Janus Funds Decline Sparks Debate

By Adrienne Pauly, Contributing Writer

Falling stars, whether celestial or financial, draw intense interest from observers who react variously to them. The recent disappointment of the Janus Funds after years of stellar performance has produced a strong response within the financial community and further fueled the debate between proponents of active portfolio management and those in favor of index investing.

In fairness to Janus, they are in part a victim of their own success. Others study Janus investments and then jump into the same stocks pushing prices and evaluations skyward, which obviously has its benefits for the trend-setter, but also carries the risk of increased volatility.

Gus Sauter of Vanguard Group commented on the phenomenon in an interview (watch for it as an upcoming feature-length article on this site).

"That works for a while," said Sauter. "It used to be called the Peter Lynch effect. He created such a big fund that by the time he was done buying a stock he himself had driven the price up. That kind of momentum can last for a period of time. But there are other periods of time when that kind of investing does very poorly. Janus has been riding a very strong wave here."

How the mighty have fallen. By mid-August the funds of Janus Capital, representing $307 billion in assets, were up on average just 1.6 percent and lagged 60 percent of comparable portfolios. This contrasts with a whopping 65 percent gain for Janus funds last year. Coupled with a recent massive inflow of cash into Janus, it represents a classic example of herd mentality chasing past performance.

Annual Rates of Return For the S&P 500 and Janus Growth Funds

Sources: Janus Distributors, Inc., Wiesenberger; 2000 returns YTD through 8/16/2000
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