Janus: From Red-Hot to Red-Faced

But Stilwell insists it doesn't want to unload its problem child

For the last couple of years, Thomas H. Bailey and other top honchos at high-flying mutual-fund manager Janus Capital Corp. have wanted nothing to do with the folks at their parent company, Stilwell Financial Inc. (SV ) Like the trailblazing high-tech outfits they invested in so heavily, the Janus managers wanted to be on their own. Being associated with a company that sprang from an old railroad, Kansas City Southern, couldn't help them, they figured. Relations, as Stilwell officials tersely admitted in their latest annual report, have been "strained."

Now, with its high-tech winnings a distant memory and button-down investing again in style, Janus is dragging down Stilwell. Chief Executive Officer Bailey roiled the waters anew on June 12 when he stepped down from the top post, 33 years after he founded the outfit. He'll keep the chairman's job for now, but he's leaving at a time of crisis: Since 2000, Janus' assets have been cut in half, to $160 billion, while Stilwell's stock price has plunged to 19 from 50. With 87% of its net income coming from Janus, Stilwell's earnings fell a dizzying 54% last year, to $302.3 million. In the first quarter, the setbacks continued as Stilwell's profits slid 13%, to $97.2 million.

Furthermore, sale rumors are swirling. They've picked up steam after some of Janus' investment missteps--such as taking big stakes in Enron and Tyco International--have come to light. And Janus' once-vaunted investment gurus now have "egg on their faces," says Brian Portnoy, analyst at Chicago fund researcher Morningstar Inc.

So will Stilwell managers sell their problem child? Nope, they say. Despite talk that such financial giants as American International Group (AIG ) might want to buy, Stilwell CEO Landon H. Rowland vows to keep Janus. "Top-line growth will return as markets recover," he says.

Plenty of skeptics don't see it that way. If the market continues to slide, impatient investors will be less likely to wait for the promised recovery. "If Stilwell stock takes an even more terrible beating, a buyer could emerge, especially given Janus' high-profile brand name," says Burton J. Greenwald, a mutual-fund consultant in Philadelphia.

But Janus' weaknesses may give a buyer pause. This year, investors have yanked out $4.2 billion, according to fund-research firm Lipper Inc. Although that's a tiny share of the firm's remaining assets under management, Janus is still losing more money in withdrawals than any of 15 large-fund family rivals. Janus is the nation's sixth-largest fund group. And on June 11, Moody's Investor Service cut Stilwell's debt outlook to negative from stable, citing the risk of more withdrawals.

Morale at Janus began to drop last year when Bailey cashed out his 12% stake for $1.2 billion. The move also hurt Stilwell's finances. On Apr. 30, it had to pony up $614 million after investors forced the company to buy back a convertible bond issued to finance just over half of Bailey's shares. Instead of holding on to a zero-coupon bond that could be converted into stock, investors wanted an immediate cash payment. Stilwell sweetened the bond by offering 4% interest, but some 88% of the investors insisted on cash. Bailey declined to comment.

Through all this, the investment savvy of Janus' managers has been cast badly into doubt. They held large positions in stocks such as Intel (INTC ), Cisco Systems (CSCO ), and America Online (AOL ), big winners in the late 1990s. But the collapse of tech and telecom eroded their gains. And their Enron and Tyco bets have made a mockery of the firm's claim that its managers dig deeper than their rivals before investing in companies.

Janus' managers have been laboring to restore their reputations. In February, they named Helen Young Hayes, a senior manager, as managing director of investments. Responding to criticism that managers are too independent, Hayes now coordinates portfolio assignments and strategy. She also runs the $20 billion Janus Worldwide and the $5 billion Janus Overseas funds. Janus also named James Goff director of research. Goff had managed the Janus Enterprise fund, which had declines of 40% in 2001 and 30% in 2000.

Janus has taken stakes in more stable companies--among them potential acquirer American International Group and Warren E. Buffett's tech-averse Berkshire Hathaway (BRK.A ). "We have broadened our coverage in many different industry areas and are more flexible in finding interesting investments," says Goff. Still, performance hasn't improved for many of its funds.

With Bailey heading for the door, Stilwell will now have an opportunity to revamp troubled Janus from the top down. Unless, that is, the company is forced to sell first.

By Pallavi Gogoi in Chicago

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