Janus gears up for global expansion

Michael Jones, the supremely self-confident boss of distribution to European financial institutions at US funds house Janus Capital, has taken on a tough mandate since joining the firm in September 2008. Headquartered in rented offices in Citypoint – with a panoramic view of nearby rival institutions, panning right out to London’s suburbs – it is Mr Jones’ brief to expand the 7 per cent of the group’s $132bn (E92bn) asset cake currently handled for non-US clients to 15 per cent by 2012. Janus chiefs in Denver, US, where the group combines its equity and fixed income research, want the earnings from overseas clients to hit 25 per cent within three years. Mr Jones, a smooth and long-term mandate pitcher in the institutional market place, with history at Fidelity and Merrill Lynch, has several strings to his bow. Janus, with a 40 year track record in growth oriented US equity is no longer a one-trick pony. It has added expertise in global equity and US fixed income. Two subsidiaries – Intech, offering a mathematical, risk-managed approach, and Chicago-based Perkins, specialising in US value equities – add further options to the suite of products available in the suitcases of Mr Jones’ sales team. “Our international business is just ten years old, so it is still very much in its infancy,” he says. “Our heritage is in the US domestic market, which is relatively mature, so we are expecting growth on the international side.” A near-death experience The pivotal moment in the Janus distribution strategy occurred in 2004, when Gary Black came in as chief investment officer, to become chief executive officer two years later. The appointment followed what Mr Black himself described as a “near-death experience” for the firm, comprising three major factors: poor performance and the technology crash, which together ravaged the group’s asset base; and a market timing probe from the authorities, after which Janus agreed to pay fines and investor compensation totalling $225m. Although Mr Black has been credited with much of the group’s recent success, he left the company in mid-July, to be temporarily replaced as CEO by board member Tim Armour. It remains to be seen whether the company will see any further changes of direction once a permanent successor for Mr Black is found. According to Mr Jones, “no more than 20 to 25 per cent” of Janus’ key clients in Europe were aware of the group’s somewhat chequered recent past. “Most know the brand as big, American and growth oriented. One in four knew we had a difficult time in 2003. None of them said they can’t deal with us due to those problems.” If anything, the clean-up and emphasis on compliance following the scandal – including a full investigation of any questionable practices by cross-border legal specialists Linklaters – tightened up procedures at the company, leaving it in a much healthier operational state than previously. “The firm has learned valuable lessons about process, legal and compliance functions and monitoring and analysis of trades,” admits Mr Jones. “It can sometimes be a pain in the neck to have so many controls in place, but you can be confident we will not blow up in the future, with that kind of heritage and legacy.” Distribution revolution The distribution revolution instigated under Mr Black five years ago, involved a move away from direct retail sales, targeting the man in the street, to a focus on sophisticated intermediary buyers of funds such as banks, wealth managers and insurance companies. While gross sales across Europe currently “look great”, fund of fund managers are currently switching between products so much, that money moving into one strategy is often flowing out of another. “If you are sitting in a firm like Janus, you can see revenues changing from day to day,” says Mr Jones. “The profit and loss account is affected not just by market movements, but by performance. If you perform badly, assets walk out the door.” Distributors and their customers are switching between managers for two main reasons, both of them with a generally shorter-term outlook. The first is asset allocation, with clients keen to get the maximum potential out of any market bounce, so short-term positions can often be the norm. The second is performance. While many clients are busy switching out of funds that have lost them money and caused them pain in the recent crisis, funds that have performed well over several months can also benefit substantially. But in order to stay on the team sheet when selectors meet to change allocations, it is vital to be close to the client, says Mr Jones. “If a client wants to get out of one of their US managers, we don’t want to be number three on the list. We need to build a relationship with clients so we are not as easy to dispose of as the competition.” His team works predominantly with 150 key distributors, including both domestic and cross-border banks throughout Europe. Those with a more international range of activities – such as Citibank, UBS and BNP Paribas – are usually given priority. The most lucrative hunting ground is currently “German speaking Europe”, where Thomas Doring and Peter Zurhorst are responsible for servicing clients in Germany, Switzerland and Austria from the Munich office. France, Italy, the Benelux region, Spain and Scandinavia are also in Mr Jones’ sights. The UK has proved more problematic, as clients there prefer domestic funds, rather than the cross-border Luxembourg-registered products favoured by Janus and most competitors. Business in London has been more focused on the sub-advisory space, which is currently just as important as intermediated distribution of mutual funds. “The trend is for financial institutions to ask themselves whether they should manage everything in-house or to outsource some of it,” he adds, with this being particularly true for those banks and fund houses preparing themselves for sale. His view is that the European market will increasingly start to resemble the US system within the next five years, with sub-advisory delegation of mandates from one financial institution to another becoming much more the norm rather than the exception. Mr Jones has seen a gradual opening up of distributors’ mindsets, welcoming occasional third party offerings onto their banks’ shelves, following the drastic retrenchment of mid 2008. “Last summer, you could see, as the crisis unfolded, first and foremost, the desire to prop up banks’ balance sheets through attractive rates on cash deposits,” he says. “Then there was a move to protecting revenue by favouring internal funds, as the bank staff know what these are doing, and they also keep a greater slice of the revenues in-house.” But an easing off of this trend in the last few months has left a handful of operators “in a few markets” with a more flexible attitude, believes Mr Jones. “These are typically people running sophisticated, multi-manager portfolios. Even if their banking masters say they must pick in-house funds, they carry on choosing best of breed.” Traditional active mutual funds, along with competing exchange traded funds (ETFs) should become the savings vehicle of choice, with growth eventually expected from defined contribution pension schemes, believes Mr Jones, as the industry moves out of a wealth distribution phase into a new wealth creation era. “Once we have a sub-advisory, outsourcing mentality, there will be huge pools of assets, which independent, focused managers will have a crack at.” Proprietary distribution – in the shape of bank branches – is currently a clear advantage, if “the game is only about raising assets,” believes Mr Jones. “But in the long-term, wealthy investors are demanding choice and you cannot be successful by selling your own products. Merrill, Citibank and Morgan Stanley all have full open architecture and are agnostic about which product they promote, so they do well in proprietary distribution, but they have plenty of space left for independent asset managers.”