Time to Save Face at Janus?

Janus Capital's recent work for fundholders looks mediocre, at best. But it's unlikely the trustees will even consider a new management company

Are Janus funds getting a fresh start? News that founder Thomas Bailey is quitting on July 1 as CEO of Janus Capital Management suggests changes for Janus' $131 billion fund complex. The next CEO has yet to be named. Lots of Janus' four million investors would no doubt welcome new leadership. Many Janus funds have been bleeding through the bear market, in part from getting caught with big stakes in the likes of AOL Time Warner and Tyco.

Don't count on seeing much change any time soon, though. Bailey is staying on as chairman of the board of trustees (table), which by law is supposed to serve as every Janus fund investor's watchdog. Under the board's own retirement policy, Bailey could remain chairman for another eight years.

Nothing wrong with that, necessarily. But if I were a Janus investor, I wouldn't want to wait until 2010 to see the trustees shake things up a little. Each year, every fund's board must decide whether to renew its management contract with the fund's investment adviser, in this case Janus Capital. While it may not be practical for the trustees to yank billions from Janus Capital, they could take steps to show that better performance is on the way.

Even if you set aside big blow-ups such as Tyco and Enron, Janus Capital's returns are mediocre at best. Morningstar puts four of Janus' five biggest funds in the bottom quartile for the past year's performance. Over the past three years, just one is ranked above average.

Given these reasons for fundholder dismay, I wondered if the trustees were growing disenchanted with Janus Capital. Bailey declined to comment. But Martin Waldinger, a longtime Bailey friend and trustee, told me: "We have had a bad run, but I don't think there's anything wrong at Janus. They made some bad investments, or they made some investments that went against them." Finding a new adviser, he added, is "not even close" to being on the trustees' agenda, despite redemptions that have slashed assets under management.

Waldinger is one of six independent trustees directly responsible to Janus investors. Whether the other independents agree with him, I can't say. Only one, John McCarter, returned my call: He pleaded ignorance, having just joined the board. In any case, the trustees recently voted to renew Janus Capital's contract for another year. Cameron Avery, the independents' lawyer, said they focus on the funds' performance "at each and every board meeting" but aren't usually interested in debating it publicly. "It's very easy for the outside world to take potshots, in hindsight, at investment performance," he said.

True enough. Yet it's also hard to see how fundholders would be hurt if Janus Capital's annual contract renewal weren't such a slam dunk. What might the trustees do instead? Consider USAA Funds. The adviser, USAA Investment Management, manages $28 billion in assets, including $7 billion in stock funds. The USAA Funds' trustees, uneasy with the stock funds' lackluster showings, were set to consider on June 26 whether to dump USAA as the adviser. "The review is to determine if we can provide consistent, above-average performance by seeking external [investment advice]," a spokesman said.

Translation: USAA's trustees have opened their minds to other ways of delivering what their clients want. Janus' trustees don't have to throw open for bidding the contract to run all 52 funds they oversee. But why not find a new management company for a troubled fund, such as $2.5 billion Janus Enterprise? A bit of fresh thinking would go a long way toward assuring investors their watchdogs aren't fast asleep.

By Robert Barker

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