurfaces, but turmoil at the top clouds picture

Published September 8, 2007 at midnight

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Colorado's largest pension plan gave up on Janus in early 2004.

Financial advisers lost patience, too.

Investors, who had endured severe losses in Janus mutual funds during the 2000 to 2002 bear market, said enough is enough when Eliot Spitzer accused Janus and other companies of fraud.

"That's when we became disenchanted with Janus," Denver financial adviser Peter Tedstrom said, recalling the former New York attorney general's investigation into abusive fund trading, revealed in September 2003. "We don't like our clients reading about their investments on the front page of the newspaper for the wrong reasons."

Clients fled in droves. All told, they pulled more than $70 billion from Janus stock and bond portfolios over a six-year period through the end of 2006, according to Financial Research Corp. They have run from Janus even as many of the company's mutual funds have redeemed themselves.

After paying a steep price, Janus finally has turned the corner.

Management upheaval

Although Janus has distanced itself from the painful history, the firm still struggles to attract money to its signature funds and faces potential new concerns as well. Three of the top brass - the chief financial officer, the chief lawyer and the head of sales to institutional investors - have left this year.

And roughly half of Janus' portfolio managers have walked out the door since early 2006, with one filing a breach-of-contract lawsuit against the company. Making efforts to lure reluctant investors that much tougher, one of Janus' biggest stars, Scott Schoelzel, has called it quits.

Tom Bailey, who founded Janus in 1969 and stepped down in 2002, has watched the developments from his Iron Rose Ranch near Aspen.

"Some turnover is appropriate at times," Bailey said recently. "But a high degree of turnover has always bothered me. It would bother me on the ranch. It bothers me when I see it at Janus. And it bothered me when I was investigating companies and I'd see it there."

Janus executives have emphasized that they are keeping the company on the same course that made it an industry star and led to dazzling returns in the 1990s, conducting in-depth research ("ridiculously thorough" as Janus said in a recent ad campaign) and betting aggressively on stocks. At the same time, Chief Executive Gary Black has presided over reforms that have changed the face of Janus.

By many measures, those changes have paid off.

Janus this year stopped the bleeding, as sales of its core stock and bond funds surpassed withdrawals for the first time in roughly six years. Six of the firm's stock funds are in the top 10 percent of their Lipper peer groups over one-, three- and five-year periods. Its Intech subsidiary has exploded.

And Janus Capital Group shares have rallied about 50 percent in the past 52 weeks, touching their highest levels in five years.

Janus "has made enormous strides," and Black has "made some tough decisions" to put the company on the right track, said Jeff Keil, a fund consultant based in Littleton.

During the Black era, Janus has strived for a more disciplined and risk-conscious approach. Wagers on tech, telecom and Internet stocks, and overlapping holdings burned Janus in the early part of this decade. The company has significantly increased the number of stocks it follows to 1,300 from 500, while expanding its team of analysts to 47 from 29.

"I think they've piqued the interest of a lot of people who had been questioning them as an organization," the head of Keil Fiduciary Strategies said. "Still, people are cautiously optimistic, and perhaps not quite ready to send them the chunks of money they had in 1998. It's all about trust."

Funds are a tougher sell

For years, Janus was so hot that its mutual funds sold themselves. The company's portfolios attracted heaps of cash in the 1990s, boosting its assets under management to a peak of about $330 billion.

These days, Janus must work a lot harder to win over customers.

Janus has concentrated more on reaching out to institutions and financial advisers. The company has built a consultant relations team and is "seeing additional interest" in the Janus line of funds on the consultant side, said spokeswoman Shelley Peterson. The company also has more than doubled the size of staff devoted to serving intermediaries, she said.

Janus' long road back underscores how long it takes to restore investors' faith once you've lost it. Janus in 2004 agreed to pay $226 million to settle allegations it allowed favored clients to engage in rapid trading at the expense of buy- and-hold investors. Three former Janus employees still are dealing with Securities and Exchange Commission claims.

"Janus is an example of what it costs to violate a trust and to not take your customers or potential customers seriously," said Richard Wagner, a longtime financial planner in Colorado.

Plenty of investors found alternatives they liked better and have not returned. Colorado's Public Employees' Retirement Association, which had Janus manage a separate large-cap growth account for its defined benefit plan, ended that 15-year relationship with Janus in February 2004 and has not come back. PERA also removed the Janus Fund from its menu of 401(k) options in late 2003.

Tedstrom, who once relied on Janus, abandoned most mutual funds, not only Janus, in the wake of the Spitzer probe.

DeDe Jones, a financial adviser in Lakewood who once invested in the Janus Worldwide Fund but moved clients' money to other products several years ago, said it would take a lot to get her to rekindle ties with Janus. She cited transaction and tax expenses that make it unappealing.

"There's a cost with every shift," she said. "You need a compelling reason, and right now Janus isn't giving me a compelling reason to make a shift. Hundreds of other companies aren't either."

Intech subsidiary leads firm

Many who have embraced the company have bought into Intech instead of the Janus funds. Innovest Portfolio Solutions, a Denver-based adviser to retirement plan sponsors, wealthy individuals and other investors, is one example. The firm recommends Intech, which takes a mathematical approach rather than relying on traditional research, because it has a unique strategy and a strong team, managing principal Richard Todd said.

With $70 billion in assets under management, the Intech unit has rapidly grown to more than a third of Janus Capital's $191 billion in assets.

Those who follow the company said they expect Janus portfolios to win more of investors' money as the pendulum shifts from "value" to "growth," a style that has been out of favor for several years.

"It wouldn't surprise me that once growth takes over that will build Janus' reputation again," Tedstrom, the adviser, said.

Investors are taking a close look at Janus again, and Black doesn't deserve all the credit, as he would agree. The investment group has delivered when it counts.

Two-thirds of Janus' retail funds sit in the top half of their rival groups over the past five years, Lipper said. The Janus Twenty, Janus Research, Janus Orion, Janus Venture, Janus Contrarian and Janus Overseas funds all sit in the top 10 percent over one-year, three-year and five-year spans through the end of the latest quarter.

In another good sign, portfolios such as the Janus Fund and the Janus Worldwide Fund that had been slumping have improved. In the past year, those portfolios are in the top 15 percent and 5 percent, respectively.

Janus' stock and bond portfolios - excluding Intech - recorded $1.5 billion in net sales in the second quarter, ending the long losing streak. Janus had broken even in the first three months of the year.

As the company writes a new chapter, it is trying to stick to its roots. Still, things will never be the same at Janus' Cherry Creek headquarters.

"What has stayed the same is our research into individual companies," said Gibson Smith, a co-chief investment officer. "Digging deep continues to be the focus of the enterprise. As the world has changed and as the asset management industry has changed, we've had to evolve with it."

Schoelzel, leaving after hitting his 10-year anniversary at the helm of the Janus Twenty Fund, put it this way on the day his news broke.

"I think we've moved from a firm with an iconic founder to a firm that is now being corporately run," said the manager, who finished the decade in the top 2 percent of his peer group. "There are positives and negatives to both."

Many of the names, such as Tom Marsico, Jim Craig and Helen Young Hayes who elevated Janus' profile, moved on a long time ago. Bailey cut his last link to Janus this year, leaving his seat on the board of the Janus funds, though he continues to have sizable investments in the company's portfolios as well as in Janus Capital stock.

Schoezel's exit could hurt

The firm has had another wave of departures in the past year and a half, saying goodbye to a dozen portfolio managers, including veterans Blaine Rollins, Claire Young and Schoelzel, and losing many years of experience.

Some of the managers ran lower-profile products, however, and their exits are unlikely to rattle clients. The -Schoelzel news is a different story. Investors in his portfolios might decide it's time to leave, too, despite the fact that Ron Sachs, a well-regarded stock picker, is replacing him.

While crediting Black with making smart moves, the consultant Keil said "the sense I get is there is an issue of Mr. Black's management style."

One former portfolio manager Ed Keely claimed in a recent lawsuit that Black held a meeting in October to say he was sharply cutting paychecks, violating the portfolio managers' contracts. Janus has filed a response, denying it breached Keely's compensation agreement.

A couple of years ago Janus altered the way it paid portfolio managers, linking compensation more closely to performance and basing it less on asset size, and noted that its entire team had signed on to the new system. Janus has not said whether it has made further changes to pay.

In a recent interview, Black attributed the departures to setting the "performance bar high" and said that with some of the individuals heading out the door "there have been performance issues."

Bailey said it appears other factors are at play, but at this point he calls himself an "outside observer" who isn't privy to what's really happening on Detroit Street in Cherry Creek. He declined to offer any opinion on the changes at the company. Today, Bailey is more concerned about his new career breeding horses at his sprawling Carbondale property.

"Not all of those people left for performance reasons," he said. "Certainly Scott isn't leaving for performance reasons, and that should tell you something. When your chief legal counsel, chief financial officer (and head of institutional sales John Zimmerman) all leave, in addition to a number of portfolio managers and analysts, not all of whom have left for performance reasons while admittedly some might have, it raises questions."

If Janus fund performance stays strong and the company keeps the momentum on the sales side - difficult tasks in a volatile stock market and a competitive industry - no one will complain about the turnover.

The true test for Janus may not come until the stock market hits a long period of distress. Janus said products such as the Janus Orion and Janus Twenty funds have held up well in a volatile stretch since late July.

"We've learned a lot of lessons," co-Chief Investment Officer Jonathan Coleman said. "There are never any guarantees, but we feel we've much better positioned to weather a prolonged downturn."

The departed

Key Janus execs who left in 2007:

Scott Schoelzel, fund manager for the Janus Twenty fund

Dave Martin, chief financial officer

John Bluher general counsel

John Zimmerman, managing director of institutional asset management

Portfolio managers who have left since 2005:

Ed Keely, institutional separate accounts

Mike Lu, Janus Global Technology

Tom Malley, Janus Global Life Sciences

Jeanine Morroni, Janus Government Money Market

Sharon Pichler, Janus Federal Tax-Exempt, Money Market

Karen Reidy, Janus Balanced, Core Equity

Blaine Rollins, Janus Fund

Ron Speaker, Janus Flexible Income

Claire Young, Janus Olympus

Brad Slingerlend, Janus Global Technology

Doug Kirkpatrick, international equity

Through the years


MARCH Nasdaq hits its peak.

MAY Janus closes the $42 billion Janus Worldwide Fund, the $8 billion Janus Olympus Fund and the $3 billion Janus Global Life Sciences Fund to new investors after taking in huge amounts of money.

JULY Stilwell Financial, which includes the Janus and Berger fund families, reports $313 billion in assets under management.

AUGUST Janus Chief Investment Officer Jim Craig says he's leaving to manage money for a charitable foundation he established.


FEBRUARY Janus announces 468 job cuts from its operations unit.

APRIL Janus says it will cut 546 jobs, including 400 as it closes its Austin call center.


JUNE Janus founder Tom Bailey steps down as the company's CEO.


The company says Stilwell and Janus will combine operations under the Janus name and Mark Whiston will become CEO.


JANUARY Janus reports $138 billion of assets under management.

APRIL Helen Young Hayes, co-manager of the Janus Worldwide Fund and the Janus Overseas Fund, announces her retirement.

SEPTEMBER New York Attorney General Eliot Spitzer alleges Janus and other firms allowed improper trading that harmed investors.


MARCH Janus brings Gary Black on board as chief investment officer.

APRIL Whiston steps down. Steve Scheid succeeds him. Janus reaches a $226 million settlement with regulators.


FEBRUARY Janus assets slip to $132.7 billion.

OCTOBER Gary Black takes the reins as CEO.


APRIL Janus buys another 5 percent of Intech for $90 million, bringing its ownership stake to 82.5 percent. Intech's assets cross the $50 billion mark. Black declares at a shareholders meeting: "Janus is growing again" and cites a number of reforms, including a move to more closely link portfolio manager pay to performance.

JUNE Portfolio managers Blaine Rollins and Claire Young head for the exits.

AUGUST The SEC accuses three former Janus employees, including onetime star manager Warren Lammert, of allowing abusive fund trading.

NOVEMBER Jonathan Coleman and Gibson Smith named co-chief investment officers.



Janus CFO Dave Martin and General Counsel John Bluher leave.

APRIL Janus ends a six-year losing streak of withdrawals, as its stock and bond fund flows, excluding Intech, finally break even.

MAY Tom Bailey cuts his last formal tie to the company, stepping down from Janus funds' board.

JULY Janus flows, excluding Intech, turn positive, as the company records $1.5 billion in net sales in the latest quarter. Janus assets pass $190 billion.

AUGUST Scott Schoelzel, who managed money at Janus for 14 years, is the latest to quit.

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