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Making Amends at Janus Mercury

By Angelina Dance Janus Mercury Fund (JAMRX) changed its manager three years ago and has been repairing poor past performance after the excesses of the late 1990s. David Corkins began reshaping the portfolio in February, 2003, after he took over from Warren Lammert, who had run the fund for 10 years prior. Corkins previously piloted the more conservative Janus Growth & Income Fund (JAGIX).

For the 12-month period ended Mar. 31, Mercury returned 3.8%, vs. a gain of 1.8% for the average large-cap growth fund, and 6.7% for the S&P 500-stock index. For the three years ended in March, it registered an annualized return of 1.8%, vs. a loss of 0.5% for its peers, and a gain of 2.7% for the S&P 500.

DISMAL PERFORMANCE. In the five years ended in March, Mercury compares less favorably to its peers, having recorded some of its worst performance from 2000 to 2002. It fell 13.6% on average for this period, underperforming its peers, which were down 9%, and the S&P 500, which lost 3.2%. The Russell 1000 index -- which Mercury uses as a benchmark -- shed 3%.

A concentration in the technology sector and the dot-com implosion contributed to the poor performance following the stock market's peak in 2000. With double-digit losses against the S&P 500 and Russell 1000, Janus began to make amends as Mercury and other of its growth offerings fared poorly.

Adding fuel to the fire, Mercury and other Janus funds were cited among those involved in the rapid-fire trading scandal in 2003. Janus has since reached a final settlement with regulators and taken measures to compensate investors.

LESS AGGRESSIVE APPROACH. Standard & Poor's upgraded Mercury to 4 Stars from 3 Stars in February, 2005, as it outperformed its peers on a risk-adjusted basis over the 36-month period.

Corkins keeps a long-term mindset when selecting securities, as he seeks consistent returns over time. Despite his less aggressive approach relative to the fund's previous manager, he's still able to invest in dynamic outfits with little limitation on location, size, or industry. Since Corkins took over, he reduced the number of stocks in the portfolio to 70 from around 100, a more manageable size in his opinion. He selects high-quality companies with good management teams focused on free cash flow and return on invested capital.

Three-quarters of the portfolio is invested in stocks of large-cap growth companies, while the remainder tends to be in what Corkins calls "fallen growth names." These are weaker companies that have done well in the past and are expected to return to their traditional growth status due to a catalyst such as new management. Corkins believes the approach provides a good balance within the portfolio.

COVERING BASES. "Generally, when the economy is doing well, growth stocks outperform, and in turn, three-quarters of the portfolio does well," he explains. "When the economy is sluggish, and value stocks are doing well, then the remaining quarter of the portfolio outperforms."

At the end of February, top holdings included Liberty Media (L) at 4.5% of the portfolio; Roche Holding (RHHBY) at 3.6%; Berkshire Hathaway (BRK.B) at 3.59%; and Tyco International (TYC) at 3.57%.

"Tyco is one of the weakening stocks in the portfolio," Corkins says. Added in 2003, the embattled company has reorganized its management and is now focused on improving cash flow. A general turnaround took place as Tyco restructured its balance sheet, divested businesses, and bought back stock.

VALUE-CONSCIOUS. "They're benefiting from strong economic trends right now," Corkins adds, but he recognizes that it's not as strong a value as it was when originally added to the portfolio. And Corkins is value conscious: "Risk-reward is starting to change, and so we're taking a slight cutback."

The manager isn't optimistic about financial stocks either and previously reduced some of his positions in the sector. However, he believes patient investors have a few attractive opportunities now. Within the portfolio, JP Morgan (JPM), Berkshire Hathaway, and Goldman Sachs (GS) are unique cases. "They're actually benefiting, despite market conditions," he says.

Typically, Corkins doesn't allow one sector to make up more than 20% to 25% of the portfolio at a time. Overseas investments don't exceed that level either. The fund currently has holdings in health care, consumer discretionary, technology, and industrials. Corkins finds the large-cap pharmaceutical category weak. He's more interested in small companies focused on oncology, medical supplies, and devices.

KNOWLEDGE IS STRENGTH. With a more manageable portfolio, Corkins can focus on minimizing risk and searching for new opportunities. He believes knowing individual stocks well helps control risk. Compared with its peers, Mercury does have a higher

Sharpe ratio, 0.02 vs. -0.12.

Portfolio turnover is lower than that of its peers, and

volatility is just slightly lower. Corkins sells mainly when he believes stocks are fully valued.

Overall, he believes "great companies have three things in common: strong management, a good business, and predictable earnings." With a thorough understanding of each company that sparks his interest, Corkins looks to gain from growth that others might miss. Dance is a fund analyst for Standard & Poor's Fund Advisor

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