IN conversation with: Richard Weil, Janus Capital

Since coming on board in February as CEO of Janus Capital Group Inc., Richard M. Weil has set the groundwork for his firm’s goals for 2010 and beyond. Not surprisingly, the 14-year veteran of Pacific Investment Management Co. LLC has put building Janus’ fixed income business at the top of his list. His other top three priorities for the firm are building distribution through intermediaries in the U.S.; developing an institutional business through its subsidiaries Janus Capital Management LLC and Perkins; and growing the firm’s offshore presence and product offerings.
Janus has come a long way from where it was in 2003, when it was hit hard by the dot-com bust and market-timing scandals. About 84% of its funds ranked in the top half of their Lipper categories in the three-year and five-year periods ending March 31. Janus Capital funds brought in $1.4 billion in the first quarter of this year, while its Perkins unit brought in $1 billion.
But Janus is still a small player compared to its peers, and whether Mr. Weil can achieve his goals will largely depend on who he taps to help him, said Geoff Bobroff, a mutual fund consultant. “The big problem that Mr. Weil has,” said Mr. Bobroff, “is that the company has a lot of needs and he is only one person.”
Last week, InvestmentNews reporter Jessica Toonkel Marquez sat down with Mr. Weil for a wide-ranging conversation. Here’s what was said.

Q. What are you doing to gain distribution in the U.S. and let advisers know that you aren’t the same Janus as five years ago?
A. We are building out our internal wholesaling team and investing in the brand development process more. The registered investment adviser channel is an area of focus. We have also been having advisers in and giving them access to our portfolio managers and research. One of the problems with saying that you are differentiated as a result of your research is that every asset manager in the world says “we look under the manhole cover,” and “we crawl into the airplane engine,” and most of them have not necessarily lived up to that promise. We strongly believe that our research is a differentiating factor, but simply saying it is isn’t an adequate proof statement.

Q. What is your goal with regard to growth in the RIA channel?
A. We don’t set goals by channels at that size. We have internal targets across different businesses, but overall we think that a first class company in this business should be generating 5% plus organic growth over time and consistently growing profits. I think it will take us some years to develop the right diversity and foundation to be able to deliver that on a consistent basis year in and year out.

Q. Where do you see the distribution challenges going over the next five years?
A. The consolidation of distribution in the U.S. means that a rather smaller number of players are going to get the opportunity to be partners with the key distributors. The distributors used to be closed-using only their own products; then they went wide open and accepted everyone’s products. Then they said “hey, that’s inefficient I need a smaller number of very high quality partners who I can work with in a more significant way.” Now the distributors are going to consolidate their partnerships around some key players and Janus is on the cusp of being qualified to being in that. We are a little small. We are a little under-diversified. We are not as solutions-oriented compared to others. But I think we have the capabilities to develop in those other dimensions so that we can be among one of these 15 strategic partners for this consolidated U.S. distributor.

Q. How do you plan to grow your offshore business?
A. Right now we are looking to hire a head of international and that will hopefully get wrapped up in the next two months. Then we will embark on a strategy with a new leader where we develop our response to what is a simple truth: the composition of global growth is changing. More of it is going to happen outside of the United States, outside of Europe and outside of Japan. We need to be prepared for that in a 10 year time frame. It’s not a one year time frame because these things take a long time to develop. We need to embark on that soon.

Q. Where would you like to see Janus?
A. You have to do well in Europe. You have t do well in Japan. And then you have to decide where you are going to place your bets in terms of more frontier investing. Are you going to Korea? India? What is the strategy for Brazil? You need to constantly be planning seeds which grow a couple of cycles out so you will always have a harvest. The immediate focus has to be largely Europe. The Middle East is probably the most important area for us to focus on and Japan. Then over time China will become more significant and other Asia markets will rise.

Q: Do you plan to be a niche player in the fixed income space?
A. I think niche is too narrow but we are clearly not going to be replacing Pimco either. It’s being a complement to big players. Right now we have $12 billion in fixed income assets under management and our target over the coming years is get that to be $40-$50 billion. We will launch at least one additional fixed income product this year.

Q. Are you worried that with the potential of interest rates rising, that you have missed your window to make a big push into fixed income?
A. Yes Absolutely. And we had this conversation internally. I said “this fixed income bull market doesn’t go on forever and eventually we get to higher rates.” My personal opinion is that we don’t get to higher rates that quickly because things like Greece slow the inflation train and before we get to inflation we still need to worry about some deflation. That’s just a personal thing, but it informs how I think about this investment in fixed income. We need to develop fixed income as effectively as we can and live with the risk that the market won’t be as hot down the road as it is now. We aren’t just developing this fixed income business to e hot. It should be a core competency to offer in all market cycles in the future and it should be something that we combine with other work on the equity side to create multi-asset allocation solutions. This is a key strategic development for us that don’t depend on there being a bull market. That said, we are obviously very interested in getting as far as we can while the wind is on our back,

Q. Will Janus get into the actively managed exchange-traded fund market?
A. ETFs are a really significant strategic challenge for all of us on the active equity side. They are a very interesting vehicle for consumers. They respond to the desire for immediacy and ease of transactions that consumers want and they don’t seem put off by the relative lack of transparency which is associated with ETFs. So it’s important for us to respond. However it’s hard because the structure of ETFs requires the disclosure of transactions pretty much on a daily basis. If we are managing a fund and we want to manage that as an ETF, we would have to disclose our buys and sells everyday and we are concerned that might compromise our fiduciary duty to shareholders. I think the actively-managed ETF business needs to go through some further structural, generational changes before it’s a good vehicle for truly active strategies.

Q. With InTech however, you have a strong quant presence. Why not do quantitatively-based active ETFs?
A. We could do a strategy designed for ETFs based on quantitative analysis but wheatear our decision making tool is—whether it’s quantitative or fundamental—you end up with the same problem: people can see your trades on a daily basis. If you end up attracting any amount of investment size and your investments become predictable, there are incentives for rapid traders to trade in front of you.

Q. Laurent Saltiel, the manager of your $2.44 billion Worldwide Fund, just announced he is leaving at the end of the month. What are you doing to replace him?
A. We are going to promote from within for some of those assets and for some of those assets we are going to do a search which might end up with an external hire, but it might not.

Q. A fund executive recently said to us that over the next five or 10 years the fund business will go from being extraordinarily profitable to nicely profitable. What do you think?
A. I think that’s a reasonable guess. I think the consolidation in distribution isn’t likely to help the fees to the investment managers. I think the competition from passive and asset allocation strategies using passive beta, whether it’s ETFs or otherwise, also creates fee pressure. I think the number of people in our industry who have underperformed and disappointed their clients create a lot of fee pressure. The combination of those forces makes it sensible that over time some of the fees in our business will go down.

Q. What will you do to remain profitable?
A. We need to embrace a culture where we pay people for value created and where they are creating value they get paid for. If fees go down and the value they create goes down then we will have to address that in our compensation system and in our expense structure. But there are plenty of opportunities to dot hat in such a world.

Q. You are implementing performance-based fees for more of your funds—making Janus the only public asset management company to do so. Won’ this be tough on your earnings?
A. We have just implemented a much more comprehensive set of performance fees [pending shareholder approval] and it does represent some risk that we will have more volatile revenues. On the other hand, it represents greater alignment with our ultimate clients and so we would ask our Janus Capital Group equity investors to understand that they get better alignment with our ultimate clients in exchange for greater volatility.

Q. Reportedly, your predecessor Gary Black had looked into Janus being acquired or merging with other firms. Do you plan to remain a stand-alone firm? And if so, do you plan to remain public?
A. We think our best future is as a stand-alone company. As a public standalone, I am not sure that’s the absolute ideal ownership structure in a theoretical sense but our success right now isn’t dictated by ownership structure. I think we need to focus less energy on those kinds of things and focus more on delivering on the ground where the business is done for our clients.

Q. What other asset classes are you looking at to fill holes in your product line down the road?
A: We are looking at a lot of things. If you think of eventual inflation risk and what might fit there. We think about the increasing need for income. We think about what might fit there. And of course we think about the alternative space. But focus is very important and we can’t do everything at once.

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