Monday, February 6, 2006

Has Janus Turned the Corner?

News Analysis
February 6, 2006

Business Week Online

Has Janus Turned the Corner?

The asset manager has turned itself around, thanks in part to CEO Gary Black's efforts, but there are still reasons for investors to be cautious

Named for a two-headed Roman god, Janus Capital Group (JNS ) may have done an about-face. Investors poured $2 billion into the Denver-based asset manager's products in 2005, after $20.6 billion in outflows a year earlier. Fourth-quarter profits rose. And analysts are widely touting the return of growth stocks, the company's bread-and-butter investing style (see BW, 12/29/05, "All Aboard the Growth Train"). On a recent conference call, Janus Chief Executive Gary Black declared: "We've got a lot of momentum as we begin 2006."

Investors have noticed the turnaround. Janus shares hit a 52-week high of $22.43 during trading on Jan. 12, partly on news that Bank of America upgraded the stock to buy from sell (see BW Online, 1/6/06, "B of A Ups Janus Capital, Legg Mason Shares to Buy"). Last year the stock was stuck in a $13 to $16 range until November, when takeover speculation surfaced. Granted, the rising stock market is lifting all asset managers' boats.

Janus recently reported 23.1% higher fourth-quarter profits, as expected, on revenues of $225.2 million. Rivals like Franklin Resources (BEN ) and T. Rowe Price (TROW ) posted similar gains, with substantially higher revenues.

HEFTY SETTLEMENT.  While Janus has taken strides in the right direction (see BW, 9/6/04, "Putting a New Face on Janus"), it may be tough for it to return to its former glory. "It's like turning a battleship," says Morningstar equity analyst Rachel Barnard.

The company still doesn't have many fans on Wall Street. All but one of the analysts have hold or sell recommendations on the stock. Currently trading around $21, the shares are priced well above Barnard's $17 estimate of their fair value. On Jan. 31, UBS analyst Michael Carrier downgraded Janus to reduce from neutral, citing valuation in a note titled "Nice turnaround, but too pricey." The stock price is banking on too many uncertainties working in Janus' favor, Carrier said.

Recent years have been tough for Janus, one of the highest-flying mutual-fund companies of the late-1990s bull market (see BW Online, 5/7/04, "Janus Is Hardly in the Clear"). Fund performance took a nosedive after the bubble burst in 2000, and investors shifted money to value stocks. In 2004, Janus struck a $226 million settlement with state and federal regulators as part of New York Attorney General Eliot Spitzer's probe into improper fund trades.

EXECUTIVE OVERHAUL.  Janus' regulatory troubles, at least, seem like a thing of the past. The company has placed new emphasis on compliance, kick-started by Chairman Steven Scheid, who was CEO from 2004 until Black's recent promotion (see BW Online 9/6/04, "Janus' Scheid On 'Our No. 1 Goal'"). "They can't afford to make any more mistakes," says Jeff Keil, principal at industry consultancy Keil Fiduciary Strategies.

Black has overhauled his investment team to boost performance. Most recently, the company tapped David Corkins to run its struggling flagship Janus Fund (JANSX ). Janus also promoted portfolio managers Jonathan Coleman and David Decker to co-chief investment officers of its domestic equity group. "Black has done a terrific job in his short tenure of making the firm more disciplined and laying out a long-term strategy," Barnard says.

Long-term performance numbers are starting to creep back, as the brutal 2000 and 2001 showings recede in the rearview mirror. As of Jan. 26 well over half of Janus' funds were beating their peers on a five-year basis, up from 26% at the beginning of the year. Sixty-four percent of Janus' funds are ranked four or five stars in Morningstar's three-year ratings, compared to an industry average of roughly 33% with those rankings.

Despite the improved performance for Janus mutual funds, investors haven't been putting new money in them. Although Janus reported it had inflows last year, they came mostly from Intech, its lower-margin quantitative business for institutional clients. Excluding Intech and money-markets, investors yanked a net $14.1 billion from Janus products in 2005, after outflows of $29.2 billion the year before. Company spokesman Blair Johnson finds the progress encouraging. "We always thought that flows would follow strong performance, and it's good to see that happening in a number of products," he says.

GETTING EVEN.  Janus' outflow woes won't necessarily screech to a halt. The reason is what fund-industry consultant Geoff Bobroff calls the "get-even syndrome." Shareholders tend to pull their money out when it grows back to the amount they originally invested. "Good performance only gets investors back to even faster," Bobroff says.

Some investors may want to get even in another sense, too. The bull market's collapse cut many shareholders to the quick. "A lot of investors who have been burned by Janus in the late 1990s feel like it should be drawn and quartered," says Morningstar's Barnard.

Ultimately, any big move in Janus shares will be tied to the overall fortunes of growth stocks. And there are less risky ways to bet on growth than buying into a rebuilding asset manager.

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