Asset allocation funds offer investors varying levels of volatility.
Janus Capital Group Inc. (JNS), the money manager that made its name placing big bets on stocks, is trying something new to stem a five-year customer exodus.
Chief Executive Officer Richard M. Weil is introducing funds that seek to spread risk across asset classes and protect clients from sharp market drops. Instead of focusing on returns, which are difficult to forecast, the so-called asset allocation funds offer investors varying levels of volatility.
“Investors, in general, have less confidence in aggressive, active equity management than they did 5 or 10 years ago,” Weil, whose firm oversees $157 billion, said in an interview. “Risk-adjusted returns, rather than swing-for-the-fences returns, are absolutely more important.”
Janus, named for the two-faced Roman god who looked to both the past and future, is following firms from BlackRock Inc. (BLK) to Invesco Ltd. and Goldman Sachs Group Inc. in using the promise of lower risk to lure back clients burned by losses during the stock market rout five years ago. With equities approaching record highs again and volatility declining, the industry's latest sales pitch has been hampered by underperformance.
Asset allocation funds returned a risk-adjusted 0.8 percent in the year ended Feb. 28, compared with 1 percent for the Standard & Poor's 500 Index and 1.3 percent for the Barclays U.S. Aggregated Bond Index. Over three years, the funds gained 2.3 percent, compared with 2.5 percent for stocks and 5 percent for bonds, according to data compiled by Bloomberg.
'Too Good'
Bloomberg's calculation of risk-adjusted returns is based on total return divided by volatility, or the degree of daily price variation, giving a measure of income per unit of risk. The figures aren't annualized.
“There's definitely been a trend in response to the crisis of 2008 and to people's fears about the stock market,” Josh Charlson, analyst at fund research firm Morningstar Inc., said in an interview. “There are a lot of new products designed to lower volatility while also producing some decent returns, although it sounds like a formula that's too good to be true.”
Selling safer funds after a crisis isn't Janus's first attempt to staunch investor withdrawals, and it's turning to a strategy that's had mixed results for competitors. Sales of U.S. asset-allocation funds peaked at $59 billion in 2004, two years after the collapse of the technology-stock bubble. Investor deposits rose to $25 billion in 2012 from about $14 billion in each of the previous two years, according to Chicago-based Morningstar Inc.
Beyond Conviction
Janus has been hurt by more than a decade of turmoil. Its concentration in technology stocks led to a rapid rise and steep fall when the sector's 1990s boom turned to bust. Assets peaked at $325 billion in the first quarter of 2000, before shrinking by 59 percent over the next three years.
The firm, based in Denver, introduced the first of its new funds, the Janus Diversified Alternatives Fund (JDAIX), in December, using derivatives to mirror returns from stocks, bonds, commodities, currencies and real estate.
Derivatives are contracts such as futures, swaps and options whose value is derived from one or more underlying assets. They typically use leverage to amplify returns.
With 82 percent of its investments in actively run equity portfolios, the company is seeking to reverse a 24 percent drop in assets since the end of 2007 as clients pulled money in 18 of the last 20 quarters.
Janus's Brand
“Janus's brand clearly stands for high-conviction stock- picking,” Weil, who has already built up the firm's fixed- income group, said in the interview in New York. “We would like to expand the brand to mean more than that.”
Among 263 U.S.-registered mutual funds categorized by Bloomberg as asset-allocation products, 130 have opened since the end of 2009. The group ranges from traditional stock-and- bond balanced funds to more varied versions such as Janus's Diversified Alternatives.
Invesco, based in Atlanta, beat the wave with its Balanced- Risk Allocation Fund (ABRZX) in June 2009. The fund is similar to Janus's offering in its use of derivatives.
Balanced Risk has grown to $12.9 billion, returning a risk- adjusted 6 percent from its June 2009 inception through Feb. 28, versus 4 percent for the S&P 500 Index. Versions sold in Canada, the U.K. and continental Europe hold an additional $7.5 billion.
“When other fund companies see Invesco getting $12 billion, you're going to get some copycats,” Charlson said.
Goldman, Franklin
BlackRock, the world's largest money manager, refashioned a stock-and-bond fund in January 2012 when the New York-based company added asset classes and renamed it the BlackRock Multi- Asset Income Fund. (BIICX) The $2.4 billion fund has since returned a risk-adjusted 3.2 percent, compared with 1.3 percent for the S&P 500.
Goldman Sachs Group Inc., also based in New York, has seen its $1.3 billion Dynamic Allocation Fund return a risk-adjusted 2 percent since its January 2010 opening, compared with 2.3 percent for the S&P 500. San Mateo, California-based Franklin Resources Inc.'s $866 million Franklin Templeton Multi-Asset Real Return Fund has returned 1.4 percent after price swings since starting in December 2011, versus 2.3 percent for the U.S. benchmark.
As money poured into fixed-income and asset-allocation funds last year, the stock funds in Janus's traditional wheelhouse dealt with redemptions. Large-cap growth funds, or those targeting large-capitalization companies expected to achieve above-average profit increases, lost $38 billion to withdrawals.
Black's Reign
On top of the industrywide redemptions, Janus suffered a setback in 2004 when it agreed to a $225 million settlement with New York and Colorado regulators over allegations it permitted favored customers to engage in the improper trading practice known as market timing.
Struggling to regain assets even as fund performance recovered, then-Chief Executive Officer Gary Black set out to rein in the independence of fund managers and reduce their pay after taking over in 2006. Several top-rated managers left and one, Edward Keeley, won $4.8 million in 2009 when a Colorado jury found the firm had breached his contract and committed fraud in cutting his pay. Black quit that July, paving the way for Weil's hiring in February 2010.
Fund performance slumped anew when the 2008 financial crisis struck. Even as the picture began to brighten in 2012, four-fifths of the company's stock pickers remained in the bottom half of their Morningstar categories over the three years ended Dec. 31.
Industry 'Failed'
In addition to improving core fund performance, Weil said Janus can do a better job than competitors with products promising risk-adjusted returns, because the company will focus more on diversifying the sources of risk.
“The industry has failed investors in the asset-allocation structure,” he said. Most products “sound diversified, but the underlying return streams aren't.” The variation in returns among asset-allocation funds comes largely from the degree of equity risk, he said.
That explains why many such funds didn't protect customers well enough during the financial crisis, Weil said. The average asset-allocation fund dropped 25 percent in 2008, the same year the S&P 500 Index (SPX) slid 38 percent, according to data compiled by Bloomberg.
Weil in May hired Andrew Weisman, a former chief investment officer and board member at Nikko International, to head the firm's new alternative-investments group. In September he added Richard Lindsey, a former Bear Stearns Cos. executive, to be chief strategist of the group.
Forecasting Volatility
The new fund doesn't target a specific mix, Weisman said, but seeks to identify independent sources of risk found within asset classes. The goal is to make investments across asset classes that won't collectively move in step with broad markets.
As of Dec. 31, Janus Diversified Alternatives had invested 29 percent in commodities, 26 percent equities, 21 percent bonds and 20 percent currencies, according to the firm. The allocations change over time based on risk weightings.
“We can do an OK job at forecasting volatility,” Weisman said. By lowering the volatility for a given average return, the fund can give clients a smoother ride and greater wealth in the long run.
The first fund seeks 3 percent historical volatility, a measure of price variation, on an annual basis. That compares with 2.4 percent volatility for the Barclays U.S. Aggregate Bond Index in the year ended Feb. 28, and 13 percent for the S&P 500. Two other strategies Janus offers only to institutional investors target 6 percent and 9 percent volatility. The company plans additional mutual funds in the series, Weil said, without providing details.
'Liquid Alternatives'
The push into what Janus calls “liquid alternatives” follows earlier efforts by Weil, a former chief operating officer at Bill Gross's Pacific Investment Management Co., to expand the firm's bond team and the assets it oversees. Fixed- income investments have grown to $26.4 billion, or 17 percent of assets, from $7.8 billion, or 5 percent, since he took over.
Weil, 49, said serving existing clients was “exponentially more important” than adding products. Even so, he said, “We've elected to make a huge bet on liquid alternatives by bringing in this really world-class team and making a commitment to filling out this area.”
Janus faces two hurdles in its latest attempt to diversify, according to Geoff Bobroff, a fund consultant in East Greenwich, Rhode Island. It lacks the track record in multiasset investing that firms such as Invesco and BlackRock carry, and it's joining the trend late.
Many financial advisers, he said, will want to see two or three years of history before they use a fund, and by then, the draw of conservative asset allocation may have faded if equity markets continue their recent advance. Invesco's Balanced Risk Fund returned 1.3 percent this year through Feb. 28 as the S&P 500 rose 6.6 percent.
“Part of the problem with these products is that they work well in saw-toothed markets,” Bobroff said, referring to elevated volatility. “If we end up in a bull market, they will severely underperform.”
-- Bloomberg News --
