Janus: Tiptoeing Out of Tech


Most investors know that mutual-fund shop Janus has long had a fondness for technology stocks. So it may not be surprising that many of its high-octane stock funds, which raced up the charts in the late 1990s, started running out of gas in 2000 -- when the tech-sector carnage began.

The news hasn't improved much since then. Still, the performance of many of Janus' former star funds has been startlingly poor over the past year -- down 25% or more even as the Standard & Poor's 500-stock index eked out a 1% gain.

TOO SLOW, OR STUCK. A look at the company's public filings with the Securities & Exchange Commission shows why: The Denver-based money manager continued to maintain a high concentration in a select group of poorly performing media and technology stocks through most or all of 2001. As of its last reporting date, Dec. 31, 2001, Janus still held massive positions in the likes of AOL Time Warner (AOL), Comcast (CMCSK), and Nokia (NOK) -- all of which have plummeted over the past year.

Janus Fund (JANSX), down 26% in 2001, had 26% of its assets in tech stocks as of last October, according to Morningstar. Janus Twenty (JAVLX), off 29% in 2001, was 30% tech stocks. And Janus Mercury (JAMRX), down 30% in 2001, had 25% of its assets in tech stocks as of late 2001. Such major tech positions indicate that Janus was either slow to react to the slide or too tied up in the stocks to move quickly.

What's going on? Through a spokesman, Janus says its managers no longer discuss specific holdings and that each portfolio manager holds independent views on stocks. But other fund analysts say Janus has been quietly changing its tune on tech stocks of late -- and now it appears to be shifting allocations out of some of the stocks it has long favored, betting instead on nontech blue chips such as Citigroup (C), ExxonMobil (XOM), and Pfizer (PFE).

"PAID THE PRICE." Based on his discussions with Janus fund managers, Morningstar analyst Brian Portnoy guesses that individual funds' tech-stock allocations have dropped since their holdings were last made public. "There's no question that Janus has been concentrated in certain securities," says Robert Adler, whose company, AMG Data Services, tracks the flow of mutual-fund assets. "They've paid the price for that, and now they're selling many of those investments." His research shows that Janus funds had a net outflow of $7.7 billion in 2001 and an additional $1.5 billion so far this year.

Much of those assets originally poured in during 1998 and 1999, when Janus Capital, owned by Stilwell Financial, was one of the mutual-fund world's star outfits. As tech stocks soared in 1999, Janus Enterprise (JAENX) skyrocketed 122%, Janus Mercury climbed 96%, and Janus Twenty increased 65%. Meanwhile, tech concentrations in those funds rose above 40% of assets.

When the technology bubble burst in March, 2000, the Janus funds popped as well. Managers whittled back on their stakes, but not enough to protect from losses. Janus Twenty lost 32% in 2000, 29% in 2001, and is down 6% so far this year, while Janus Mercury fell 23% in 2000, 30% last year, and 5% in 2002 to date.

CLOSED-MOUTH POLICY. Janus steadfastly declines to discuss its investing strategies going forward. But judging by its filings with the Securities & Exchange Commission, the fund company appears to be quietly unwinding many of those massive tech and media stakes and diversifying into other sectors. That doesn't mean Janus will dump all of its shares in, say, AOL and shy away from further investing in tech and entertainment giants. But it seems to be doing what it can to reduce some of its large positions without harming share values.

Janus' changing AOL position may be the best example of its new strategy. Long before federal approval of the $110 billion merger between AOL and Time Warner in January, 2001, Janus was a huge fan of both companies and the proposed merger. Its fund managers never shied away from singing the praises of the AOL Time Warner merger, talking about the combo's growth strategy and praising its management.

Now, Janus won't say a word about individual stocks -- even AOL. It's a fairly new policy, a company spokesman explains. Yet amid the silence, Janus appears to be quietly selling off part of its big stake in AOL (Janus is AOL's single largest investor). The combined AOL holdings of all Janus funds totaled 183 million shares -- 4.3% of the company -- valued at about $5 billion at the start of 2002. That's down more than 25% from the 244 million AOL shares, worth $10 billion, it held in January, 2001.

"STRATEGIC CHANGES." Since the merger, AOL's stock has dropped to around $24 a share, from $50. AOL declined to comment for this story, but analysts say Janus' sell-off has created some turmoil. "There is no question that much of the pressure on AOL has come from large instituional investors selling the stock," says Chris Dixon, analyst at UBS Warburg.

"There are definitely strategic changes going on at Janus. What the fund managers are doing with AOL is an indication of that," says Morningstar's Portnoy. "But I also think that, to a large extent, Janus is stuck with most of its AOL investment for now. When you have such a massive position, the fund managers would be hard-pressed to really move out of it without sinking their own ship, too."

The same pattern of behind-the-scenes selling shows up with several other Janus investments. After finding itself overexposed during the tech and advertising slump of 2001, Janus has been unloading big positions in Nokia, Comcast, and EMC as their stocks have declined in value. At the beginning of 2001, Janus held 266 million Nokia shares, valued at $11.6 billion, according to securities filings. At last count, it held 164 million shares, valued at $4 billion. The stock has fallen to around $21 recently, from about $45 a share. Nokia declined to comment.

PULLING BACK. Janus' investment in Comcast hasn't contracted as much. But the fund company began to loosen its grip on the cable company early last year. At the start of 2001, Janus owned 101 million shares of Comcast's class A nonvoting stock valued at $4.2 billion -- making Janus the largest investor, with more than 10% of the stock. Lately, however, it has been pulling back on Comcast. At the start of this year, Janus held 92.4 million nonvoting shares, valued at $3.3 billion. Comcast's stock has fallen to $31, from about $40 a share at the start of 2001. Comcast had no comment.

The pullback has been more dramatic with EMC, which Janus has unloaded completely. A year ago, it held nearly 65 million shares of the data-storage king, valued at $1.9 billion. It apparently sold all of them, as the stock doesn't appear on Janus' Dec. 31 companywide list of assets. Janus declined to comment on specific holdings. EMC has tumbled from about $80 a share at the beginning of last year to $12 in recent trading.

As a strategy going forward, Janus' move to lessen exposure to big tech and media names could be a wise one -- especially with the tech and advertising segments still sputtering. Janus may emerge from the recession with a broader investment focus and one that turns a more discriminating eye on big tech names.

That could be good news for investors. "It has not been a pretty picture for Janus," says Sheldon Jacobs, editor of the No-Load Fund Investor. "But I personally would not cross them off. Their management is quite good, and they've benefited more than most fund companies when the economy is rolling."

FOOD FOR THOUGHT. Nonetheless, Janus may still have more work to do when it comes to unwinding its large tech and media holdings. That's worth noting for investors who own shares in the companies Janus may be quietly selling, since sales by such a large institutional investor could potentially mean more downside for already battered names.

Investors who own Janus funds -- and may be thinking of them as a way to play a tech recovery -- should also take note, since more-diversified funds may not bounce as high when tech stocks recover as they have in past tech rallies. For example, Janus Enterprise was down to only 7% exposure to tech at Morningstar's last check.

In recent letters and statements to its investors, Janus has reminded them that its funds have always come back after bear markets and that with the improving economy, prospects are much brighter for all its equity funds. But there's no mention that it has been unwinding many of its bigger investments in tech and media, and reducing its exposure to tech stocks in search of better performance. For investors who remain with Janus, that improvement can't come a day too soon. By David Shook in New York


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