Reuteman: Janus underestimated the severity of the slowdown
<<Mea culpa. Mea culpa. Mea maxima culpa.
Those Latin verses from altar boy days of yore kept popping into my head the other day as I read through the "What Happened?" section of the Summer 2001 Janus Report. Newly chastened portfolio managers at the formerly high-flying Denver fund family talk rather frankly about the market downturn, how it caught them by surprise and cost them and their customers tens of millions of dollars.
"Perspective. I've been around a long time, and there's no doubt I have my share of it," said Janus founder Tom Bailey. "But I can always get more, and the last year and a half has definitely provided just that. When the market basically goes straight up -- as it had for about 10 years -- perspective is difficult to maintain. The reality is that only when market euphoria turns to market meltdown do you get the kind of kick-in-the-pants that you absolutely need."
Helen Young Hayes, portfolio manager of Janus Worldwide and Janus Overseas Fund, concludes, "In hindsight, we underestimated the severity of the economic slowdown and the scope of the stock market's retreat. We were aware that the valuations of many technology-related companies were disconnected from business fundamentals and that there was a growing risk of substantial stock price declines for weak players, so we avoided these companies.
"We didn't however expect an economic downturn of the breadth, magnitude and severity we've seen. This punished the leaders along with the laggards."
Young Hayes -- and most Janus managers -- fared much better in the second quarter just ended. Janus Worldwide, the 13th largest U.S. mutual fund, gained 4.1 percent for the quarter in total returns, but is still down 13.8 percent year-to-date. The five-year average is 89 percent. Her Overseas fund: up 1.6 percent on the quarter but still down 15.7 percent in 2001. The fund's five-year return is up 13.6 percent.
Global Technology Fund manager Mike Lu admits he and his peers at Janus felt insulated from steep market drops because they mostly shunned pure dot-coms, in favor of "enabling companies, firms that produce the hardware, software and services needed as opposed to merely wanted by the corporate marketplace."
"We began taking money off the table as telecom service providers started to reduce capital spending," Lu said. "But in hindsight, we should have been more aggressive. Our focus on enabling companies and essential products and services isn't wrong. In fact, in a period where businesses are buying on an as-needed basis only, our emphasis is even more important. But the dramatic change in the marketplace took us more or less by surprise.
"The stock prices of many of the companies we hold -- Sun Microsystems, Applied Materials, Nokia and many others -- have been hit hard," Lu conceded. "But instead of cutting back on R&D or efforts to introduce new products, these companies have maintained or stepped them up. That's important for long-term gains in competitiveness and market share, and it's why they continue to play an important part in our portfolios."
For the second quarter, Janus Global Tech is up 3.6 percent, according to Lipper Analytical, but still down 28 percent on the year.
"We are dealing in a very demanding period, but we are not changing our approach," agreed Warren Lammert, manager of the Janus Mercury Fund.
"The market will turn up again eventually . . . While attempting to limit our downside by balancing the degree of economic exposure in our portfolios, we believe we have positioned ourselves to participate in the next up cycle."
The Mercury Fund was up 9.4 percent in 2Q, down 17.3 percent year-to-date and still up 138 percent over the past five years.
Jim Goff, manager of the Janus Enterprise Fund, sees the market caught up in economic forces that paralleled "the perfect storm."
"Unlike previous downturns, this one didn't involve a gradual braking," Goff said. "Instead, the economy moved almost overnight from an annual growth rate approaching 6 percent to a less than 2 percent pace. We didn't foresee that. Granted, no one did. But the sharpness of the slowdown took a toll on the companies we own. And on our results."
The Enterprise Fund was up 8.4 percent last quarter, still down 27 pecent for 2001.
Blaine Rollins, who manages the Janus Fund -- eighth largest in the country -- expressed unwavering confidence in the Internet and the E-commerce revolution.
"We believed -- and still believe -- that it's in our shareholders' best interest to hold the companies with the best business models and the highest growth and profit potential," Rollins said. "Many of these companies aren't growing as fast today as we once expected. That's clearly disappointing, and we've experienced some losses. But if we had avoided these investments altogether, the disappointments and lost opportunities would have been greater."
The Janus Fund, still up 103 percent over 5 years, is down 12.3 percent in 2001 after finishing 2Q up 7 percent.
An analysis of second-quarter mutual fund performance in this Sunday's New York Times is headlined "Signs of a New Bull, or a Rest for the Bear?"
"The second quarter brought a bit of a respite from the gloom," it reads. "Many investors may now be asking this question: Is this the beginning of good times or a trap before the market revisits the lows of March?"
Janus stock funds all finished in positive territory this quarter. The company's assets under management grew 6.4 percent to $210.6 billion in three months. Indeed, the average U.S. stock fund gained 6.8 percent in the quarter, compared with a 5.9 percent gain in the Standard & Poor's 500-stock index. But you don't sense much joy yet listening to the Janus managers.
As Janus research analyst Jean Barnard summed things up: "Obviously you question your thesis when the market suggests you're wrong.">>
July 2001
Rob Reuteman can be reached by phone at (303) 892-5177 or by e-mail at reutemanr@RockyMountainNews.com. |
