Freaky Friday? Pimco and Janus try different roles

Bond giant moving into equities; stock specialist heading into bond funds

Jan 26, 2012 @ 3:24 pm

By Jason Kephart

Two prominent mutual fund companies are hard at work moving beyond the specialties that made them well-known in the first place.

Pacific Investment Management Co. LLC, synonymous with bonds, is rolling out equity funds, and Janus Capital Group Inc., known for growth investing, is putting its faith in fixed-income funds.

It's hard enough for a company to find success in one area of an industry, let alone two. Just ask PepsiCo Inc. about Crystal Pepsi, its short-lived attempt in the early 1990s diversify its soda lineup by offering a “clear alternative” to regular cola.

So expansions like the ones Pimco and Janus have embarked on aren't slam-dunks.

“These kinds of shifts are often met with healthy skepticism,” said Jeff Tjornehoj, senior research analyst at Lipper Inc. “Bigger firms have it a bit easier, though, simply because they have so many resources.”

Greg Carroll, managing partner with Sterling Wealth Management Group, shares that skepticism. Mr. Carroll said he's avoiding new funds from Pimco and Janus, for now at least. “Pimco is bonds, Janus is high-beta equities. Until they get a significant track record doing something else, we're going to stay away. We've been bitten too many times in the past,” he said.

The firms are focused on diversifying their lineups to help weather the various market cycles, the same as an investor looks to diversify his or her portfolio between a healthy mix of equities and fixed income. At stake is both firms' ability to continue growing regardless of which asset class is in favor, and both are putting significant resources toward making sure that happens.

“Looking back at our strategic focus from 24 months ago, we made the decision to really focus on diversifying our asset business,” said Gibson Smith, co-chief investment officer of fixed income at Janus.

A quick glance at fund flows since the beginning of 2009 makes it obvious why Janus, which has 78% of its mutual fund assets in equity funds, would want to make the push toward its fixed-income funds.

Fixed-income funds have taken in more than $130 billion in the past three years as investors have pulled more than $150 billion out of equity funds, according to the Investment Company Institute.

Janus had a head start on its expansion into a new asset class, having launched three fixed-income funds prior to 1995. It launched its first new fixed-income fund in more than 15 years in mid-2010 and has made fixed income a focus. Janus' team of fixed-income analysts has grown from seven to about 30 over the past few years.

“When people think about Janus, they usually think of the growth equity franchise, but we're seeing more interest in our fixed-income funds,” Mr. Smith said.

Even though Janus is still much more established as an equity manager, having three bond funds with more than five-year track records has made it much easier for advisers to take them seriously, said Kathryn Young, mutual fund analyst at Morningstar Inc. Janus' four fixed-income funds drew $1.4 billion in net inflows last year, which helped offset the more than $8 billion of outflows the firm saw in its equity funds.

Given those continued outflows, it came as no great suprise when Janus announced on Thursday that Steven L. Scheid, the fund firm's chairman, will retire in April as the company struggles to reverse investor withdrawals. Glenn S. Schafer, 62, a director since December 2007, will replace Scheid, 58, as chairman, the company said today in a statement

Certainly, Janus' foray into bond funds has yet to revive the company's prospects. The Janus Global Bond Fund (JGBAX), which was launched in 2010, has managed to attract only $33 million in assets despite being ranked in the top 15th percentile of global bond funds in 2011. Ms. Young attributes the lack of adviser interest to the fund's lack of a track record. “If they can keep up that performance, there's no doubt it will attract assets,” she said.

For Pimco, which has been one of the biggest beneficiaries of the shift toward fixed income, it's about being a one-stop shop for investors, said Neel Kashkari, head of global equities at the company.

“It's about providing solutions, not products, and part of the solution is active equities,” he said.

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Pimco's wasted no time getting its equity fund lineup up and running. It launched its first pure equity fund, the Pimco EqS Pathfinder Fund (PATHX), in mid-2010, and this month, it launched its third equity fund, the Pimco EqS Dividend Fund (PQDAX). Two more strategies are already in the works, with Mr. Kashkari in the process of interviewing management teams to run a long/short global equity fund and a global growth fund.

Mr. Kashkari is focused on hiring established portfolio managers rather than growing out the equity team from inside the organization. For example, Pimco hired Thornburg Investment Management Inc. veterans Brad Kinkelaar and Cliff Remily to manage the Pimco EqS Dividend Fund “We want to go out and cherry-pick the best in the industry,” Mr. Kashkari said.

Having a long-term track record to point to, even if it's not something a firm can actually market, helps alleviate some of the concerns over a new fund for Adam Jordan, director investment research and management at Paul R. Ried Financial Group LLC. “It's a way to get around not having a track record,” he said.

Like any investment strategy, whether Pimco or Janus is able to successfully grow beyond its signature asset classes is going to come down to performance. Mr. Smith acknowledged that it can be hard to get an adviser to think about Janus as more than just a growth shop, but once he's able to get them to look at the fixed-income funds' records, it's a much easier conversation. “Our returns speak for themselves,” he said.


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