The situation, which is detailed in Morningstar's ongoing scandal coverage
, is that Spitzer has presented internal Janus company e-mails clearly indicating that some of its executives sold a hedge fund the right to "market-time" some of its funds to the detriment of its long-term shareholders. I strongly encourage investors to read the complaint
. In my view, here are its most germane observations: Janus had explicitly acknowledged in its fund prospectuses that market-timing worked to the detriment of its portfolio managers and shareholders. Some Janus executives allowed timing because they thought Janus' own profitability more important. This was over the objections of others at Janus who opposed selling such timing capacity but ultimately deferred to key sales executives. In short, Janus placed its own monetary interests ahead of the investors. The e-mails presented in the complaint strongly suggest that salespeople at the firm have had both the capacity and willingness to steer the company against its fiduciary duties in hopes of making a fast buck and that key investment personnel were either out of the loop or impotent in stopping it. Janus has not disputed the allegations and has offered full restitution to harmed shareholders.
What has soured our stomachs with Janus in particular is that the firm already had two major strikes against it: poor bear-market performance and noteworthy management departures. This ethical breach is the third strike against it. Three strikes, you're out.
Bitten by the Bear
The firm was founded in the 1970s by an investor, Tom Bailey, and this tight-knit group had more than its fair share of talent for a while, including Tom Marsico, Jim Craig, and Helen Young Hayes. For years, Janus was an extraordinary investment boutique.
And then, sometime in the mid-to-late 1990s, things changed. It didn't happen at the peak of the bubble, however. What's distinctive about Janus' performance record wasn't its results in 1999 (its numbers were good that year, but so were many others') but its results in 1998. Yet in that stellar performance across the firm's most prominent offerings lay the seeds of the firm's decline. Portfolio managers collectively owned many of the same stocks, and Janus accelerated on its path toward dangerously large stock and sector bets. Huge portfolio overlap that created impossible-to-exit firm-wide positions in the likes of AOL and Nokia was aggravated by large asset inflows.
On top of that, there was some flat-out awful stock-picking. The firm's research effort focused on a relatively narrow list of companies, and a number of them ended up being duds. Further, it was disturbing to read research director Jim Goff's musing in The New York Times
that when tech and telecom stocks failed, the group didn't have many other good ideas to turn to. It is only more recently that the firm has broadened its coverage and enlarged its analyst staff. Finally, despite Janus' claims about investing with the best and brightest companies, don't forget that it was Enron's largest shareholder and one of its biggest cheerleaders. (See this list
of stock picks from ex-Janus Mercury manager Warren Lammert.) In all, Janus destroyed an astounding amount of shareholder capital during the bear market. Icarus, not Janus, seems the appropriate mythological image here.
Janus' effort to retool its process and buff its tarnished image hasn't gone smoothly. The appointment of Mark Whiston as Janus' new CEO hardly raised our confidence in this ship getting righted. Janus needed a strong hand to address its problems, including taking a hard look at whether its top investment personnel were the right people for the job. Seeing how Whiston's appointment was widely supported by the insular group of Janus executives for whom an outsider was an unacceptable alternative, we've not been confident that he could make some of the necessary tough decisions. Furthermore, neither publicly nor in private conversations have we heard a satisfying account of what went wrong with many of its portfolios and how it's responding. Without such an account, it's unclear whether the firm is currently taking the right steps to fix what was broken.
Even though no heads rolled as a result of the funds' travails, personnel changes came anyway. One of the quiet ironies of the Janus saga is that some of its top people threatened to jump ship if their firm was not granted its corporate independence, but for reasons not altogether clear, it was only after Janus Capital Group
got off the ground that people bolted. In short order, Warren Lammert, Helen Young Hayes, and Sandy Rufenacht--three of its brightest names--quit in 2003.
The departure of Hayes is most disturbing. In addition to her being the firm's most prominent manager, she had recently been appointed director of investments (basically, the chief investment officer). When the famously private Hayes decided to pack it in, she left in a lurch those Janus Worldwide
and Janus Overseas
shareholders who held on through terrible losses because of her good reputation. And she left Janus without a CIO, something it has desperately needed for a long while. The fact that this current scandal will make hiring a topnotch CIO even more difficult is yet another negative consequence of the scandal.
A Sad Day in Denver
The reason I've gone into such detail on Janus' first two strikes--its performance and management issues--is that this family was already on very thin ice before the scandal broke.
And now with the disturbing details of the Spitzer documentation in combination with Janus' uninspiring reaction to the crisis
, we'd recommend that investors avoid Janus' in-house funds. (This does not affect their star ratings, which are a purely quantitative measure of risk and return.) What's more, given the many fine, trustworthy choices that beckon elsewhere, we also suggest that shareholders in Janus' in-house funds consider moving their investments elsewhere, with appropriate attention given to tax, sales charge, and other pertinent considerations. We're currently offering a hold recommendation on the funds run by Robert Perkins-- Janus Mid Cap Value
and Janus Small Value
--as well as the other subadvised funds that just recently joined the Janus family. Because it's still sold by Janus, we have removed Janus Mid Value from our Analyst Picks
To close, there remain a number of good and honest investors at Janus--David Corkins and Blaine Rollins among them--but their individual virtues will for some time be overshadowed by the organization's misdeeds. Janus' top brass has often told us that when the management integrity of a company in which they own stock is called into serious question, they will walk away. We have long lauded this approach and see no reason not to apply the same principle to this situation.
When Janus cleans out the bad apples and pursues a myriad of other remedies to both pay back shareholders and rebuild a culture of integrity, we will consider recommending certain Janus funds once again.