BUSINESSWEEK ONLINE : JANUARY 24, 2000 ISSUE
SPECIAL REPORT -- MUTUAL FUNDS How Janus Made Mincemeat of Its Rivals Most years, the mutual-fund performance derby is a game of inches. Fund companies gain bragging rights--and attract investors' dollars--if they manage to beat the competition by just a percentage point or two. But 1999 was no ordinary year for the markets, which saw widely disparate returns between the top-performing stocks and the laggards. And no fund company took advantage of the trend better than Janus Funds. The Denver company annihilated the competition by making huge bets on some of the stock market's biggest gainers. Last year, Janus' 19 U.S. diversified equity funds produced a 76.5% average return, according to Morningstar Inc. That was nearly twice as much as the 39.9% average return of the second-best fund complex, the AIM Family of Funds. (table). And it crushed the funds that are tied to the Standard & Poor's 500-stock index, which was up 21%. Seven Janus funds earned ''A'' ratings, according to BUSINESS WEEK's Scoreboard (page 86). ''We were in the right companies in the right industries at the right time,'' says James Craig, chief investment officer at Janus. Instead of focusing on strict valuation criteria, Craig began three years ago placing big bets on leading companies in diverse markets, with much less concern for price. Most of Janus' closely knit stable of 21 fund managers followed suit, buying many of the same big-name stocks, including Cisco Systems, Microsoft, Sun Microsystems, and General Electric. While most of Janus' returns came from large tech companies, they were also boosted by a handful of Internet stocks, such as America Online Inc. and eBay Inc., along with winners in retail, finance, and health care. GROWTH SPECIALIST. Its strong results are quickly moving Janus up the ranks of fund industry leaders. At a time when new cash flowing into mutual funds is slowing industrywide, assets under management at Janus last year soared 130%, to $249 billion, making Janus the fifth-largest fund manager. That's up from being 12th-largest just three years ago, when it had assets of $68 billion. New cash flowing into Janus last year outstripped all but Vanguard Group, whose index funds remain popular with many investors. For a long time, Janus has been a specialist in growth stocks, the hottest part of the market for much of the 1990s decade. But Craig says that his decision to focus only on stocks that are market leaders was triggered by his recognition of a ''dynamic shift in the economy.'' With interest rates at sustained low levels, investors would pay up for large, industry-leading stocks with strong earnings growth even if they had high price-earnings ratios, because they were a better value than bonds, he reasoned. Instead of p-e ratios, Janus managers now look closely at a company's return on invested capital as a key indicator of future growth. And the bigger the growth prospects, the better the investment. ''We like winners in great industries. We don't like cheap companies in great industries,'' says Craig. The potential downside to Janus' approach is that it is narrowly focused, according to Christine Benz, a Morningstar analyst who tracks Janus. The Janus Fund, for example, has 40% of its assets in its top 10 stocks, and owns only some 60 stocks in all. Fidelity Investments' Magellan, by contrast, has 24% of its assets in its top 10 stocks and owns 341 stocks in all. Janus funds also carry unusual risk because they have ''sky-high'' p-e ratios, making them vulnerable if a sudden market shift punishes high p-e stocks, Benz says. Craig, who recently stepped down as manager of the Janus Fund, is unfazed. He's worried about the possibility of rising interest rates causing a market downturn in the first half of 2000, and he's advising Janus managers to keep as much as 10% of their funds in cash. In recent months, he reduced the fund's technology stake to about 24%, down from 29%, and boosted stakes in nontech names including McDonald's Corp. and Bank of New York. ''MOST DYNAMIC.'' Craig believes the ''adjustment'' in the market in the first half will set the stage for more gains ahead--and he counsels his team to pick up good values during downturns. The best investments will continue to be ''the best companies in the most dynamic industries,'' he says. For example, about a dozen Janus funds together own 7.75% of Time Warner Inc., and the Jan. 10 runup in that stock in the wake of the proposed merger with AOL added some $2 billion in net assets. Craig has certainly been right with his market wisdom so far. But he may want to consider what happened the last time one fund complex made mincemeat of the competition using a similar investment approach. In 1993, Fidelity's big growth funds on average doubled the return of the Standard & Poor's 500-stock index, due in large part to concentrated bets on key sectors, including high technology, energy, and foreign stocks. Eighteen months later, Fidelity's swing-for-the-fences approach backfired when the targeted sectors went south. Janus has the magic touch at the moment. But in the fund business, it's never easy for anyone to stay on top. By Geoffrey Smith in Boston _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP					RELATED ITEMS Mutual Funds: What's Wrong CHART: Flows to Mutual Funds Slow Down CHART: Assets Have Exploded, But Expenses Remain High CHART: Taxes Take a Toll on Returns How Janus Made Mincemeat of Its Rivals TABLE: Janus Tops the Charts INTERACT E-Mail to Business Week Online

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