Janus woes weighing on Stilwell

When Stilwell Financial Inc. was formed a little over a year ago, Janus Capital Corp. tried everything short of a proxy fight to keep from being lumped into the company.

Now the shoe may be on the other foot at Stilwell, the Kansas City, Mo., holding company that began life as a railroad.

Stilwell last week reported a third-quarter net income of $90.5 million, or 39 cents per diluted share, compared with a net income of $170.1 million, or 73 cents per diluted share, for last year’s third quarter.

The decline is attributable partly to a decrease in the amount of money that Stilwell manages. Assets under management had fallen to $171.8 billion as of Sept. 30, down 46% from a year earlier.

But its once-hot Denver mutual fund shop is the biggest problem.

drain on assets

Janus assets totaled $101.52 billion at Sept. 30, down 50.6% from the same date last year, according to Financial Research Corp. in Boston. Janus saw net outflows of $2.48 billion in September. The silver lining is that most of the decline was from falling stock prices.

Surprisingly, many analysts are upbeat on the future of Janus and its parent, even though the third-quarter result was 2 cents below the forecast of analysts polled by Thomson Financial/First Call in New York.

And despite problems at Janus’ parent company, financial advisers say they still see it as a viable fund company that can be a good choice for investors willing to take an aggressive growth stance.

“It’s a fine aggressive option for people who have the discipline to hang on in these dark days,” says Thomas Grzymala, president of Alexandria (Va.) Financial Associates Ltd., with about $75 million under management. “They’re good for young people if they have the intestinal fortitude to hang on.”

The reason that Janus funds are such a good “aggressive option” is, of course, because of their emphasis on technology and other high-growth sectors of the stock market.

While that emphasis is the main reason the fund group and its parent aren’t doing well in the current sour market, it’s also one of the reasons why it’s a good buy right now, says Mike Baum, an associate analyst with Friedman Billings Ramsey & Co. Inc. in Arlington, Va.

“When the market turns, this is going to be a great stock to own,” he says. “The question is, when do the markets turn? We’re not really making a call on that, but we think it would be a wise move for someone to accumulate [Stilwell stock] before the market does turn.”

That’s because Stilwell is trading at a discount to other money managers, Mr. Baum says. It’s trading at 12.5 times both 2001’s and 2002’s expected earnings, while the average money management company is trading at 19 times 2001’s earnings and 17 times 2002’s expected earnings, he says.

Of course there’s a reason why Stilwell is cheaper than other money management firms.

Uncertainty still exists about Thomas Bailey’s decision to sell to Stilwell his remaining stake in Janus, which he founded in 1969. Under the terms of the agreement, by which he sold 80% of Janus to Stilwell’s predecessor in 1984, Stilwell must pay considerably more for the stock than it is worth.

The total sale, the first half of which was executed in April, carries a hefty $1.2 billion price tag. It also raises questions about whether he will stay with the company – and if he doesn’t, whether others will follow him out the door.

For his part, Mr. Bailey issued a statement earlier this month saying he has no intention of leaving. He will stay on as chief executive and as a board member of Janus, but the sale means he gives up his right to appoint the majority of members of the board.

Five key members of Janus’ executive investment committee also recently sent a letter to shareholders saying they do not plan to leave Janus in the foreseeable future.

The five key members are Blaine Rollins, manager of the $23.3 billion Janus Fund; Helen Young Hayes, manager of the $19.9 billion Janus Worldwide Fund; Scott Schoelzel, manager of the $14.3 billion Janus Twenty Fund; Warren Lammert, manager of the $7.8 billion Janus Mercury Fund; and Jim Goff, manager of the $2.9 billion Janus Enterprise Fund.

Those statements were enough for Putnam Lovell Securities Inc. in San Francisco to bump its rating on Stilwell to “buy,” from “hold,” says Bruce Brewington, an equity analyst with the firm.

“It’s Tom and the investment committee that has been responsible for Janus’ success; it certainly isn’t Stilwell management,” Mr. Brewington says.

“The risk to the franchise value [of Janus] has been reduced by their statements.

“Certainly they have suffered this year in a market that is not conducive to growth equities, but they did so well in 2000 because of the stocks they picked in 1997. The stocks they’re picking now will probably do well in the future.”

a tough deal

That may be true, but the deal is still going to cost Stilwell. The company is not yet saying how it plans to pay for the second half of Mr. Bailey’s stake in Janus.

It has said only that it has 120 days to give Mr. Bailey his cash, but the way it chose to finance the first half may come back to haunt it.

In April, it sold convertible bonds worth converting only if Stilwell’s stock price went up considerably. Investors, however, have the right to sell the bonds back to the company at a small profit by April. Because Stilwell stock is doing poorly, some industry experts say investors may take that option.

Mark Lane, a research analyst with William Blair & Co. in Chicago, says that if that happens, it could dilute Stilwell’s existing capital. Those bullish on Stilwell, however, argue that in such an event, the buyback would be relatively inexpensive, and the company would be able to absorb it.

Lou Stanasolovich, president of Legend Financial Advisors Inc. in Pittsburgh, which has about $150 million under management, says that he’s not concerned about the personnel or financial situation at Janus.

Such issues wouldn’t prevent him from investing with Janus, Mr. Stanasolovich says.

What does make him think twice about using Janus – it’s on his “approved” list, but he doesn’t recommend it – is an issue that has long plagued the mutual fund shop: It has too much overlap among its different portfolios, which means that no one fund is all that different from another, he says.