Back in the Black
Under CEO Gary Black, Janus Capital Group is retooling its investment process, rededicating itself to new distribution channels and -- at long last -- rebuilding its fund flows.
Few fund managers have risen so high, so fast, or fallen so low, so abruptly, as Janus Capital Group. The growth-stock dynamo raked in billions in the late 1990s from delirious investors with its kick-the-tires research credo and a direct-sales strategy that reached into bedroom communities across the U.S. But assets ballooned faster than its ability to manage them: Addicted to tech stocks the firm crash-landed when the bubble burst. Then, in 2003, it got caught red-handed in the mutual fund trading scandals.
Investors fled; money flew out the door. From a peak of $330 billion in March 2000, Janus’s assets plunged to $136.7 billion at the lowest ebb, in December 2002. It seemed nothing could stop the carnage. As recently as this January, seven long years, one bear market and one stirring recovery later, Janus CEO Gary Black was grousing in his cramped, glass-enclosed office at the firm’s Denver headquarters, “I think our net flows will probably still be negative in 2007. We are all frustrated.”
What a difference a quarter makes. The mood -- and the money flows -- are buoyant once again at Janus. Thanks to strong performance and a broad-based shift in market sentiment from value to growth, retail investors poured money into the firm’s mutual funds in the quarter ended March 31. For the first time since the second quarter of 2001, Janus-branded funds attracted as much new money as they lost. Indeed, they would have notched net inflows of nearly $1 billion had the firm not lost a low-fee-earning subadvising contract with WM Advisors, the mutual fund unit of Washington Mutual that the bank sold to Principal Financial Group in January.
Profitability is up. First-quarter net income rose modestly to $35.6 million from $35.3 million in the same quarter last year, while operating margins increased to 27.8 percent from 27.1 percent. And with two thirds of its assets in growth-oriented equity mutual funds, Janus is better positioned than just about any other publicly traded equity fund manager to benefit from a revival in its core discipline. These facts haven’t been lost on investors. With shares hitting a 52-week high of $28.29 in late May, Janus’s stock was up 28 percent this year, compared with an 8.1 percent gain for the Standard & Poor’s 500 index. In September 2002 the money manager’s stock traded at an all-time low of $9.08.
No one is happier than the CEO. “We believe we have turned the corner,” he exults. “We believe flows on the Janus side will be positive here on in.”
It may be too soon to declare victory -- markets and investors are fickle, after all -- but Black, 47, should bask in the progress. More than anyone, he deserves credit for engineering the turnaround of this once out-of-control highflier. A renowned securities analyst turned investment executive, Black came on board in 2004 as president and chief investment officer with a mandate to restore the firm’s battered performance and reverse crippling outflows. He had the pedigree and the chops: a Harvard Business School graduate fresh from Goldman Sachs Asset Management, where he had successfully run institutional and third-party sales and, after just a year, had been promoted to chief investment officer for global equities. In that role he doubled assets in GSAM’s value-oriented portfolios, tripled its real estate investment trust business and achieved record flows in growth stocks.
Black first made a name for himself in the 1990s by making tough, contrarian calls as a top-ranked tobacco analyst at value shop Sanford C. Bernstein & Co., now part of AllianceBernstein. But his toughest call may have been whether to join Janus. In fact, in 2003, he turned down its initial offer to become CIO and eventually succeed then-CEO Steven Scheid. It took six months -- and a sweetened compensation package -- to sign him.
The hesitance of Black, who became CEO in January 2006, was understandable. Rescuing Janus was going to be a tough job, requiring him to calm disaffected investors, stanch internal squabbles and reposition the firm in a much more competitive market. The extent of the damage to Janus’s reputation and business became painfully clear last year. Even though 14 of the 27 distinct mutual fund strategies in the flagship Janus Investment Fund family recorded top-quartile performances, wary investors still withdrew $9.7 billion in assets.
The powerfully built Black has grappled with the challenges at Janus by applying the drive and determination of the high school wrestler he once was. To rebuild the money manager’s investment culture, he tightened risk controls and revamped the firm’s compensation plan to reward analysts and portfolio managers for performance rather than asset growth. He tripled spending on research and replaced underperforming managers. He has worked tirelessly to repair Janus’s stock-picking reputation by refashioning the firm as a classic growth manager, the investment style he says Janus pursued before its process and risk controls became unhinged in the late 1990s.
“We buy high-quality companies, but we try to buy them in a disciplined way,” says Black, citing as examples two of the firm’s current top-five positions: Procter & Gamble, which trades at a forward price-earnings ratio of 18.2, and Yahoo!, whose P/E is 39.7.
The results speak for themselves. In the first quarter, Janus funds were up 3.3 percent on an asset-weighted basis, compared with 0.6 percent for the S&P 500 -- the best investment performance among the 14 diversified, publicly traded money managers tracked by Merrill Lynch & Co. In 2005 just 39 percent of Janus’s funds had earned coveted four- or five-star ratings from performance tracker Morningstar. As of May 31 that figure had climbed to 51 percent; among its publicly traded peers, Janus is second only to T. Rowe Price Group, with 57 percent.
“Gary Black reformed Janus,” says mutual fund consultant Jeffrey Keil, founder of Keil Fiduciary Strategies in Littleton, Colorado. “He has done virtually everything he had to do.”
Still, performance alone won’t sell funds in today’s crowded marketplace. That’s why Black has deemphasized direct sales and is spending millions to build from scratch a new distribution platform that targets brokers, financial advisers and other third-party sales channels. Retail sales chief Dominic Martellaro, who joined Janus from Van Kampen Investments in 2004, has recruited a battalion of 45 well-paid wholesalers. One of his first hires was a fellow Van Kampen veteran who oversees the team: Jim Yount, a crewcut former Marine Corps officer who once used sleep deprivation to train troops at the Marines Corps Air Ground Combat Center in Twentynine Palms, California. In the first quarter assets gathered through the third-party channel hit $1.1 billion -- the best quarterly inflow ever and more than half the amount that Janus brought in from intermediaries during all of last year. Janus plans to add five more salespeople this year.
“Fifty wholesalers at Janus is more like 80 at places that are less efficient,” says Martellaro.
So far so good. Still, Black faces a host of challenges. In recent years, while the Janus-branded retail funds flailed, the firm was propped up by the stellar performance of its Palm Beach Gardens, Floridabased quantitative subsidiary, Enhanced Investment Technologies. Intech, as it is known, managed $66.3 billion in mostly institutional money as of March 31, or about 38 percent of Janus’s total of $176.2 billion; demand for its products allowed the parent firm to report overall positive inflows. But like many quant managers, Intech has stumbled of late because of low stock market volatility. It underperformed its benchmarks in 2006 for the first time since 1998, causing net inflows to decline in every quarter last year versus the prior-year periods.
To attract stickier assets, Black must improve sales momentum in the adviser channel while stepping up fledgling efforts to build business in the defined benefit and defined contribution markets. As investors cycle back into growth products, the CEO must also ensure that Janus’s funds stand apart from the offerings of competing fund complexes such as AllianceBernstein, AIM Management Group and American Century Investments. Not everyone is convinced that Black’s “classic growth” approach is destined to be a useful differentiator.
“Janus used to have hard-core growth,” observes Eric Branson, a financial adviser at Raymond James & Associates in St. Petersburg, Florida, who manages about $80 million for retail clients. “Now Janus is boring.”
Black’s approach to growth stock investing bears more than a passing resemblance to the prebubble Janus. The fundamental, bottom-up research boutique was founded by flamboyant investor Tom Bailey in 1969 with $654,000 raised from 35 individuals. In the early days Janus bought classic growth stocks like Glaxo Holdings and value plays like Waste Management. “Janus’s roots were in ‘growth at a reasonable price,’” says Karen Dolan, a Morningstar analyst in Chicago.
That interdisciplinary approach worked well for the first two decades. In 1984, when Bailey was managing $400 million, he sold 82 percent of the firm to Kansas City Southern Industries, a railroad operator that owned a stable of money managers, for $24 million. By 1990 assets had reached $2.2 billion. That year the flagship Janus Fund, which had returned an average annualized 19 percent and been ranked in the ninth percentile among its peers for three years, suddenly delivered flat returns, slumping into the 36th percentile. Just 3 percent of the fund’s $1.48 billion in assets was invested in media, telecommunications and software companies. To boost performance Bailey steered his analysts into hard-core growth. Helen Young Hayes, a star analyst who had worked at Fred Alger Management before joining Janus in 1987, led the charge.
The new approach worked brilliantly. By 1995, when the Janus Fund returned 29 percent, the firm was managing $30.9 billion. In 1999, nine of Janus’s top ten holdings were in soaring technology, telecom and Internet stocks. With investors drawn in by stellar performance and ubiquitous Janus ads touting its research prowess, assets exploded. But the firm’s two dozen analysts were stretched too thin to grasp the perils of dot-com investing. The research desk was merely chasing performance and embraced “a culture of mindless asset accumulation,” says Michael Rosen, a principal of Angeles Investment Advisors, an investment consulting firm in Santa Monica, California, who since the 1990s has decided not to bring clients to Janus.
In 1998, Kansas City Southern’s chairman, Landon Rowland, decided to spin off the company’s money managers. Bailey, backed by most of his employees, preferred to spin out Janus on its own and led a revolt against the plan. But in late June 2000 he lost the battle: KCSI spun its financial services holdings, including Janus, into a holding company called Stilwell Financial, which began trading on the New York Stock Exchange at $39.50 a share. Janus accounted for about 90 percent of Stilwell’s assets, revenues and profits.
KCSI’s timing couldn’t have been worse. Over the next two and a half years, Stilwell’s stock collapsed; in December 2002 it traded at just $14. Janus’s assets plummeted, and its equity funds fell 65 percent, versus a 40 percent drop in the S&P 500 index. By then Bailey had sold Stilwell his 12 percent stake in Janus for about $1.2 billion and resigned from the firm.
Janus tapped Mark Whiston, the firm’s head of retail and institutional sales, to succeed Bailey in January 2003. Whiston, who had joined the firm in 1991, persuaded the board to eliminate the holding company structure. In a reorganization Janus acquired Stilwell and started trading on the NYSE as Janus Capital Group. The money manager then absorbed its former Stilwell siblings. Two became subsidiaries: Intech, which managed $6 billion as of January 2003, and Chicago-based small-cap value manager Perkins, Wolf, McDonnell and Co., which oversaw $5 billion and became the subadviser of the Janus Small Cap Value Fund. Nelson Money Managers, a British firm that ran $1.5 billion, was sold in October 2003. And ten growth funds run by Denver-based Berger Financial Group, which oversaw $14.3 billion, were merged with existing Janus growth products. One sibling was shut down: Oakland, Californiabased Bay Isle Financial, a value manager with $1.1 billion in assets.
Whiston began a sweeping reform of Janus’s research process. He grew the equity research team to 32 analysts from 22 in 1999 and devised a plan to divide the researchers, who were then generalists, into eight separate industry teams. His efforts were derailed when Janus became one of the first money managers to be named and shamed by the Securities and Exchange Commission in the 2003 mutual fund trading scandals. The regulator accused Janus of negotiating market-timing arrangements with 12 preferred clients. In a settlement, Janus paid $100 million in restitution, plus $1.2 million to the state of Colorado for investor education, and agreed to $150 million in fee reductions at the rate of $25 million a year for six years. (On July 31, 2006, the SEC accused three former Janus executives of improperly allowing the market-timing trades. All three are fighting the charges.)
The scandal hurt: Janus’s settlement with the SEC scared off investors and triggered a wave of management changes. Sixteen-year veteran Hayes, CIO for a year, resigned in April 2003. Whiston followed suit a year later, replaced by Scheid, a Charles Schwab Corp. veteran and former Stilwell board member who was already chairman. He made two key hires: sales chief Martellaro and John Zimmerman, who joined from Bank of America Capital Management to run institutional sales.
Janus had begun wooing Black, then CIO of Goldman Sachs Asset Management’s global equities business, shortly after Hayes resigned. The son of a telephone installation man in the blue-collar town of Howell, New Jersey, Black helped pay his way through the Wharton School at the University of Pennsylvania, where he earned a bachelor’s degree in economics, by stocking the shelves at an A&P supermarket. Later he worked as a security guard while earning an MBA at the Harvard Business School, which he completed in 1988. After working as a product manager for Tylenol at Johnson & Johnson and as an analyst at real estate developer Trammell Crow, he joined Sanford C. Bernstein in 1992 as a tobacco, food and beverage analyst. He made his most famous call by slapping a rare sell rating on Philip Morris shortly before “Marlboro Friday” in early April of the following year, when the stock dropped 23 percent in one day following a costly cigarette price war.
“I became a star analyst from that one call,” says Black, who went on to be ranked No. 1 in his sector for six years running as a member of Institutional Investor’s All-America Research Team.
In March 1999, Black shifted to management, becoming head of institutional marketing on the buy side of Bernstein, where his challenge was to sustain interest in value stocks when growth was king.
“We focused a lot on getting people to believe in our deep value strategies,” he recalls. “People thought the Internet bubble was permanent, and we were among the first to call it a bubble.”
In November 2000 the firm was acquired by growth shop Alliance Capital. Tension ensued, with the Bernstein marketing team complaining about a lack of access to Alliance’s growth funds. The following June -- just six months before his unit at AllianceBernstein was shut down -- Black jumped to GSAM as head of the firm’s institutional and third-party sales teams in the U.S. GSAM was barely profitable but was beginning to build its adviser-sold platform to reach individual investors. It was the perfect training ground for the future Janus CEO: Black saw that investors who had been burned in the bear market would gravitate toward trusted intermediaries to pick funds for them -- and that advisers would pick GSAM mutual funds if performance was good.
“People like my father, Mr. New Jersey Bell, realized they couldn’t do it themselves anymore,” says Black. In his first seven months on the job, he helped GSAM bring in $7.6 billion in new money and increase its total assets under management by 18.5 percent, to $351 billion at year-end 2001, although a significant portion of the new assets were in low-fee-earning money market funds. GSAM’s institutional business raked in $3.1 billion worldwide, bringing assets in that channel to $226 billion.
Thanks to those results, Black was promoted to CIO of global equities, overseeing 180 people, including the CIOs of growth and value equity products in the U.S. and international markets. Within a few years, though, he started to yearn for a new challenge. “I look for the raw ingredients,” he says. “They weren’t there at GSAM.”
Janus’s CIO search committee came calling in 2003. Black’s record as a cutting-edge stock analyst, an effective institutional salesman and head of an equity research operation sparkled. But he played hard to get, turning down the first offer from Janus, according to a former Janus employee who was a member of the search committee. Then Scheid sweetened the pot by offering a base salary of $500,000 plus bonuses and other performance-based incentives that gave Black the potential to earn as much as $10 million a year. Black called back about six months later and accepted.
There was plenty of room for improvement when Black arrived at Janus in April 2004. The research team still lacked focus and discipline. “Our existing analysts were all over the place,” says James Goff, director of research at Janus.
Black quickly began administering prescriptions. At the time, only two sector teams, covering health care and global technology, were in place. The CIO increased the number of teams to eight, as Whiston had envisioned. He added more experienced analysts, raising the head count to 35, and hired 18 new research associates to conduct sector-based research. Thanks to bigger travel budgets, Janus’s stock pickers went out on the road, conducting the fundamental, bottom-up research that the firm paid lip service to during the bubble.
Black also installed a performance-based compensation plan for both researchers and portfolio managers. “Today, unless you are above the 50th percentile, all you make is your base salary,” says Black. “That’s a pretty high bar in this industry.”
Not long after arriving in Denver, Black discovered that several senior Janus analysts, including Goff, were already using discounted-cash-flow models -- a traditional value investor’s tool. Black mandated the use of the model in all new product launches and promoted investment professionals who were comfortable using it. The goal, he says, is to buy at a reasonable price companies that are growing their market share, increasing their returns on capital and returning excess cash to shareholders.
One of Black’s first moves was to replace Blaine Rollins, manager of the $11.4 billion Janus Fund, which underperformed the Morningstar large-cap growth category in 2004 and 2005, delivering abysmal peer group rankings in the 83rd percentile and the 73rd percentile, respectively. “Blaine was a very hardworking guy who came in at 5:30 in the morning and had a great rapport with the analysts,” says Black. “But he wasn’t getting the job done.” (Rollins, who later resigned from Janus, declined to comment.)
The Janus Fund’s new skipper, David Corkins, is off to a good start: in the 12 months ended March 31, he beat the Morningstar large-cap growth category average by 3.7 percentage points, moving the fund up the category ranks to the 19th percentile for 2006 and the 7th percentile as of April.
There has been some unexpected turnover as well. In February, Janus chief financial officer David Martin resigned to take the same post at Dimensional Fund Advisors in Santa Monica, California. General counsel John Bluer also left Janus. And on May 1, Thomas Malley, manager of the Janus Global Life Sciences Fund, and J. Bradley Slingerlend, co-manager of the Janus Global Technology Fund, both resigned. A former Janus analyst expects more investment staff to leave this year and says the turnover is related to dissatisfaction with Black’s new compensation formula. (Black and the former executives declined to comment.)
Black has also stepped up risk controls. Before his arrival, the concentration of Janus’s funds in the same stocks had declined significantly, in part because of the drop in value of the core holdings. But Black inherited an operation that had just one employee who provided risk-control data to portfolio managers -- and no procedures or staff to ensure that they acted on the information. In March 2005 he hired Daniel Scherman, a former quantitative money manager from MFS Investment Management, as director of risk management and trading. Scherman set up a risk-control committee composed of portfolio managers that regularly monitors positions. By the end of last year, 31 percent of Janus’s assets were held in the funds’ top 25 stocks, down from 35 percent at the end of 2003 and a dangerously high 55 percent at the end of 1999.
“I ask portfolio managers what keeps them awake at night and what they’re going to do about it,” says Scherman. “When you are forced to describe it, you crystallize your thinking.”
Under Black, Janus funds have scaled the ranks of growth managers, with the average performance climbing from 1.9 percentage points below the Morningstar category average in the 12 months ended December 31, 2003, to 9.8 percentage points above the average in the quarter ended March 31. Last November, with performance improvements continuing apace, Black gave up his duties as CIO and promoted two portfolio managers to split the job -- Gibson Smith, a fixed-income manager hired from Morgan Stanley in 2001, and Jonathan Coleman, a midcap growth equity specialist who joined the firm in 1994. The move signaled that Black had finished rebuilding Janus’s investment culture and was ready to focus on building the business.
Black’s diagnosis was simple: Janus was still too beholden to do-it-yourself individual investors despite a four-year effort to build a third-party sales channel. The imperative for improvement falls to retail sales chief Martellaro, who has borrowed heavily from the playbook of his previous employer, Van Kampen Investments. He has replicated the same aggressive sales culture, created Web-based portals to serve brokers buying funds and even set up a training service called Janus Labs, which helps them hone their sales skills in the hope that they will pick Janus products. “The ideal would be to nurture your own distribution culture,” says the head of a competing mutual fund platform in Denver. “But Janus is in a hurry.”
The strategy is gaining traction. Net sales to retail investors through the new broker-dealer channel notched positive flows in every quarter last year before skyrocketing in the first quarter of this year. In 2004 and 2005 the channel registered outflows of $2.6 billion and $100 million, respectively.
To keep money pouring in, Black is creating new products in the Janus Adviser Series of load funds. One such offering, launched in August 2006, is the Janus Adviser Long/Short Fund, which aims to beat the LIBOR by 360 basis points annually. The fund was seeded with $5 million in assets last August, and as of late April its retail and institutional share classes were sucking in $2 million a day in new money. As of April 30 shares sold by broker-dealers had notched a four-month return of 9.4 percent and ranked in the first percentile among the 137 long-short fund share classes tracked by Morningstar.
Despite Intech’s recent performance woes, Black has rolled out new Janus-branded funds that repackage the quant subsidiary’s strategies. In December 2005, Janus launched the Janus Adviser Intech Risk-Managed Value Fund, which isn’t yet rated by Morningstar, and in May added the Janus Adviser Intech Risk-Managed International Fund, which is benchmarked to the MSCI Europe, Australasia and Far East index. Their predecessors, Janus Adviser Intech Risk-Managed Growth Fund and Janus Adviser Intech Risk-Managed Core Fund, were introduced in January 2003.
Black is also counting on an ad campaign to drive flows. Janus plans to spend more than $10 million on ads this year in financial trade publications, says chief marketing officer Robin Beery. In addition, ads in newsstand magazines and newspapers will tout Janus funds -- but urge investors to call their advisers. In January, Beery hired Campbell-Ewald Co., a Warren, Michiganbased advertising agency, to develop the campaign. The agency has created ads for such image-challenged clients as health plan provider Kaiser Permanente. “A lot of people are so ready to hear the new Janus story,” says Beery.
That may be true. But one group with its ears stuffed up is sponsors of defined benefit and defined contribution plans. “We still don’t have a lot of assets in that channel yet,” acknowledges Black.
Before he arrived, no attempt was made to market Janus products to investment consultants or to develop new offerings to cater to the risk-averse CIOs of defined benefit plans. Instead, Janus simply created institutional share classes of its retail funds. And its institutional sales force, with only seven executives, was tiny. Now Janus rolls out products -- like the new long-short fund and the Janus Adviser Intech offerings -- that hold particular appeal to institutions seeking steady, long-term returns and solid risk controls.
Janus is also launching funds that don’t risk having a performance meltdown if a single manager walks out the door. The firm’s first team-managed fund, the Janus Global Research Fund, is overseen by Goff and was launched in early 2005. The strategy, which institutions can access through a separate account, is sector neutral and provides entrée to the analyst teams’ best thinking. With 125 global growth stocks -- and with the top ten holdings making up only 15 percent of assets -- it is highly diversified. In the 12 months ended March 31, the fund was up 16 percent and ranked in the second percentile among peers. “Our risk-adjusted returns have been excellent,” boasts Goff. (A similar domestic U.S. research fund, however, has not performed so well.)
Janus has intensified its institutional sales push. Zimmerman, who leads the effort, has more than doubled, to 17, the number of salespeople targeting defined benefit and defined contribution plans. One of his most important hires was a new head of consultant relations, Carolyn Patton, who joined in 2005 from Morgan Stanley in London.
“Thirteen consultants have been through here in the past year focused on Janus-managed product,” Zimmerman says, “up from zero the year before.” On May 21 his team bagged a $250 million mandate from a major defined benefit plan, the largest such mandate that Janus has won during Black’s tenure. (Janus declined to name the plan sponsor or provide details.)
Some investment consultants contend that Janus-branded offerings still aren’t differentiated enough. “There’s nothing inherently wrong with the way Janus’s products are designed,” says Carl Hess, Americas practice director at Watson Wyatt Investment Consulting in New York. “It’s just that there are many other choices out there.”
Wins have come quicker in the defined contribution market, where plan sponsors are more singularly focused on returns. A case in point is the Ohio Public Employees Deferred Compensation Program, which had removed the Janus Fund and the Janus Twenty Fund from its 457 plan following the 2003 market-timing scandal. But last year, on the advice of consultant Ennis Knupp + Associates, the $6.7 billion-in-assets plan reinstated the Janus Twenty Fund, says R. Keith Overly, the program’s executive director.
To deliver more converts -- and sustain the improvement in Janus’s asset flows -- the firm has more work to do building out its new distribution channels. But there’s no doubt that after years of turmoil it is headed in the right direction. Success “just doesn’t happen overnight,” says Black, who is confident that strong performance and a disciplined investment process will yield continuing improvements. “That’s one thing I learned at Bernstein and Goldman,” he adds, “it takes time to build a business.”