When Gary Black joined Janus Capital Group as president and chief investment officer earlier this spring, some observers expected him to be the new sheriff in town: laying down the law and imposing his will on a once high-flying growth equity shop that had lost its way. His blue-chip resume — with six years as a top-rated tobacco analyst at legendary value shop Sanford C. Bernstein & Co., two years as head of institutional business under sales guru Roger Hertog and three years helping build up Goldman Sachs Asset Management — gave him the bona fides to make far-reaching changes at an investment management house tarnished by poor performance and an industry market timing scandal. But Mr. Black might end up playing a kinder, gentler role, more akin to that of a den mother of the local Cub Scout troop: firm but fair, and confident that with a little direction the pack will prove as impressive as any group in the land, if not more so. Janus passed a major hurdle on its comeback trail when the recent departure of Chairman Mark Whiston apparently paved the way for the settlement with regulators announced on April 27. Mr. Black spoke with reporter Douglas Appell about the road that led him to Janus and his new company's prospects.
A quiet leader
A They found me. I was very happy being a partner at Goldman Sachs. As CIO, I had about $60 billion in assets under my management, and about 180 people working for me. Mark Whiston called me about a year and a half ago and asked me if I wanted to have a cup of coffee. We did have a cup of coffee, but I said I wasn't really interested at that time. (Then) in January of this year he asked me if I would sit down with him again … and then I started talking to him a little more seriously. They had me interview with about 15 to 20 portfolio managers. It was kind of weird, when you're going in and the portfolio managers you're going to manage are interviewing you, but I think what Mark wanted to make sure was that these folks bought into me coming on.
A For a couple of reasons, these are the negatives of Gary Black being the CIO of Janus. The first issue is, he comes in more as a value person than as a growth person. But whether you're a growth investor or a value investor, you want to buy good companies that trade at a discount to their fair valuation, so that's not going to be an issue whatsoever. The second issue is the guy's never run money before, and the third, harder issue is that I'm from New York and I'm going to have dual residence. Now coming from an investment background, having been an analyst and being a stock junkie, not having run money is not going to be an issue. But I think they want somebody there in Denver a lot, and not half time.
A I just felt at the end of the day that (1), it would give me the chance to actually build something, that I would be the person who had the "x" on his forehead, and (2), what I liked about Janus is that it's all about research. It's very similar to Bernstein, in that research and research edge are what sets them apart. Their job is to go out and find the answers themselves.
A I think where Janus lost its way, (when the tech bubble turned to bust in 2000 and 2001) they didn't have a sell discipline. They did do their research, got into stocks, but they didn't know when to get off. One of the things I learned at Bernstein is that at the top of any successful investment management shop there are usually two people, one who worries incessantly about performance, and one who worries incessantly about marketing. At Janus, when Tom Bailey left, and Helen Young Hayes left, Jim Craig left, Tom Marsico left, I think the portfolio managers lost their voice, they didn't have any leadership. To be a really world-class investment management organization, the portfolio managers have to run the place, because that's what clients hire you to do. I think the investment organization got frayed, because of the turnover. So one of the things that attracted me to the place was the chance to work with really smart people who want to win, who are looking for a leader, and hopefully I can help out.
A (The analysts) were actually very disciplined about how to put a valuation on a stock, but at the end of the day, the portfolio managers make the decision. Should they get off something that's running? It goes against human nature. (But) I believe Janus has learned a lot in the three years since the bubble burst. I believe, and I wouldn't have taken the job if I felt otherwise, that if and when we see another bubble, they will know next time that you can't pay more for a stock, or hold a stock if it's worth more than its intrinsic valuation.
A People want to know if (I'm) going to change the culture, make it more value oriented. Absolutely not! What we do well is find good business franchises with strong growth prospects, high returns on capital, where managements are focused on doing the right thing with the cash flow, and we try to buy them at less than what their intrinsic value is. I'm not going to say go play in the value universe. I'd really rather just focus on the growth side.
A What investors, institutional investors in particular, want to see is, can we deliver, and this is my singular objective, delivering strong consistent performance over a market cycle. I've got to make sure that we've got the sell disciplines in place, that we don't have "unintended bets" going on, so that when the markets turn down, we're ready. A lot of our best performing portfolio managers are very, very strict on valuation. I just have to make it more systematic.
A I think it's interesting that despite all the (recent) turmoil at Janus — you know we had the market-timing issue, the CEO resigns — the performance has been very strong during this time period. The portfolio managers are very focused on running their portfolios, and if you look at our Morningstar ranks, as a percentage of their funds, only one other investment management organization, T. Rowe Price, has as many funds rated four or five stars.
A I like the portfolio management side of the business, because I like talking stocks, I like thinking about the economy, I like trying to figure out if inflation comes back, where should we be invested. If somebody said to me, what would you do if you were independently wealthy, you know, I would probably start my own fund.
A Well, Mark Whiston just resigned … He was one of the best salesmen in the industry. He and I would have been a very good team. I've made it very clear to people that we probably need to find an overall head of sales.