Janus Capital confirmed last week that its trustees have approved a new compensation plan that ties portfolio manager pay more closely to the performance of its mutual funds, advancing the interests of its shareholders and providing further proof of its nascent recovery.
The move follows through on a pledge made by Janus' new CIO Gary Black that the company would place greater emphasis on investor returns and less on revenue and assets under management. Known for having some of the highest-paid portfolio managers in the fund business, Denver-based Janus was vilified when pay levels remained high despite poor performance at its funds.
Ironing out the contracts for all of its portfolio managers ahead of their April expiration date "sends a strong signal to our client base that Janus is here for the long term and that the investment team is in place," said Janus Chairman and Chief Executive Steve Scheid, on its fourth-quarter conference call. The contracts, retroactive to Jan. 1, are open-ended by design and thus binding for as long as the portfolio managers remain with the firm, most likely to prevent losing managers to free agency.
The new Mutual Fund Share Investment Plan links compensation directly to one-year and three-year fund performance, with greater emphasis on three-year results. There is also a factor in the contracts for consistency in rankings among peers. A significant portion of managers' incentive-based pay will be reinvested equally in Janus stock and mutual funds. The remaining portion will be awarded through deferred cash payments.
The company is also now requiring fund skippers to maintain a certain level of their investments within Janus funds and barring them from owning the individual securities in those portfolios. "The portfolio managers should share in either the glory or the pain as they deliver for our shareholders," Black told analysts on the conference call. In keeping with that philosophy, Scott Schuzel, manager of the $10 billion Janus Twenty fund, has 98% of his personal wealth invested in the fund and prior to the contract was the fund's largest shareholder.
The new portfolio manager agreements are the latest in a series of steps Janus has taken to restore investor confidence in the aftermath of a pervasive fund trading scandal that exacerbated the three-year bear market. The company has strengthened its management team through several key hires and instituted stricter governance measures as a result of its $226 million settlement with state and federal regulators.
Since the scandal broke in September 2003, Janus has lost nearly $14 billion in long-term assets under management along with a number of its top executives, including former CEO Mark Whiston and former CIO Helen Young Hayes.
With the help of a robust rally in the stock market the past few years and a more cautious growth philosophy, fund performance has continued to improve broadly. Three-quarters of its equity funds are in the top two quartiles based on total returns on both a one- and three-year basis, compared to 38% of the funds on a three-year basis at the end of 2003.
Janus still has a long way to go in generating new fund sales and slowing redemptions, as evidenced by the $30 billion outflows from its non-Intech funds in 2004. However, Janus funds did achieve a $6 billion improvement in net sales in the second half of the year. Overall, the company suffered $21 billion in outflows. In 2005, the company plans to continue stabilizing net flows and increasing revenue.
"Much of that depends on whether the market turns in their favor," said Don Cassidy, senior fund analyst at Lipper. The last five years have been dominated by value investing, and given the rarity of value outperforming growth for such an extended period of time, Janus is positioning itself for a growth rebound. However, with interest rates expected to rise and investors still feeling snake-bitten from the bear market and the trading scandals, the wind may be in their face, Cassidy said.
Janus is also looking to continue building sales in its fastest-growing business, the institutional business, which represents 25% of its assets. A big part of this new sales strategy is penetrating the third-party distribution channel and servicing more sophisticated investors. That effort will include redesigning marketing material to appeal to institutions, launching an institutionally oriented Web site and aligning its sales force to reflect its services for institutional clients, the company said.
To strengthen its brand, Janus has earmarked $23 million for advertising. Two new television ads began airing in January, and it plans to run future TV spots during high-profile sporting events, likely the NCAA men's basketball tournament. Scheid said he would eventually like to increase that budget twofold but is comfortable with that number for the time being. He expects trade publication advertising and networking to be sufficient to support its institutional push.
Another important step Janus has taken under Black's leadership is modifying risk. Rather than putting a stock that management likes in two-thirds of its funds, for example, Janus is more concerned with putting it in the right funds. The company plans to hire an executive to serve as a risk officer to monitor the funds and ensure they're staying the course. In terms of culture, Black stressed Janus' "team" concept of portfolio management, noting the long tenures of its managers and analysts and how they mesh well together. He intends to continue promoting from within the ranks to foster the team mentality. Janus will also continue to leverage its strong research capabilities to win new business.