Whether it’s simply managers getting their sea legs or not staying ahead of market conditions, these visible funds are having a tough time performing, writes Greg Carlson of Morningstar FundInvestor.
Morningstar takes a long-term, fundamental approach to investing and fund analysis. But for the funds below, poor performance in 2011—and, just as important, the reasons for their struggles—is causing us to re-evaluate their prospects.
Janus Fund (JANSX), Janus Twenty (JAVLX)
Jonathan Coleman and Ron Sachs took over Janus’ two flagship funds—Janus Fund and Janus Twenty, respectively—in November 2007 and January 2008, in what represented a changing of the guard at the firm. They replaced the departing David Corkins and Scott Schoelzel, who had both amassed impressive records running Janus funds since 1997.
Coleman steered Janus Enterprise (JAENX) to top-quintile returns in the mid-growth category from 2002 to 2007, and Sachs managed the all-cap Janus Global Select (JORNX) (previously called Janus Orion) from 2000 to 2007, edging the typical mid-growth fund and comfortably beating the Russell Midcap Growth Index.
But each manager has struggled at his current charges. Janus Fund lost nearly as much as the typical large growth fund in the October 2007 to March 2009 bear market, outperformed modestly in the ensuing rally the rest of the year, and trailed most of the pack in 2010 (when cyclicals and smaller fare performed better) and in turbulent 2011 (when larger, sturdier companies led the way).
Janus Twenty did a bit worse in the latter part of the bear market, scored big in the rally, and has struggled even more than Janus Fund has since then. Overall, Janus Fund and Janus Twenty have trailed 70% and 85% of large-growth funds, respectively, during Coleman’s and Sachs’ tenures.
Why have these previously successful managers stumbled? Perhaps the transition to larger funds that focus heavily on the market’s biggest, most-scrutinized companies has proved more difficult than expected. Janus has said that both funds have suffered compared with the category because they own more mega-caps.
That emphasis should have helped in 2011, yet both ended 2011 in the category’s bottom quintile. Furthermore, both funds—particularly Janus Fund—have scaled back their exposure to behemoths lately, and now own fewer of the stocks Morningstar categorizes as giant caps than does the typical large-growth fund.
And on measures of quality such as debt-to-market cap, returns on assets, and equity and net margins, the funds’ holdings look subpar versus the category norm. That’s not what we’d expect from these funds.
Brandywine (BRWIX), Brandywine Blue (BLUEX)
These funds, which seek out companies that management believes are poised to beat Wall Street’s earnings expectations, have performed terribly for the past four years. From the October 2007 start of the bear market through 2011, Brandywine has lagged 99% of its mid-growth peers, and is an annualized 9 percentage points behind the category norm.
Over the same span, Brandywine Blue trails 99% of other large-growth funds, and lags the norm by an annualized 7 percentage points. Both funds previously had strong records, but they now look mediocre or downright lousy (in Brandywine’s case) over even ten- and 15-year periods.
Lead manager Bill D’Alonzo and his team contend that the funds’ poor performance is largely the result of stock prices being driven by macroeconomic sentiment, rather than by corporate earnings, for the past several years.
There was merit to that argument for the period from late 2007 at least into mid-2009, when stocks sharply reversed twice.
Indeed, quant funds that follow earnings-momentum strategies struggled mightily during that stretch.
But four years of wretched returns is a long time to pin on a single factor. It may be the case that the extensive channel checks that the team performs to estimate companies’ prospects are no longer effective, leaving the funds without a long-term edge.
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