Weil Counts on Gross as Peyton Manning in Janus Rebound

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Bill Gross
Bill Gross, Janus Capital Group Inc. Fund Manager. Photographer: Tim Boyle/Bloomberg

When Bill Gross quit bond giant Pacific Investment Management Co. three months ago, almost as stunning as his departure was his choice of employer: Janus Capital Group Inc., a struggling stock fund manager whose assets had shrunk by half from a peak 14 years earlier.

Two chief executive officers had tried and failed to turn around the firm. A third, Richard M. Weil, a former Pimco operating chief who had worked with Gross before moving to Janus, started to diversify, yet redemptions persisted.

When Gross asked to run a new, popular type of bond fund for Janus, Weil knew it may be the break he had been looking for.

“Bill Gross is our Peyton Manning, that game-changing level of talent for us,” Weil said in an interview in Denver, referring to the quarterback of the National Football League’s Denver Broncos. “People are looking at us.”

Hiring Gross was the boldest step yet in an almost five-year effort by Weil to attract new money and change the public perception of Janus, a firm still known primarily for its growth-equity funds. Earlier this year, he hired Nobel laureate Myron Scholes as chief investment strategist to help develop asset allocation products, which have gained popularity in recent years. And he bought a company that runs exchange-traded funds, a rapidly expanding area of the industry, and plans to start an ETF run by Gross.

Investors’ Memory

Janus shares surged 43 percent on Sept. 26, their biggest one-day gain ever, after Janus announced that Gross would join the firm. They have almost tripled in the past three years as Weil added strategies and slowed the exodus of money managers.

“Since Dick’s arrival, he’s done a number of interesting things and they’re starting to take shape,” said Macrae Sykes, an analyst at Gabelli & Co. in Rye, New York, who recommends investors buy Janus shares. “You’re starting to see some nice fruit from his ascension.”

Turning around an asset manager isn’t easy because investors don’t easily forget when they lose money. It took Legg Mason Inc. seven years to stanch redemptions sparked by poor performance prior to and during the 2008 financial crisis.

Janus has suffered redemptions for 21 straight quarters, and assets, at $174 billion at the end of the third quarter, remain 48 percent below their peak in 2000. While the fourth quarter may be the first in which clients are adding money on a net basis again, Gross so far has only attracted a small fraction of the billions that clients pulled from Pimco after his departure.

Ambitious Plans

Gross is facing a challenging market as slumping oil prices and a crisis in Russia rattle markets. His Janus Global fund has declined 0.8 percent since Gross took over, beating 59 percent of its peers from Oct. 6 through yesterday, according to data from Chicago-based research firm Morningstar Inc.

Gross declined to comment.

Weil’s plans for Janus are ambitious. He has expanded offerings beyond Janus’s traditional focus on domestic stocks, and plans to triple the proportion invested in fixed income and adding asset-allocation products.

Along with Ashwin Alankar, head of asset allocation and risk management, Scholes is running products designed to help clients target how much risk they want to take. Scholes and Alankar are developing quantitative models to indicate when investors should shift their holdings between asset classes.

Scholes, the co-originator of the Black-Scholes options pricing model, shared the Nobel Prize with Robert Merton in 1997 for his work on valuing derivatives. He was a partner in Long-Term Capital Management LP, the hedge fund whose $4 billion loss in 1998 set off a near-panic in financial markets.

Gross ETF

In what Weil calls a “happy confluence” of events, Gross joined just as Janus announced the acquisition of VelocityShares, to expand in exchange-traded products, where industrywide assets have more than tripled to $1.9 trillion since 2008, according to the Investment Company Institute.

“Bill has opened the door for us to be very relevant in product wrappers like closed-end funds and ETFs,” Kelly Hagg, the head of product development, said in an e-mail. “Our first ETF will be a Bill Gross-run strategy and we are currently working with our internal product development team and the new VelocityShares team to develop the most compelling strategy for the market.”

VelocityShares will open ETFs in strategies including fixed income, asset allocation and volatility management, said Hagg. The first strategy probably won’t replicate Gross’s Unconstrained fund, he said.

Index-Based

Janus’s first ETF may be more of a traditional fixed income strategy, according to a person with knowledge of the matter, who asked not to be identified because the details are private. The firm’s sales team met on Dec. 10 to plan how to roll out new products, the person said.

Janus asked the U.S. Securities and Exchange Commission yesterday for permission to “establish certain index based market basket investment products,” according to a filing. The funds would be able to invest as much as 20 percent in index futures, options, swaps or derivatives, according to the filing.

To support Gross, Janus is building its infrastructure, adding as many as eight people to help in pricing and processing derivative and volatility trades, Weil said. The firm is also hiring at least one investment professional to assist Gross.

In addition, Janus plans to hire as many as five people to its fixed-income team over the next year, as client deposits expand funds. October and November made for the first two-month stretch of net inflows since April 2010, the firm said.

Analysts are divided on Janus’s outlook, with more than half of those surveyed by Bloomberg recommending that investors hold the shares, and a quarter advising that clients sell.

Scheid, Black

Janus, which bet heavily on riskier growth companies before the collapse of technology stocks at the turn of the century, had seen assets peak at $334 billion in August 2000. The next year, the firm was one of the first mutual-fund companies identified by former New York Attorney General Eliot Spitzer as permitting improper trading, and agreed to pay $226 million in penalties and management fee cuts to settle complaints.

Steven L. Scheid took over as Janus’s CEO in 2004 as he set out to restore client confidence after the mutual fund scandal. He relinquished his role as CEO to Gary Black in 2006, while remaining chairman of the board. Redemptions persisted under Black, whose tenure was also marked by manager departures. At least 15 fund managers and senior executives departed after Black reorganized and cut the influence and pay of star fund managers.

Leaving Pimco

Scheid, who retired in April 2012 after eight years, clashed with fund managers over the company’s leadership, and passed on takeover attempts by larger rivals. The company conducted talks with Franklin Resources Inc., the San Mateo, California-based money manager, and Massachusetts Mutual Life Insurance Co. in 2009 over a possible purchase of Janus, two people familiar with the matter said at the time.

Weil, 51, took over as CEO in February 2010 after about 15 years at Pimco, most recently running the unit that advises investors on valuation and risk management. He was a member of its executive committee, and served as general counsel from 1999 to 2000, when he became chief operating officer.

He took home $20.3 million in 2010, his first year at Janus, including $10 million in stock received as a signing bonus. In 2013, Weil was paid $4.7 million, according to company filings.

Now, approaching his five-year anniversary at Janus, the top priority is performance for clients, Weil said.

‘Dead, Shot’

Janus funds on average beat 52 percent of peers over the past five years through Dec. 17, and 50 percent over 15 years, according to data from Morningstar. This year, they’re ahead of 58 percent.

Employee turnover has slowed, with 11 money managers and leaders leaving Janus’s equity business and one from fixed-income since 2010. Janus has replaced seven of those equity managers and has hired two in fixed income. Weil also reduced the reliance on equities, with just over 80 percent of Janus’s assets now in actively-managed equities, compared with 92 percent at the end of 2009.

Adding such a high-level name as Gross created anxiety for the existing fixed-income team at Janus, led by Gibson Smith, who joined in 2001. The day Janus announced that Gross was joining, Smith’s team peered into his office in shock. He was on the phone, smiling.

“Everyone thought I was dead, shot,” he said. He and Weil called the more than 30 fixed-income professionals into their corner conference room to explain that Gross would add to the existing bond team rather than replace it.

Separate, Distinct

“The way Dick and I are talking about it -- separate and distinct, but complementary,” Smith said. “Even with all the drama associated, what a win for Janus.”

Weil said he plans to keep the two bond platforms separate.

“Gibson is more traditional; he invests in cash bonds, builds up from credit,” while Gross trades more derivatives, he said. “They’re good for each other. Neither has to do what the other is doing.”

That separation is made easier because Gross is working just down the block from Newport Beach, California-based Pimco, rather than moving to Denver. He flew in last month to speak to a gathering of Janus investment professionals, in a room set up like a college lecture hall. For 40 minutes, he discussed the history of trade and took questions for another 20 minutes.

Gross’s long-term performance is among the best in the industry, with his main fund at Pimco beating 96 percent of peers over 15 years, according to Morningstar. Pimco’s assets doubled to $2 trillion between 2010 and 2013.

Back to Winning

Janus has been winning new cash since Gross joined the firm. Gross’s Janus Global Unconstrained Bond Fund received an estimated $769 million in new money last month, bringing assets to $1.21 billion, according to data compiled by Bloomberg. The firm also won a $500 million mandate from a vehicle managed by George Soros’s investment firm.

Janus Flexible Bond got about $125 million of net deposits. That fund is beating 48 percent of peers this year, according to data compiled by Bloomberg.

As Janus’s employees enjoy the spotlight, money manager Andy Acker remembers how, when he joined the firm 15 years ago, people were lining up at Janus’s investor service center on 100 Fillmore Street, waiting to invest in the firm’s funds.

“I want people to experience what I experienced when I first started. I want to get back to that, winning -- a place everyone pays attention to.”

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