PHILADELPHIA — Even though he was aware that it would violate their contracts, Gary Black, chief executive of Janus
Capital Group Inc., told the company’s portfolio managers last October that they would receive pay cuts, according to a lawsuit filed last month.
Edward Keely, who oversaw about $1.2 billion in assets for institutional investors at Janus before he resigned in May, filed the suit Aug. 21 in Denver District Court.
It alleges breach of contract and seeks damages and back payments of $3.8 million.
A spokeswoman for Denver-based Janus declined to discuss the lawsuit. The company, however, filed a response to the suit last week arguing that it did not “breach its obligations” to pay Mr. Keely under the terms of his contract.
Janus also claims that while Mr. Black did call a meeting of portfolio managers in 2006 during which “compensation issues were discussed,” he did not say changes Janus planned to implement would violate their contracts.
If the allegations are true, however, it could help explain why a handful of portfolio managers and other executives have recently left the company, industry experts said.
Janus announced just last week the departure of star manager Scott W. Schoelzel, a portfolio manager with the Janus Twenty Fund, Janus Adviser Forty Fund and Janus Aspen Forty Portfolio, he was responsible for managing about $15 billion of fund assets.
“I think Black is trying to keep expenses in line with revenues,” said Burton Greenwald, president of Philadelphia-based B.J. Greenwald Associates, an industry consultant. “Obviously, that’s gotten a lot of people upset.”
But don’t expect performance at Janus to suffer, Mr. Greenwald said.
The economy is starting to favor growth stocks, and that is what Janus specializes in, he said.
The company has already started to see improved mutual fund performance, and that has translated into improved fund flows.
Year-to-date through July, Janus had seen $3.08 billion of net flows into its funds, compared with net outflows of $1.58 billion during the comparable period a year earlier, according to Financial Research Corp. of Boston.
And with the exception of Mr. Schoelzel, most of the managers who have left — whether it was because of cuts to their compensation or for other reasons — were not high-profile managers, Mr. Greenwald said.
Recent departures include Tom Malley, manager of the Janus Global Life Sciences Fund; Brad Slingerlend, co-manager of the Janus Global Technology Fund; Ron Speaker, manager of the Janus Flexible Bond Fund; and Sharon Pichler, co-manager of the Janus Money Market Fund.
Their departures shouldn’t hurt Janus too much, Mr. Greenwald said.
Janus could find itself in trouble if other managers start to leave, but that seems unlikely, according to industry observers.
After all, it’s not as if Janus is necessarily being unfair, said Geoff Bobroff, a mutual fund consultant in East Greenwich, R.I.
Janus generated outsize returns before the technology bubble burst in 2000, and its fund managers were rewarded with outsize compensation, he said.
As a result, Mr. Black “inherited a compensation structure that was probably from a different era and might not work in today’s world,” Mr. Bobroff said.
In 2003, Morningstar stock analyst Rachel Barnard took Janus to task for “sky-high” manager compensation.
Based on the fact that Janus paid $353 million in compensation in 2002 and that 5% of employees are on the investment team, she estimated that the average paycheck for a Janus portfolio manager was $4 million. That is “far above their peers, who make an average of $400,000” a year, she wrote in a report about the company.
At the time, Janus disagreed strongly with her findings.
As for the lawsuit, Mr. Keely has a shot to walk away a winner, but it’s a long one, said Andrew Stoltmann, a plaintiff’s attorney and partner in Stoltmann Law Offices PC in Chicago.
