Money management

Janus asset drain expected to end

William H. Gross is expected to be a major draw for Janus, but initially from retail clients.

Janus Capital Group's hiring of bond guru William H. Gross is expected to bring the Denver firm its first overall net inflows in 4 years and boost its $177.7 billion in assets under management by up to 25% over the next several years, analysts say.

Initial inflows likely will come from retail investors rather than institutional ones, analysts interviewed for this story said.

The arrival of Mr. Gross could also help boost the firm's growth in Japan, where it has a 2-year-old strategic relationship with Dai-Ichi Life Insurance Co. Ltd.

“Without a doubt it's transformational for Janus,” Jason Weyeneth, analyst at Sterne Agee Group Inc., New York, said of the hiring of Mr. Gross. “It takes a lot of pressure away from turning around the equity franchise.”

Mr. Weyeneth predicted Mr. Gross' arrival will bring in $45 billion in new assets by the end of 2016.

Despite a profit margin of around 30%, publicly traded Janus has been riding equity market gains to earn more fees to produce profits. Its largest strategies, $81 billion in fundamental equity and about $50 billion in quantitative equities — have been in long-term outflow mode.

Mr. Gross joined Janus' $31.4 billion fixed-income business, one of the company's bright spots, with net inflows of $18.1 billion since 2009.

He reports to Janus CEO Richard Weil, not the CIO for fixed income, Gibson Smith. Mr. Weil worked at PIMCO for 15 years before joining Janus in February 2010.

Mr. Smith said in an interview that it made sense for Mr. Gross to report to Mr. Weil. “Dick and Bill worked together at PIMCO, I think it's logical in light of their relationship,” Mr. Smith said.

He said Mr. Gross' top-down investment approach will offer an alternative to the fixed-income investment team's bottom-up approach.

Just how many assets Mr. Gross will bring in to Janus is subject to debate. One analyst, Robert Lee of Keefe, Bruyette & Woods Inc., New York, predicted inflows of $30 billion through 2016.

“It was kind of a no-brainer for them,” said Mr. Lee of Mr. Gross' hiring. “His investment reputation precedes him.”

William Katz, an analyst at Citibank, New York, wrote in an Oct. 3 report that the market has already anticipated $25 billion to $50 billion in inflows to Janus because of Mr. Gross' move, “setting up for possible disappointment should AUM growth lag such lofty expectations.“

Asked what Mr. Gross' arrival at Janus could mean for the tie-up with Dai-Ichi Life Insurance, a spokeswoman for the Tokyo-based insurance giant suggested company officials view him as a potential manager of Dai-Ichi general account money and might consider distributing his funds in Japan.

When asked if Dai-Ichi Life might allocate more money for Mr. Gross to manage, she said in an e-mail that company officials are “proactively considering investment into the fund depending on further due diligence.”

When Janus announced on Sept. 26 that Mr. Gross was leaving Pacific Investment Management Co. to join the firm, its stock increased 46%, hitting a 52-week high of $15.95. Janus stock closed at $13.95 on Oct. 10.

Mr. Katz said in an interview he expects retail investors will drive the inflows to Janus initially. He added consultants to institutional investors might be slower to embrace Mr. Gross and Janus.

“If I was a consultant, I would have to be somewhat concerned about how things ended at PIMCO and also wonder, given his long time in the business, whether Janus in a few years would ultimately face the same succession issues that occurred at PIMCO,” he said.

Mr. Gross had some high-profile disputes with other employees, including Mohamed El-Erian. Messrs. Gross and El-Erian were co-chief investment officers. Mr. El-Erian resigned earlier in the year. Mr. Gross' behavior was called erratic by some employees, who threatened to resign if he was not fired.

Turned sour

Mr. Gross' strong performance as a portfolio manager of the $200 billion Total Return Fund turned sour last year, resulting in 17 straight months of net outflows totaling $90 billion through September.

For the year ended Sept 30, the fund returned 3.29%, compared to the Barclays U.S. Aggregate Bond index's 3.96%, Morningstar Inc. data show. For the five years ended Sept 30, the fund returned a compound annualized 5.07%, while the index returned 4.12%.

Michael Rosen, principal and CIO of Angeles Investment Advisors LLC, Santa Monica, Calif., said he would want to understand Mr. Gross' investment process and determine the support team he will have in building his new Janus fund. But Mr. Rosen said if initial due diligence is positive and Mr. Gross develops strong initial results, he could see recommending the strategy.

“He's an astute investor with an excellent track record,“ he said.

“The interesting question is what is Bill Gross trying to do,” said Mr. Weyeneth. “The initial view is that this is going to be huge, but then people look at his age ... Maybe he's coming to Janus not to re-create PIMCO, maybe he's getting back to the roots of managing money.”

Mr. Gross said on Oct. 9: “I want to return to a simpler role, completely focused on markets, investment performance and serving my clients. ... It seems like a good time to turn away from the complexity of helping to run a huge firm.”

Mr. Smith said Mr. Gross' team will be small at first, likely consisting of an assistant portfolio manager, a sales person and a trader. “As the assets grow, he'll need to reconsider what resources he'll need.”

Mr. Smith said Mr. Gross' hiring will be a positive for the entire Janus fixed-income team.

“I think his arrival will also open up a lot of eyes to what we've been doing over the last 14 years in building up this business— the strong consistent performance we've put up, the strong risk-adjusted returns,” he said. n

Reporter Douglas Appell contributed to this article.

This article originally appeared in the October 13, 2014 print issue as, "Janus asset drain expected to end".