Don’t mention the dot.com decline to Janus Capital Group. The Denver-based growth house is still struggling to recover from a year which represented a fateful turning point in its financial fortunes.
Since March 2000 when the bottom fell out of the technology market, assets under management have more than halved, from $325bn to $140bn.
A return to profit last year was marred by allegations of irregular mutual fund trading in the US, which culminated in a recent agreement to pay over $225m in regulatory penalties and restitution.
In a bid to attract new assets under management, the group has been busily diversifying its product range. Small and mid-cap value funds have been launched to complement its growth capability, while risk-managed equity funds have been introduced by Janus’s subsidiary, Intech.
Charged with marketing a strategy, which was launched in Europe about a year ago, is David Schofield, Janus’s European director of sales.
He said that Janus is mainly targeting the large pools of capital parked in passive funds linked to US benchmarks.
“We are approaching these investors to explain that because US large-cap stocks are priced efficiently, it does not mean that the benchmark they slavishly follow is an efficient portfolio. What Intech does is take that benchmark and re-weight the stocks to a more efficient combination and generate an excess return.
“The level of interest we have seen so far from the large and most sophisticated European pension funds is significant. We have high hopes of translating that interest into mandates.”
But the man who admits to spending 90 per cent of his time introducing and promoting the Intech strategy to big European pension funds, is mindful of the competition he faces from established passive players such as Barclays Global Investors and State Street Global Advisors.
He said: “They are the leaders in benchmark-tracking products and are encouraging their clients to make that move from passive to enhanced index products. They have that advantage.
“But we say that Intech is generating alpha in an entirely different way. Those managers have quantitative products which rely on some fundamental research input into the process.”
Despite the marketing push over the last 12 months, Intech has yet to convert European investor interest into critical levels of new business. The firm has managed to win only one segregated account mandate – a $250m US large-cap enhanced portfolio from the Netherlands-based Blue Sky Group, managers of the pension fund for KLM Royal Dutch Airlines.
A Janus-branded Risk Managed Core Equity Fund, launched in Dublin a year ago, has garnered a modest $100m of assets under management.
Is this because investors are having difficulty grasping the investment concept?
Mr Schofield said he is generally impressed with the level of sophistication shown by pension fund trustees of large schemes in Europe.
“What we are seeing is that rather than wanting to oversimplify the process, the investor base and consultant community – both in the UK and in continental Europe – have wanted to delve into it in more detail,” he claimed.
The lack of a global equity product is cited as a hindrance to Intech’s growth ambitions in Europe. The company plans to roll out such a strategy later this year.
Mr Schofield said: “At the moment, we offer only large- cap US equity strategies. This limits our appeal to the very largest European pension funds that choose regional US equity managers as opposed to going down the global route.
Global equity mandates are much more significant in Europe, and a global equity product will enable us to market to a larger number of investors.”
But despite the product gap, Mr Schofield said he is happy with Intech’s progress in Europe so far.
He refuted suggestions that Janus’s involvement in a US investigation into irregular mutual fund trading has led to a negative perception of the company or Intech in Europe.
He said: “With Intech being part of Janus, we have obviously had to address that question (mutual fund trading allegations). The company is run with a high degree of autonomy and investors who have been seriously considering investing with us have been very comfortable with that. They have had no issues at all.”
He said Intech is “absolutely key” to Janus’s business recovery plan, adding that the firm “is at the heart of our product offering to the institutional world”.
On the question of Intech’s relative lack of brand recognition in Europe, he claimed that investors are interested in what the company has to say because it is a new name in Europe.
“But it has the advantage of history in the US. It is a strong brand in the institutional market in the US which does translate over in Europe,” he added.
Process based on mathematical theory
Driven by a mathematical investment process based on stochastic portfolio theory, Intech’s risk-managed equity strategies are the brainchild of Robert Fernholz who founded Intech in 1987.
The former professor of Princeton University is now chief investment officer of a firm which manages $16.4bn of assets largely for institutional investors in the US.
Intech’s investment approach is to find stocks with high relative volatility but low correlation to each other. The company then tries to build a portfolio with the ideal weightings of such stocks designed to capitalise on the volatility of stock price movement.
The portfolio is optimised or traded on a weekly or a six-day basis.
Robert Fernholz said his process differs from traditional quantitative strategies in that there is no use of fundamental analysis.
The investment process, he said, is based on mathematical theory rather than the mining of past data. Also, the formula does not depend on mispricing.
Fernholz: ‘our strategy takes advantage of stock volatilities’
He explained: “The idea is that there is nothing being done in passive investing to take advantage of stock volatilities. We try to take advantage of these volatilities to construct a portfolio with the same risk level of the index and see if we can get slightly higher returns.
“If you can raise the average volatility of the stocks in the portfolio but maintain the portfolio volatility at about or lower than the market, over the long term you will eventually outperform the market.”
Intech manages four US equity strategies – large- cap growth, large- cap value, large- cap core and enhanced index – in addition to running a Dublin-based pooled fund, the Risk Managed US Core Equity Fund.
These active strategies are benchmarked either to the S&P 500 Index, the Russell 1000 Index or the respective style indices for growth and value.
The strategy aims to beat the index by 2 to 3 per cent a year.
In the three-year period ending December 31 2003, Intech claims to have outperformed the S&P 500 Index by 3.37 per cent.
– HS
