Once the pride of the direct-sold channel, Janus mutual funds can no longer boast that they sell themselves. As part of an extreme makeover in recent months, Janus Capital Group plans to start using brokers to pitch its mutual funds, a move that represents a departure from its traditional sales strategy.
The Denver-based fund complex, synonymous with both the dizzying highs and the terrifying lows of the technology bubble, said it is seeking regulatory approval to expand its repertoire to include funds distributed through intermediaries who will charge investors an upfront sales load. Previously, Janus funds were almost entirely sold directly to the client as the formerly very insular fund shop gathered heaps of assets based on an impressive track record.
The new initiative aims to boost fund sales, which have taken a beating in the aftermath of a three-year bear market and a regulatory probe that forced the firm to pay $226 million to settle trading allegations. Total net assets for all Janus equity and fixed income funds were at $86 billion at last glance, a slice of what they were in 1999.
"When your performance is less than ideal or mediocre, you need a little bit of help through the broker-sold channel," said Kip Price, director of Global Fiduciary Review at Lipper.
In 2003, 87% of all mutual funds were sold through an intermediary or some sort of a third-party distributor, according to industry trade group Investment Company Institute.
"The reason to expand to more of the broker-sold channel [is that] brokers sell a lot of mutual funds," said Robert Lee, an analyst who covers Janus at Keefe, Bruyette & Woods. "It comes down to wanting to broaden your sources for distribution as an asset gatherer. The feeling was probably that they weren't maximizing their opportunity to raise assets." Lee noted that different distributors like to get paid in different ways, whether it is through an upfront sales commission of an A share or through C shares. "By not having options, you're taking yourself out of the running for certain sales situations," he said.
While still in the "red herring" phase, Janus said in preliminary prospectuses filed with the Securities and Exchange Commission that it expects to offer A shares and R shares, beginning Sept. 30. Class A equity fund shares will carry an estimated upfront sales commission of 5.75% with an opportunity for breakpoint discounts that could bring the front-end load as low as 2%, Janus said. The R shares will be reserved mainly for 401(k) plans and will carry an ongoing annual expense of roughly 1.45%, which includes administrative costs and a 12b-1 fee that inevitably goes to the broker.
"It's really about Janus offering appropriately priced options for investors who want to use a broker or other financial intermediary," a Janus spokesperson told Money Management Executive. "We're still very much committed to the direct no-load business. From our perspective, we're looking at how our shareholders want to do business with Janus." The new share classes are being added to the firm's existing Advisor Series lineup, which has been offered through brokers since 2000.
With its latest initiative, Janus follows the trend that has emerged in recent years of firms migrating from strictly direct-sold products to selling products through third parties and distributors. Strong Financial recently purchased by Wells Fargo, shifted toward the broker/dealer channel to gain critical mass. Oakmark Investments and Dodge & Cox switched to the fund supermarkets and have enjoyed success. "Most firms that have switched to the broker-sold channel definitely have positive flows," Price said.
The harsh lessons of the tech bubble have had a significant impact on asset managers in that they have come to the realization that they cannot pin their hopes of selling mutual funds to soaring stock prices. In the same respect, more and more investors are looking for help from professionals after seeing their retirement savings wiped out by a colossal collapse of the stock market. "The number of direct do-it-yourself investors is declining," Price said. "More investors would like help from a financial consultant or broker."
The current regulatory landscape may also play a factor, as the SEC is examining ways to improve transparency and eliminate conflicts of interest from the fee structure employed by mutual funds. For example, rule 12b-1, originally intended to defray marketing costs to help funds achieve economies of scale, has been used as an extra incentive for brokers to pitch certain funds. Although Janus denied that rule 12b-1 factored into its decision, some industry professionals believe it may have been a pre-emptive strike ahead of further SEC regulations. "Rule 12b-1 is going to get revised, making it less of an option for fund companies to use it to pay for distribution," Price said.
As for Janus, it will be tough to shake the bad reputation it has earned in recent years. In the end, it comes down to performance. "That's their challenge," Lee said. "It's going to take a lot of blocking and tackling, but if performance over time is good, eventually [the scandal] will recede into the background." The average Janus equity fund has posted a 13% return in the one-year period ended Aug. 11.