Janus Capital has had to withstand some face slapping from investors while it attempts to cure its ailing business, but it may soon run out of available cheek space as the hits keep coming.
The Denver-based fund shop, which has endured a facelift of senior management, a massive settlement with regulators and extremely poor performance over the course of the bear market, was dealt another blow late last month when one of its investors alerted the firm it plans to redeem $5 billion by year's end. The unnamed investor, which is widely suspected to be a pension plan, notified Janus shortly after the firm's July 22, second-quarter earnings call and said that its board of governors will vote on the withdrawal in early August.
Some experts think this move signals a new wave of redemptions, and not just at Janus. "I think there's going to be a continued run on a number of mutual fund families, as some of the internal news at those funds is a lot worse than what we're hearing now in the public. The problems run a lot deeper than is being acknowledged," said Randy Herz, a 401(k) adviser and senior vice president at Herz Financial in Firmington, Conn., and Boca Raton, Fla. "I think you will see more institutional investors and more big money start to crack down and move their money."
As for Janus, the news of the withdrawal comes on the heels of a less-than-rosy second-quarter conference call in which the firm said earnings would be down 5 cents to 6 cents a share for the second half of the year due to fee reductions agreed to in settlements and lower asset levels. However, these predictions were made on the assumption that assets would remain at the $135 billion mark. The $5 billion expected to leave Janus represents 3.7% of its assets and eclipses the $3.5 billion in redemptions the firm suffered year-to-date through the end of June, according to Financial Research Corp.
"We're disappointed when any client comes to this conclusion, especially given our improved performance and the steps we've taken to put our fund holders first," said Steve Scheid, Janus' chief executive, in a statement. Janus declined to name the investor.
While the investor may remain unknown, some of Janus' problems are not. Scott A. Wertheim, vice president at New York brokerage Wall Street Access, in charge of the firm's retirement plan division, said the combination of poor fund performance, a new management team and a high portfolio manager turnover are all factors that can drive investors away. "All the stars of Janus are virtually gone," he said. Wertheim also noted that the firm recently replaced Laurence Chang as manager of one of its most well-known funds, the Janus Worldwide fund, after only a short stint at the helm. Jason Yee took over for Chang, who succeeded Helen Young Hayes in early 2003, when she unexpectedly retired.
However, the scandal alone is generally not enough to fuel a move. Typically, performance needs to be off, or there needs to be some other significant problem. "None of our clients has made changes from plan providers, and I would imagine that most people in the industry have gone through and evaluated what they're going to do by now," Wertheim said. "The mass exodus out of different providers has come to a slowdown period at this point." Wertheim said he expected those who were going to make a move would have done so by June 30.
Others are not so sure. "The timing may be more associated with what they know about internally at the firms, and it is probably a sign of more news to come out of those fund families," said Herz, who consults with medium and large employers on 401(k) platforms. "This whole thing is not done. There is a lot more bad stuff that's going on."
Several executives at companies Herz advises are uncomfortable with having scandal-tainted funds on their platform. "We're meeting with them and they're saying, Do we really want to have Janus in here?'" He said as the news has made it more to the mainstream, and with average investors becoming educated on malfeasance, plan sponsors are less comfortable exposing employees to some of these shops.
Bruce Fenton's opinion lies somewhere between that of Herz' and Wertheim's. Fenton, president of Atlantic Financial, an independent investment firm with corporate and individual clients in Westboro, Mass., anticipates more institutional clients moving their money in the coming months, but not to the same degree as in the early stages of the scandal.
"It's a complex world for these fiduciaries, and it's a very serious matter for them," Fenton said. "I think some of them may have rushed to judgment because they moved out of one fund family into another that had exactly the same situation that they moved out of."
Fenton said fiduciaries are facing all sorts of new issues and questions concerning plan policy. "If they're moving from one family for a certain reason, is that going to be their policy forever? What happens if the next family they move to has exactly the same problems? Are they going to move again and again? Every time they move it costs money and they have to wonder whether they are being prudent." Fenton also said fiduciaries are concerned about liability, especially if they vacate one shop only to move into another where it is later revealed there are more serious problems. If they then stay put, does that open them up to liability?