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Janus Capital Group is a mutual fund company that specializes in the active management of investor assets. They are responsible for the investment advisory, distribution, and marketing of their various funds throughout the world. The company's asset management disciplines include growth, core, international and value. As of February 29, 2004 total assets under management at Janus was $ 147. 5 billion (Janus. com). Tom Bailey established Janus Mutual Funds in 1970 with only 30 investors and less than $ 500, 000 in initial capital.
By 1980, Janus had accumulated $ 33. 5 million in assets and was easily beating the S& P 500 returns by investing in value-oriented stocks. In 1984, Kansas City Southern Railroad executive Landon Rowland decided that the railroad industry was stagnant. Rowland was looking for a way for his company to diversify and approached Tom Bailey with an offer to purchase his fund company. Tom decided he would sell 90 % of his company to Kansas City Southern but managed to retain control of the firm through a clause in his contract. By 1990, the Janus family of funds had accumulated over $ 4 billion in assets and launched one of the first international funds in America, the Janus Worldwide fund. In 1996, Janus begins their first foray into national advertising and a year later become one of the first fund companies to offer a website for investors to research their funds.
In 1997, international fund manager Helen Young Hayes is named by Morningstar as fund manager of the year. In 1998, fund manager Scott Schoelzel is named Manager of the Year by Mutual Fund Magazine. Also in 1998, Janus is named "Family of the Year" by Mutual Funds Magazine and Fortune ranks Janus as one of the top 100 companies to work for. By 2000, Janus was managing $ 250 billion and was the most revered fund company in America easily beating its peers in almost every investment category. In 2002 Janus shareholders were shocked to learn that Tom Bailey, the company's founder, decided to sell his remaining ownership to Kansas City Southern, effectively relinquishing control of the company he founded. 2003 ushered in change for Janus as the company merged with Berger Funds and began trading on the New York Stock Exchange under the tick JNS (Janus.
com). Janus' mission statement has always been to "get investors where they want to go. " Tom Bailey began the company with this one simple idea and was able to impart oversized returns for his shareholders over the long run. But investors may not be willing to believe that Janus has their best interests in mind because of some recent scandals that have rocked the mutual fund industry. This once respected fund company has come under fire for unethical and even illegal activities at a time when the company was struggling financially. For example, during the tech boom of the 1990 's the Janus Mercury Fund had nearly $ 16 billion dollars in total assets and was creating over $ 100 million in revenue in the year 2000 (Strategic Insight). But as the tech bubble burst, the Mercury fund's total assets dropped nearly 70 % to less than $ 5 billion and revenues fell to $ 30 million (See Graph 1).
With revenues drying up, Janus apparently tried to increase revenue by allowing Canary Capital to market-time certain funds and trade after-hours. The actions of Janus seem quite clear; when things get tough financially, cut corners to increase revenue. In late 2003, Eliot Spitzer filed a complaint against Janus and Canary Capital Partners for allegedly engaging in late trading and market timing activities. These trading allowances let Canary Capital to make low-risk profits at the expense of individual shareholders. Janus internal memos suggest that Canary's business could generate up to $ 50 million in additional profits for the fund company (SNL Financial). The complaint filed by Spitzer alleges that in the spring of 2002, Janus allowed Canary partners to engage in after hours trading of their funds.
Because a number of companies report their earnings just after market close, Canary was able to make trades in Janus funds based on new information but at the old prices. When Janus allowed these trades to take place, they were diluting the returns of existing mutual fund shareholders. For example, if an earnings report about a major holding in a Janus fund announced spectacular earnings after market close, we would expect that stock to do well the following day. But investors typically cannot trade on this information because the new information is already integrated into the stock price.
However, the news will not be reflected in the Janus fund share price until the close of business the next day. So when Janus allowed Canary the opportunity to trade their shares at the old prices which were not based on the new information, they allowed the company to make a very low-risk profit. And the shareholders are the ones who get hurt. First, since Canary invests additional money in the fund, the number of shares that benefit from the news is increased, diluting each individual's share of the fund returns. Second, when Canary would buy after market close, they would often sell the following day, increasing transaction costs for existing shareholders. Rule 22 c- 1 of the Investment Company Act of 1940 states that all purchase and redemption orders received before a fund's close of business, usually 4: 00 p.
m. Eastern Time, are processed at a price based on the fund's net asset value as of the close of business on the day received (Securities Lawyer's Desk book). This means that all trades in a fund based on that day's NAV must be received by close of business. Because Janus allowed Canary to trade in and out of their funds as late as 9: 00 p. m. , they clearly and intentionally violated the 1940 act, which was implemented to protect individual investors. Not only were Janus' actions morally questionable, but they were also illegal according to the 1940 act.
Eliot Spitzer also alleged that Janus allowed Canary Partners to market time their funds. Market timers looked to profit by purchasing shares of a fund before market close at 4: 00 p. m. Eastern Time. But assets in the fund that are traded on exchanges outside the US often close much earlier in the day. The mutual fund company then bases the value of those securities as of the market close of the domestic market in which they trade (e.
g. the Nikkei). So information that comes out after the market close about foreign markets or stocks may affect the underlying assets but will not be reflected in the share price of the mutual fund at 4 p. m. Eastern. For example, suppose there is a strong rally in US stocks on Monday, and we know there is a strong correlation between how US stocks perform and the Nikkei, an arbitrager could buy a Janus international fund before the close of business, 4 p.
m. , and receive a basket of Japanese stocks which do not yet reflect the rally in the US. When Japanese stocks rally the following day, the market timer would then sell the international fund and make a quick one day profit with very low risk. The problem with this activity is that mutual funds tend to discourage quick buying and selling because they consider their funds to be long-term investments. But these market-timers tend to make dozens of trades in any given year even though fund companies discourage this rapid trading for their individual investors. In allowing this activity, Janus violated their own internal regulation of not allowing excessive trading. In fact, Janus Prospectuses state "The funds are intended for long-term investment purposes only.
Excessive short-term trading into and out of a fund can disrupt portfolio investment strategies and may increase expenses, and negatively impact investment returns for all shareholders, including long-term investors who do not generate these costs (Mercury Fund Prospectus). " Janus clearly states what the dangers are to existing shareholders if this kind of activity is allowed. Therefore, in allowing Canary to trade excessively in their fund, Janus knowingly and intentionally ignored the best interests of long-term shareholders in favor of generating extra revenue. There currently are no regulations in the Investment Advisors Act of 1940 or the Investment Company Act of 1940, which prohibit market timing. However, In 2001 the SEC staff wrote a number of letters to major fund companies asking them to protect their shareholders from this practice by employing "fair pricing" techniques for closing prices when there are significant developments that suggest that fair pricing may be more accurate (Hale and Door).
This means that fund companies should use updated or after hours prices when calculating the NAV of the fund when foreign markets are expected to move significantly. Since Janus received one of these letters, they were clearly aware of the concerns the SEC had for long-term shareholders if this kind of activity was allowed. Therefore, Janus' actions were also in violation of the SEC's request to protect their long-term shareholders from market timing. While the legality of market-timing may not be clear cut...
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