Investor's Business Daily, July 3rd, 2007
As a growth-oriented fund family, Janus funds were hard hit in the market sell-off that began in 2000. Many shareholders fled, causing net outflow from May 2001 until November 2006.
But since December, net shareholder flow has been positive. That's reflected in the performance of Janus' JNS stock, which has a Relative Price Strength Rating of 91.
An increased focus on risk control has helped win investors back to the Denver-based fund firm. Still, the fund family seeks outperformance. The group shows how it tries to blend those two goals in its $4.5 billion Research JAMRX and $189 million Global Research JARFX funds. Their manager is Jim Goff, who is also head of research for the firm.
The 43-year-old Goff spoke with IBD to describe how he pursues outperformance with less risk.
IBD: Owens-Illinois OI, a top holding, was up 90% this year through month end. Why does the market like a maker of glass containers so much?
Goff: They're the leader worldwide. They have a 35% market share. But for us this is a story about patience.
It was the biggest detractor from fund performance in 2006. One of our analysts convinced the team to take it to a top weighting. For us, that meant going to about a 2% weighting, up from 1%. He felt new management was running the company for high returns on capital, not just volume growth. And in 2006 costs for raw material like natural gas were going through the roof. This year, they've got some costs under control. They can pass through other price increases. And they've had easy comparable quarterly earnings.
IBD: What's the lesson there?
Goff: We've been rewarded for taking a long view, focusing on valuation and yet being opportunistic.
IBD: Comp Vale Do Rio RIO, a Brazilian minerals and mining firm that's another top holding, is up 50% this year. That's good even for a commodities firm.
Goff: What makes them unusual is that they are so dominant. They produce 35% of the world's iron ore. If you are an exporter and compete with China, life is tough. But China has no iron ore to speak of. And its growth causes above-average demand for steel.
We've sold our position in that stock. We sold on valuation discipline. We tripled our money.
IBD: You've also had big gains from Corning GLW. They make the glass substrates for a lot of flat-panel TVs, right?
Goff: That's right. Pricing for the TVs has come down aggressively. That's not helping firms that make TVs or retailers. But component suppliers make money. Corning is most notable. It has more than 50% market share.
IBD: Your two funds give their analysts a big voice in buys and sells, right?
Goff: Yes, we've created eight teams of analysts. They cover major sectors. And they make buy and sell decisions. Managers of top-performing funds usually run concentrated portfolios. They make big bets. But we got there with moderate risk.
IBD: Describe your risk control.
Goff: In 2004 (coming out of the market bottom), we decided to create Global Research as a sector-neutral portfolio. It was launched February 2005, named just Research. Its sectors are kept within one percentage point 15f its index's weightings. We rebalance quarterly. We beefed up research in sectors where we needed it, like consumer staples, energy, industrials and financials. And we created eight sector teams. We gave Mercury Fund the same approach in February.
IBD: And the funds were renamed last December?
Goff: Research was renamed Global Research. Mercury became Research. But without beefing up research teams, the name changes alone would be like putting lipstick on a pig.
IBD: So if they're sector-neutral, outperformance can only come from stock picking?
Goff: Right. We feel we've got the research muscle, especially now, to do it.
IBD: And you head the research process and are officially PM of the funds. But you don't veto buys and sells, right?
Goff: I oversee the teams. I design the investment process. But I don't make final calls.
IBD: Valuation is part of your risk control?
Goff: Yes, we try to buy good and improving businesses at attractive valuations. We use discounted cash flow analysis. What's a stock worth now based on its future ability to generate free cash flow?
IBD: Is this emphasis a reaction to Janus' tough times after 2000?
Goff: It's been our primary valuation tool since 2002. In some respects it was a response to difficult times in the market after 2000.
IBD: What's an example of a name you bought based at least in part on valuation?
Goff: Research Fund initially bought Potash Corp. of Saskatchewan POT on Jan. 30, 2006, at a split-adjusted 29.73. That's an example of valuation discipline as well as opportunism. Potash mines raw materials for fertilizer. We thought demand for fertilizer would be fueled by the trend towards urbanization in emerging markets. Now it's trading around 78.
IBD: Gilead Science GILD, a top buy in Research's latest disclosure period, is a key player in HIV treatment, isn't it?
Goff: They came up with the first once-a-day pill for HIV. They've got three successful drugs in it. Now it turns out the same three drugs work for hepatitis B. So there's more benefit in the drugs than initially expected. And they've used their prosperity to diversify into new niches.
IBD: Cypress Semiconductor CY is getting help from solar cells, right?
Goff: We believe solar will become price competitive with traditional energy sources in generating electricity. Today it provides 0.3% of electricity in the U.S. It can go to 5% to 10% in the next 10 or 15 years.
We've invested in a number of solar companies. Sunpower SPWR is one. It's also a subsidiary of Cypress. The wafers for solar cells are the same as in semiconductors. So Cypress' experience in semis gives them valuable experience for a new field.
IBD: Why is NRG NRG up 48%?
Goff: Rate setting on the margin is based on natural gas prices. NRG has a lot of generating capacity that uses coal, which costs less than natural gas. So NRG is able to raise some prices faster than its costs for coal rise.
They're now a tremendous free cash flow business. That's enabled them to buy back stock and pay down debt.
IBD: Tell me about Precision Castparts PCP, please.
Goff: Their products go into turbine blades. Some are used in aerospace, whose cycle is strong. Some are used in turbines for power plants fired by natural gas. In that market, capacity is being built.
Precision is the lowest cost producer. They are best from an execution standpoint. They've gained market share.
IBD: How tough has it been for Janus to win back shareholder trust?
Goff: We're growth investors. But we've learned lessons. We've developed greater diversification, a strong valuation discipline and risk management done right. We used to cover 900 names. Now we cover 1,400. In 2000, our average analyst had three years' experience. Now they average more than nine years. This should make us more consistent.
