Janus Capital Group has shut down its Bay Isle Financial office in Oakland, Calif., and cut nearly its entire institutional money management team, including co-founder and Chief Executive Officer Bill Schaff, leaving the future of the subsidiary hanging in the balance.

Schaff, the lead portfolio manager for its equity REIT portfolio and value funds, Steve Block, a senior analyst who oversaw a small number of value-based separate accounts, and James Murray, senior REIT analyst, are among "a handful" of Bay Isle employees that "are no longer with the firm," the company confirmed last week.

"Janus came in and cut everyone," said one source familiar with the matter. Representatives from the Denver-based fund complex showed up at Bay Isle headquarters on March 1 and told the entire staff it was "shutting down the firm, effective immediately," the source said.

The Janus reps disabled all the systems and sent the staff home with a severance package, the source said, noting that they received very little warning or explanation. Schaff, who is currently vacationing in Italy, was the only one who did not sign an agreement with Janus that would award him a severance.

"Bill Schaff was terminated for violating company policy," said Janus spokeswoman Shelley Peterson. While Peterson did not disclose the nature of the violation, it appears to relate to telephone conversations Schaff had with someone outside the firm. Although the content of these discussions are unknown, even to Janus, Schaff had been specifically warned not to call the individual for compliance reasons. Schaff did not return e-mails seeking comment.

At Bay Isle, Schaff and his team provided value and REIT investment management services to individual and institutional clients and also served as sub-advisor for a number of Janus mutual funds.

There were a few survivors from the carnage, however. Jakob Holm, previously co-manager of the $21 million Janus Aspen Series Small Company Value Portfolio and $2.7 million Janus Adviser Small Company Value Fund, will remain at Bay Isle as sole portfolio manager of the two funds, according to a recent regulatory filing with the Securities and Exchange Commission. In addition, Maciej Rygiel will stay on as a senior research analyst.

Janus downplayed the significance of the move. "Bay Isle doesn't run any of our retail mutual funds. These are intermediary-sold products," Peterson said. "We notified the handful of clients that are in the two portfolios on March 1 and did a prospectus filing at the same time."

Peterson also said that there is very little large-cap exposure at Bay Isle. Its large-cap separately managed account portfolios were small institutional accounts with less than $2 million in assets, she said. In keeping with company policy, she declined to comment on the details of the personnel moves but said that Bay Isle "will continue to operate as a registered investment advisor."

The fact that the Bay Isle entity will still exist suggests that Holm and Rygiel have agreed to relocate to Denver. Even if Bay Isle continues to operate as a phantom corporation, it is highly unlikely Holm and Rygiel would be left to rattle around the Oakland office by themselves. Meanwhile, Janus hired Patrick Brophy to replace Schaff as portfolio manager of the equity REIT portfolio, effective March 1, which Brophy will run from the Denver headquarters.

Janus inherited Bay Isle along with INTECH and a 30% stake in Perkins, Wolf, McDonnell in 2002 as part of the Berger Funds merger, the fruits of its lengthy bout with former parent Stilwell Financial. Through its acquisition of Bay Isle, Janus was able to boost its value and REIT exposure, a seemingly necessary strategic move at the time, seeing as Janus was getting hammered in the bear market for investing too heavily in growth.

But the relationship soured soon after, when Janus failed to lend support to the development of its large-cap value product and pushed for the sale of its high-net-worth unit. In July 2004, Janus set plans to sell the private-client division of Bay Isle to First Republic Bank for $8 million, a move that lifted a financial strain on Bay Isle. The high-net-worth unit failed to turn a profit, so it made sense to sell it.

But the events leading up to the split had been a major distraction for the investment team. On top of that, the mutual fund trading scandal left Bay Isle isolated from a parent focused more on protecting itself from conflicts of interest than trying to build a stronger lineup of funds. Understandably, Janus was unwilling to pump more money into the Bay Isle unit, which caused some bad blood.

While it is still unclear what exactly transpired at Bay Isle to prompt shutting down its operations, it is obvious that performance wasn't an issue. The Janus Aspen Series Small Company Value fund posted a 42% return in 2003 and an 18% return in 2004, according to fund tracker Morningstar of Chicago.

The Janus Adviser Small Company Value fund yielded a more modest 12% average annual return over the last three years, certainly nothing to shed tears over. As for its equity REIT portfolio, it sports a 23% return over the last five years, net of advisory fees, according to the Bay Isle Web site.

Despite a favorable track record, there were problems brewing for some time, and it is possible Schaff's "violation" was used as an opportunity to get Bay Isle off its balance sheet. Bay Isle has always been a very small relationship for Janus, and the product it has been specializing in, REITs, was something that Janus seemed to have little interest in, according to another source familiar with the situation. As for Janus using Bay Isle to boost its exposure to value stocks, that never really materialized, the source said.

One possible motive for pulling the plug on Bay Isle could be that Janus saw the firm as a compliance liability. Bay Isle is 1,000 miles away and Janus may not have wanted to deal with the normal types of business or compliance issues that can arise with an off-premises site. Compliance overhead is costly, particularly in the current regulatory environment. Bay Isle oversees about $500 million for Janus clients, a fraction of its $134 billion in total assets under management. Given the size of Bay Isle, the risks may have outweighed the rewards..

"I think it was a management decision based on the size versus the regulatory cost," speculated Don Cassidy, senior research analyst at Lipper. Cassidy found it curious, however, that Janus didn't try to sell the company to its money managers as opposed to shutting it down.

According to a source familiar with the matter, "This was only the final chapter of a very rocky relationship, one that Janus never cared much about - except covering their backsides after their trading scandal - and which slowly corroded the enthusiasm, esprit de corps and business model at Bay Isle."

The most likely scenario for the fate of Bay Isle is that it eventually will be folded into Janus and its brand will disappear. This much is certain. The lights are out in Oakland and nobody's home.

(c) 2005 Money Management Executive and SourceMedia, Inc. All Rights Reserved.

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