Dec 2008-Jan 2009


Janus Capital International’s CEO, Erich Gerth, sees a glimmer of hope in his firm’s US equities speciality. But more important than stock market performance, he also feels client communications will distinguish asset managers in the coming year... In Roman mythology Janus is the god most associated with the New Year. Erich Gerth, chief executive of Janus Capital International, is in his office looking ahead to 2009. For equity specialists, it’s hard to convince anyone at the moment that there are any reasons to get excited in the near future, but Gerth sees a few glimmers of hope. Gerth is responsible for all that the parent company, Janus Capital Group, does outside of its home market in the US, and lately it is patterns in US equity investment that have encouraged him about next year.

He notes: “Since Janus started the international business in 1998 we have seen positive net flows year on year, though the third quarter has been very tough. However, we are still seeing professional investors making long-term asset allocations to equities.

“In particular, there’s been a historically low allocation by non-US investors to US equities, but they are now going back to neutral, which we benefit from.”

Even in the summer, he says, before the large market inflexion occurred, investors were far more positive about the US than about emerging markets.

“Professional investors are continuing to make core allocations to both US and the global equities space, as they diversify away from their home country bias,” he says.

Good news for Janus Capital International, then, because the firm has a key focus on selling its parent company’s US equities speciality in Europe, along with global equities.

But it’s not just plain sailing from here on. As well as maths-based investing and value investing, a fundamental research approach is Janus’ third investment strategy. Yet as Gerth notes, markets have not acted lately on fundamental drivers.

“It has been very challenging in the last 90 days because the market has not acted purely on fundamentals; it is investing on macro themes, which are changing almost daily.”

Gerth remains patient; after all, he’s seen it all before. Having started in brokerage in 1986 before moving into asset management in 1992, Gerth saw the crash in 1987 and various other credit cycles. “I’ve been through various financial crises,” he says, but adds that this crisis is significant because of contagion across the world.

“In every one of those difficult markets we’ve seen a certain reaction by investors. First, they look at their current savings and investors with a long-term view tend to be sanguine.

Risk aversion
“But as for future investments, clients tend to ratchet back risk, which presents a challenge for asset managers. The percentage of investments going to equities falls and it will take several years before it comes back.”

In the 1987 crash the US market had recovered by January the following year, but investors’ confidence took longer to recover and they missed out on some of the upside as a result, he says.

In the foreseeable future of markets, investors will want a risk-managed approach rather than to chase higher risk-return strategies, Gerth feels.

But what is also critical in this market is client communications. Many of Janus’s clients are themselves professionals. Outside of the US, Janus does no direct retail business. Instead it sells to multi-managers and private banks, among others.

“One of the key things in a crisis like this is to make sure our teams are exceptionally responsive to our clients. Some of our clients, such as multi-managers, are themselves reporting to sophisticated investors, so we have to make sure we support them.

“It has been a hallmark of previous downturns that managers have not been communicative enough with clients. “Asset managers will be judged coming out of this not so much by performance, but by how we responded to client needs.”

Beyond hand-holding clients in the crisis, Janus uses its Janus Labs programmes to try and make sure clients stick around in normal times. Gerth describes these as providing business development tools to aid business growth for clients. The ‘science of negotiations’ is one programme. Another programme is designed to “manage energy levels in life and outside work”.

Gerth says: “Performance is the entry point for all managers, but to develop a real long-term relationship you have to help investors grow their businesses.”

In the US, where Janus Capital Group is listed in New York, Janus is a top-20 manager in terms of assets under management. Assets in Q3 globally stood at $160.5bn (€121.9bn). Of this Janus Capital International is responsible for $12bn.

Of the three investment processes that Janus Capital Group runs, the first is the research-driven fundamental approach. The other two are provided by firms that Janus has a controlling stake in.

Intech is driven by the mathematical theory that, by combining stocks with high relative volatility but low correlations, it is possible to create a portfolio that has a higher long-term return than a cap-weighted benchmark, yet without increasing levels of risk. This has helped propel growth for Intech from managing $6bn to just under $60bn in five years.

Minimising loss
The third arm of the business is a US-based value manager, Perkins, which takes a small and mid-cap approach. The strategy focuses on minimising capital losses by setting conservative downside price targets.

All three units pitch for business in Europe under Janus Capital International. “Our intention is not to sell one product against another. We find that some clients want bottom-up strategies, while others want more of a mathematical approach to complement other managers in their portfolio,” says Gerth.

Janus has run its fundamental-research approach since 1969. As such, analysts are like gods within Janus. Gerth says: “Our portfolios are run by managers as well as our analysts. They run team-managed portolios consisting of their most compelling ideas in which all stocks must be buy-rated and recommended by the covering analyst for inclusion in the portfolio, an unusual means of running portfolios but one which has generated a lot of interest from investors.”

He adds: “We don't start with the benchmark but we start with our research. We will never invest in stocks where we don't believe we have a research edge.”

Janus runs US and global research team-driven portfolios and recently launched a European research analyst-driven strategy. Gerth says the market for European equity strategies is currently dominated by value-orientated strategies, while this strategy will be managed in a core growth style.

Janus also plans an Asia equity strategy launch over the next year.

“Overall, we have a single-distribution strategy based on identifying those centralised decision makers who will take the asset allocation decisions in the future. Our offer is based on a core specialism, not one of product proliferation.

“We won’t be a manager offering all the products along the waterfront.” ©2008 funds europe

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