CEO Gary Black expects Janus’ boom to continue

CEO Gary Black expects business to keep booming at Janus Capital Group Inc. despite a recent wave of departures.

The Denver-based mutual fund company this year lost its top marketer and five portfolio managers who were responsible for a combined $20.8 billion in assets, plus two other marketing executives.

“We’re confident that we’ve built a strong foundation and believe that as long as we continue to deliver a consistent, repeatable process that performs well and focus on meeting the needs of our clients, our institutional business will continue to grow,” Mr. Black wrote in an e-mail.

Analysts and consultants say the firm’s recent focus on implementing institutional-type processes into its investment strategy — moving toward use of an investment team instead of a single star stock picker, for example — will allow it to absorb the blow.

Others say Janus’ attempts to translate its retail strategies to institutional portfolios could be hurt by the personnel turnover, since institutional investors such as pension funds often put managers on watch or sometimes terminate them when key staff members leave.

Among the departures: John Zimmerman, Janus’ former institutional marketing chief, whom some credit with helping Intech — Enhanced Investment Technology LLC, the Palm Beach Gardens, Fla.-based quantitative subsidiary — establish a presence in the institutional market.

Under his watch, Janus’ institutional assets jumped more than 91% in two years to $70.5 billion as of June 30, up from $36.8 billion in June 2005.

Intech, with $66.3 billion in assets as of June 30, clearly was the driving force behind the growth. None of the portfolio managers who left worked for Intech.

Mr. Black will take on Mr. Zimmerman’s responsibilities until a replacement is found. Mr. Zimmerman left in August to launch a third-party marketing firm, taking Jack Swift, senior vice president of institutional sales, with him.

Among portfolio managers, Scott Schoelzel, executive vice president and a 14-year Janus veteran, announced last month that he will leave at year’s end to pursue other opportunities, possibly in education. One of the firm’s most high-profile portfolio managers, he oversees $17.8 billion in assets, including the $10.4 billion Janus Twenty Fund. He also runs $2 billion in concentrated-growth separate accounts for institutional clients.

Edward Keely, a portfolio manager who oversaw $1.2 billion in institutional growth equity separate accounts, resigned in May and filed a suit against Janus in a Denver state court two months later. His suit alleges that Janus cut portfolio manager pay in violation of compensation contracts. Janus filed a response to the suit claiming that it didn’t breach its obligations.

Mr. Black changed the compensation structure in 2004, linking it more to performance and less to assets under management.

“There’s been a big push for pay for performance at Janus. Now it’s a lot more in line with shareholders’ interest,” said Mark Lane, equity research analyst at Chicago-based money manager William Blair & Co.

Brad Slingerlend, co-portfolio manager of the $881 million Janus Global Technology Fund, and Thomas Malley, co-portfolio manager of the $848 million Janus Global Life Sciences Fund, both left in May. Officials at Janus said Mr. Slingerlend left to pursue other opportunities, Mr. Malley to move into the philanthropic arena.

Doug Kirkpatrick, who ran the $103 million institutional Janus International Equity Portfolio, left in June to move to New Zealand.

In March, David Martin, chief investment officer, left to become chief financial officer at Dimensional Fund Advisors of Santa Monica, Calif. Analysts and officials at Janus said the departures aren’t linked.

Janus has spent the last two years remaking itself from a mostly retail shop to a money manager with institutional allure. “They have fantastic performance in the retail market, and they feel their process is portable to the institutional market,” Mr. Lane said.

Mr. Black said not all funds will translate well for institutional clients. “We are selective in the offerings that we make available to the institutional marketplace,” he said. “As a result of understanding institutional clients’ needs, we do not proactively offer many of our retail-orientated offerings such as the Global Life Sciences Fund and Global Technology Fund.”

The firm’s success in making more inroads in the institutional market will hinge on how well the replacement managers handle the portfolios, Janus watchers said.

When asked if the firm has a strong bench in place, Kevin Vandolder, principal at Chicago-based consulting group Ennis Knupp & Associates, said: “We have a fair degree of confidence that the answer is yes. We believe there is a better-than-average chance.”

Janus officials also are confident. “We have been able to replace departing managers with what we believe is equal — and in many cases stronger — talent,” said Janus spokeswoman Shelley Peterson.

But some industry professionals aren’t so sure Janus can shed its retail image.

“It’s hard to tell. Janus has been viewed as a star [stock picker] shop, and I’m not sure they’ve lost that,” said Roger Smith, vice president of equity research at investment bank Fox-Pitt Kelton Cochran Caronia Waller LLC in New York.

While the firm has made strides in changing its investment process to a more institutional model, Janus’ retail reputation might still hang on, he said.

Mr. Zimmerman admitted during the firm’s July 26 second-quarter shareholder conference call that Janus’ reputation as a retail shop is hard to shake. “As we evolve from a perception of a retail firm to an intermediary institutional firm, we need to make sure our clients understand that on the Janus side, we have institutional-quality products, institutional-quality processes, institutional-quality investment managers,” he said.

The firm, which had $190.6 billion in total assets as of June 30, was rocked in 2003 when it was accused of market timing, an accusation faced by several other mutual fund companies.

As a result, the firm’s assets dwindled from a high of $330 billion in March 2000 to a low of $132.7 billion three years later. Growth since then has mainly come from Intech, though inflows to the quant firm in recent quarters have lagged. Intech had net inflows of $1.3 billion in the second quarter, the lowest since the first quarter of 2004. Lackluster short-term returns have held down inflows, Mr. Black said at the second-quarter conference call.

But lately, Janus has been reporting good news.

In the quarter ended June 30, the firm reported net inflows, excluding Intech, of $1.5 billion, the first positive net flows in six years. Janus broke even with inflows in the first quarter, and had net outflows of $3 billion for the second quarter of 2006.

At least one client is sticking with the firm, for now. The $7 billion Ohio Public Employee Deferred Compensation Program in Columbus has $215 million in the Janus Twenty Fund.

“We are concerned,” said executive director Keith Overly, referring to the turnover. Ennis Knupp’s Mr. Vandolder, the fund’s consultant, said he recommended sticking with Janus while further due diligence is conducted.

Janus can expect to be watched closely for the foreseeable future, said Jeffrey Keil, principal at Keil Fiduciary Strategy LLC, a Littleton, Colo., consulting firm. “The scrutiny placed on returns will be very high. If they make any mistakes, they run a huge risk.”