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Friday, August 8, 2008

If you ever needed some good reasons not to buy an actively managed mutual fund read on

my comments are in italics

Foreign, Energy Bets Start to Haunt Janus
Some Funds Drop
To Bottom Decile
From Being on Top

Wall Street Journal August 6, 2008; Page C15

'Has Janus jumped off the deep end -- again? In the 1990s, the Denver money manager went heavily into tech stocks. When those blew up, it suffered mightily. In recent years, the firm has clawed its way back.
But now Janus Capital Group Inc.'s impressive recent results are threatened by big energy and foreign stock bets that these days are rapidly heading south.
Janus rocketed in the 1990s under founder Tom Bailey but then tanked as its concentrated technology and telecommunications bets imploded. A 47% return at the flagship Janus Fund in 1999 was followed by three years in the red, including a 28% decline in 2002. The firm was later caught up in the market-timing scandal, in which quick trading hurt investors, and paid $226 million in 2004 to settle charges.
Since then, Janus has made a big push under its new chief executive, imported from Goldman Sachs, Gary Black. He moved to improve stock research, expand analyst staff and ditch portfolio managers who don't fit with its new approach.
Investors have rewarded such fixes with a rich stock valuation and big fund inflows. …
On July 28, J.P. Morgan's Mr. Worthington released a note applauding the great quarterly results. Perception is now changing quickly. He has since noticed performance reversals are coming "hard and fast."
Some Janus funds have declined badly this year. That includes offerings that have now fallen to the bottom decile year-to-date after being top performers in the past three and five years. "(more evidence that past performance says nothing about future performance)
One example is the $6.8 billion Janus Contrarian Fund, managed by David Decker. It's up 11% in the past three years, or eight percentage points above the Standard & Poor's 500-stock index total return. This year, however, it has declined 18%, four points behind the benchmark. That's taken it from the first to 94th percentile among large-blend peers. As is almost always the case outsized returns vs. the index are achived by taking big risks, usually with highly concentrated portfolios, this certainly was the case here:

now this is really scary:

The fund was recently almost 40% invested in foreign stocks, and had 18% invested in Indian stocks through the end of last year, the latest data available. (morningstrar lists the fund as US large blend)That has soured, as such emerging markets have seen some of the biggest declines world-wide in 2008. Indian bank ICICI Bank Ltd. is down 52% this year.
Then there is the new weakness in once-booming commodities. The fund's Forest Oil Corp. is down almost 12% in the past three months, while utilities player NRG Energy Inc. is down 24% this year.
Big funds like the Janus Research and Janus Twenty have seen stunning recent declines for similar reasons. "With energy and commodity investments beginning to roll over, Janus' best performing funds are at risk," notes Mr. Worthington.
Meanwhile, Janus's domestic growth funds were invested 31% outside the U.S., compared with just 12% by the typical U.S. fund through June.

I must say I had never seen the last statistic and was truly shocked: even when you buy an actively managed mutual fund you are likely buying into a portfolio with 12% of more in foreign stocks…so much for keeping a handle on your domestic/international asset allocation with the active funds you trying to hit a moving target and driving by looking into a rearview mirror (excuse the mixed metaphoR).

Janus's Mr. Coleman notes that more than half of its funds were recently in the top two quartiles of their Lipper peer groups on the basis of one-, three- and five-year total returns. The $12.8 billion Janus Twenty's 14% gain in the past three years is 12 points ahead of the S&P 500. It is in the top-fifth percentile or better for the past year-to-date as well as one, three and five years.
In the past three months, though, Twenty has fallen 12%. That's about in line with the benchmark but in the bottom 85th percentile of large growth funds.
More than a quarter of the fund is in oil, mineral and agricultural chemicals and operations firms. Top holding Potash Corp. of Saskatchewan is down 11% in the past three months. Brazilian miner Cia. Vale do Rio Doce is down about 20% this year. Also potentially affecting Janus Twenty and Janus Adviser Forty is star manager Scott Schoelzel's departure in the past year.
So a large blend US fund is 31% internationally invested and more than 25% in the energy sector...and what would never know the holdings of the fund in real term only quarterly in arrears.
Many of the firm's biggest funds share the same now-falling energy and international stocks. The Janus Fund, Janus Orion fund, Janus Research and Janus Twenty, for instance, all recently held energy firm Hess Corp., which is down 11% in the past three months.

And in a classic illustration of all the bad habits of investors documented in the work of behavioral economists. Investors chased performance big time buying high and selling low, using past performance as their critieria for buying and selling funds.:I

Investors are starting to notice the shift. Janus Contrarian was the firm's biggest asset gatherer in 2007,
(after it beat the s+p by 11% for 3 years)
pulling in $2.5 billion, but has seen $240 million in sales this year
,(after declining 18% ytd)
according to estimates cited by J.P. Morgan. More redemptions could eventually nick earnings, as fund consultants and brokers who only recently got comfortable with Janus again pull back.