Earlier this morning I ws reading a Wall Street Journal article on the Janus fund group. What especially caught my eye was the part on the performance of Janus bond funds.
Over the past one and three years, only 9% and 15% of Janus bond fund assets ranked in the top half of their Morningstar categories. The corresponding figures from twelve months ago are 75% and 100%.
This home-run-or-strikeout approach to fund management is what I saw when I was competing against Janus equity products ten or twenty years ago. The idea, which I think is never successful over long periods, is to run portfolios that are built for large deviations from their benchmark indices, in the hope of achieving eye-popping relative returns that will result in large asset inflows.
One problem with this approach is that it’s extremely hard to be very right in a big way on a consistent basis. A second is that, while the freedom to make big bets may be emotionally satisfying for portfolio managers, clients don’t necessarily want the resulting large relative ups and downs. As one of my former bosses (often, as it turns out) put it, “The pain of underperformance lasts long after the warm glow of outperformance has disappeared.”
That is also, in a nutshell, the basic appeal of index funds: while there are no sugar highs, there are no heart-attack lows that force the holder to periodically evaluate whether the fund manager knows what he’s doing. Since there’s really no easy way of knowing, staying with an underperforming fund requires a leap of faith most investors are leery of making. Better to avoid being put in this position in the first place.
This is probably also the gound-level reason Janus is selling itself to Henderson. It will be interesting to see whether Janus changes its stripes under new ownership. By the way, achieving such a cultural change is easier than one might think–just change the bonus structure to strongly emphasize batting average and defense instead of Dave Kingman-like power.