In a move that further reflects the changing face of Janus Capital, the Denver firm recently increased its stake in its quantitative equities division, Intech.
In a recent conference call, Janus CEO Gary Black said the company has increased its ownership in the institutional manager by 5% at a cost of $90 million. Janus now owns 83% of Intech. The overall stake is worth $1.8 billion and represents a whopping 40% of Janus' $4.4 billion market capitalization.
Janus' year-end 2005 results, however, offer a more accurate estimation of Intech's worth. As a company, Janus reported net fourth-quarter inflows of $4.3 billion, while Intech provided $5.2 billion of net new flows. Absent the Palm Beach Gardens, Fla.-based group, Janus reported outflows of $0.9 billion for the quarter.
Although Janus is becoming more aggressive in the institutional space, said Dan McNeela, associate director of mutual fund analysis at Morningstar in Chicago, the stake increase is also a matter of common sense.
"Janus recognizes that the Intech strategy is working well, and they've confirmed that by buying a larger piece of the firm," McNeela said.
"You would want to own a business that's growing and is capable of charging more fees into the future," he said, but expressed doubt over the prospect that Janus might entirely absorb Intech in the near future.
Under any other circumstances, however, the coupling of Janus and Intech would seem as odd as that of Oscar Madison and Felix Unger.
During the bull market of the late 1990s, Janus made a name for itself by taking greater risks for the potential of greater reward and then trumpeting its successes wherever it could be heard. Retail investors listened, and at the height of the tech surge in March 2000, Janus boasted $325 billion under management.
Then came the tech wreck, and by October of 2002 its assets under management had plunged to $129 billion. And in October 2003, Janus' house was further sullied by New York Attorney General Eliot Spitzer's investigation. After submitting to a $226 million settlement for allowing market timing in its funds, Janus lost another $20.6 billion in 2004.
Last year was Janus' first year to finish with positive inflows since 2000, a development its executives called "a big step forward." Assets under management stood at $142.6 billion at the end of the fourth quarter of 2005 and about 70% of the company's primary retail funds were in the top half of their categories on a one-year returns basis, according to Lipper of New York. On a three-year basis, 68% were in the top half of their categories.
"We always expected flows to follow strong fund performance, and it's good to see that happening in a wide range of our products," Black said.
The bow-tied mathematicians at Intech, meanwhile, have been quietly building themselves into the institutional segment's fastest-growing portfolio manager. Since the fourth quarter of 2002, Intech's assets under management have increased from a modest $7 billion to nearly $45 billion at the close of 2005. Last year was particularly good to the 18-year-old firm, as it posted a 73% surge in assets under management.
Late last month, Intech, or Enhanced Investment Technologies, added a global core equity product to its lineup of large-cap equity portfolios in the growth, core, value and index styles. The global core equity product targets institutional investors in the U.K., Europe and Asia and represents Intech's first non-U.S. product. Funded with seed capital on Dec. 22, 2004, as of Dec. 31, 2005, it had produced gross returns of 15.74%, a return that's 4.64 percentage points better than its MSCI World Index benchmark. It owns 768 securities and its target return is 2.5 to 3 percentage points above the MSCI.
"We've added this capability after two years of research that showed Intech's long-established investment process for U.S. equities is equally applicable to non-U.S. markets," said Intech Chief Investment Officer Dr. Robert Fernholz, a former Princeton University professor who founded the company in 1987.
Plans are also in the works for another international strategy, ex-U.S., in the next six months. Black hinted in his conference call that additional products are in the works, too, but declined to elaborate. Black did say, however, that he expects Intech's asset gathering surge to cool in 2006. He said Intech's recent success in attracting investors is a product of turnover in growth managers, either due to poor performance or the scandal.
Black also pointed to a rapid rise in the number of institutional clients that are seeking more active portfolio management at the expense of higher fees.
"We haven't seen [a slowdown] in our numbers yet, but we're just anticipating that as we get into the second half of 2006, that the net sales growth is not going to keep going higher. It will slow down," Black said.
But Morningstar's McNeela sees another reason for Intech's ascension. While there are plenty of quantitative equities managers that employ strict mathematical processes, he said, Intech's investment process is unique in that instead of statistically analyzing particular stocks, it examines how the stocks work together in a portfolio.
"That might be part of Intech's attraction," he said.
Intech's goal is to gain "all-weather appeal," McNeela added, which might also drive popularity in today's equity markets.
Specifically, Intech begins by identifying stocks with high volatility and low correlation to each other, company officials said. Within specific risk constraints, Intech mathematicians identify target weightings of those stocks in an attempt to take advantage of the natural volatility of stock price movement. The result, they said, is a portfolio of stocks that seeks to produce an overall return greater than the benchmark index, but with less downside risk. The structured process, based on a 1982 paper by Fernholz titled "Stochastic Portfolio Theory and Stock Market Equilibrium," also results in virtually no style drift, they said.
The process has such a quantitative focus, according to an anecdote within Janus, that Intech researchers don't refer to Janus funds by their given names, but by obscure mathematic values, instead.
Either way, Intech is playing a greater role in the daily routine at Janus. Intech executives now sit on the management committee at Janus, and the two firms are conducting more co-branding exercises as Janus makes its institutional push. The companies also share a wholesaling force.
"Bringing Intech and Janus closer together is a big initiative," Black said, adding in his broader remarks that Janus has no merger and acquisition plans on the table.
Intech's sole retail offering, meanwhile, the Janus Risk-Managed Stock Fund, celebrates its third anniversary later this month. Its $404 million worth of assets is managed entirely by Intech, and since its inception, it's returned 22.05%.
But right now, Janus officials said, there are no plans to more fully integrate Intech's investment strategy with its retail business, a decision that might be more of a reflection of investors' reluctance to give their money over entirely to the cold world of quadratic functions that is part and parcel of Intech's process.
"Retail folks still like the stock pickers, people who have a story behind their decision-making," McNeela said.
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