Janus - AOL:
IA ANGWIN
Staff Reporters of THE WALL STREET JOURNAL
Is AOL Time Warner's biggest cheerleader heading for the exits?
Janus Capital Corp., the Denver mutual-fund firm that has been the largest
outside stockholder of the multimedia company, quietly has been selling its shares
in the company even as some of its managers publicly have kept a rah-rah
position on the stock. Since last March, Janus has sold about 25% of its 245
million-share position in AOL, and last week, the fund firm disclosed in regulatory
filings that it had accelerated its selling during the fourth quarter, disposing of an
additional 32 million shares.
Janus, owned by Stilwell Financial Inc., long has liked AOL stock for its strong
growth potential, but that is in question now. Wednesday, AOL shares fell 5.2%,
hurt by a downgrade from a Lehman Brothers analyst, who sharply reduced her
expectations for the company's Internet businesses during the next few years.
The analyst, Holly Becker, reduced her rating on the stock to "market perform"
from "buy."
"Janus has been dumping like crazy"
during recent months, says George
Nichols, an analyst covering AOL at
research firm Morningstar Inc. While
Janus is still the biggest institutional holder of AOL, with 183 million shares, or
4% of the shares outstanding as of the most recent regulatory filings, Mr. Nichols
says the selling may continue since AOL's projected earnings growth has slowed
and Janus generally prefers rapidly growing companies.
Already, the stock has fallen out of the top 10 holdings of Janus Fund 2, which is
run by John Schreiber, a longtime AOL bull. Perhaps more noteworthy, the Janus
funds with the most AOL shares -- Blaine Rollins's Janus Fund and Scott
Schoelzel's Janus Twenty Fund -- have been suffering heavy investor defections
of late, a situation that could cause more selling pressure on AOL if it doesn't
reverse.
Janus spokeswoman Jane Ingalls says the fund firm has sold some shares of
AOL and other technology-related companies "as we've broadened the portfolios
out" to include more investments; lately, the firm has been buying
financial-services shares, health-care concerns and consumer-goods companies.
Janus's funds have suffered subpar performance during the past two years, in
large part because of heavy concentration in technology and telecom stocks such
as AOL, which has declined 46% during the past 12 months, compared with a
7% decline in the Dow Jones Industrial Average. Wednesday, AOL shares were
off $1.32 to $24.20 in 4 p.m. New York Stock Exchange composite trading.
Janus's sales may come as a surprise to some investors, in part because the
AOL bullishness of certain Janus fund skippers persisted publicly until at least
December. Before the company was formed in January 2001 by the merger of
America Online and Time Warner, Janus managers were quoted in various
media describing the planned combination as "incredible" and a "cash-flow
juggernaut." In the spring of 2001, Mr. Schreiber said the company would "enjoy
healthy pricing power" in a slowing economy and added that the stock had a
"really compelling valuation" for "a dominant" franchise.
More recently, on Dec. 5, after AOL announced that Richard Parsons would
succeed Gerald Levin as the company's CEO, Janus's Mr. Schreiber said in an
interview that the company was doing "a pretty remarkable job of managing the
downturn." He likened the stock to a "a car we want to be driving for a while."
The next day, at a year-end news conference arranged by the fund firm, Janus
Twenty manager Mr. Schoelzel bragged about the access Janus officials
regularly get to AOL's top brass, telling reporters he was bullish on the
appointment of Mr. Parsons. "I'm very confident that things are very good at
AOL/Time Warner and the firm is in good hands for a long period of time," he
said.
Mr. Schoelzel added that, unlike some skeptics -- he believed AOL would
succeed over time in increasing the amount it charged customers per month to
roughly $160, more than six times what it charges most of its Internet subscribers
today. "That's where it is going," he said. "It is not going to happen next year but
it will over our lifetime."
A look at Janus's regulatory filings however raises the question of whether Janus
will still have a position in AOL that day. Between April 30 and Oct. 31, Mr.
Schoelzel's Janus Twenty sold about six million shares of AOL, or about 8.9% of
the fund's shares. During the same period, Mr. Rollins's Janus Fund, the firm's
largest, sold 11.4 million shares, or 14% of the fund's position. As of Oct. 31,
Janus Fund and Twenty remained large shareholders in AOL, holding 69 million
and 61 million shares, respectively. (Janus releases its firmwide holdings as of
Dec. 31, but breaks down each fund's holdings only twice a year, most recently
as of Oct. 31.)
Why would Janus sound so outwardly bullish on a stock it was selling? Janus's spokeswoman points out that AOL
was still Janus's largest holding as of Dec. 31, and Messrs. Rollins and Schoelzel still held the stock as one of their
top-10 holdings as of that date, according to Janus's Web site (www.janus.com). The spokeswoman declined to
comment on Janus's trading in AOL after Dec. 31, and an AOL spokeswoman declined to comment on Janus's
actions.
But even if AOL remains a Janus favorite, the fund managers may have no choice but to sell more shares if Janus
investors continue to abandon their funds. Mr. Schoelzel's $14-billion-in-assets Twenty Fund, for example, lost a net
$2.2 billion to investor defections during the past year, according to Financial Research Corp., a Boston consulting
firm, and Mr. Rollins's $25-billion-in-assets Janus Fund lost a net $3.5 billion to redemptions.
The trend of departing investors may not turn
around soon because the company's
investment performance hasn't yet improved.
Both Janus Fund and Janus Twenty have lost
more than 25% of their value during the 12
months ended Tuesday and their returns still
rank behind about 70% of similar mutual
funds over that period, according to
Morningstar, of Chicago.
Janus's actions come at a sensitive time for
AOL. Last year, the New York media
company failed to produce the stellar results
it had promised Wall Street. The magazine,
TV and Internet divisions were hard hit by a
downturn in advertising spending, while the
merger failed to produce much new revenue
to compensate for the slowdown.
Strategically, the company also stumbled. It
failed in its bid to purchase AT&T Corp.'s
cable unit, losing out to Comcast Corp.
Because of a previously negotiated
agreement, AOL also is being forced to pay
$6.75 billion for Bertelsmann Corp.'s stake in
AOL Europe, which analysts say has a value
less than half that amount.
Particularly galling to Wall Street has been
the slowing growth of America Online, the
Internet unit that was expected to be the
growth engine of the merged company. As a
result, analysts say, numerous momentum investors have been shedding the stock. Any sales by Janus are "part of a
wholesale turnover in AOL's shareholder base from growth to value investors," says Michael Gallant, a CIBC World
Markets analyst who downgraded AOL shares last month.
In the fourth quarter, fund companies that have more value-oriented funds, including Fidelity Investments, Capital
Research & Management and Wellington Management, added to AOL holdings, said shareholder tracking service
bigdough.com (www.bigdough.com). |
