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Janus Tests Performance-Based Fees

Janus Capital Group must really be confident in the potential performance of its funds, because the Denver-based mutual fund company's management board voted unanimously on Sept. 20 to charge performance-based fees on 13 of its 59 funds, representing 30% of its $130 million of assets under management.

Portfolios that would be affected include the Janus Adviser Worldwide, Janus Research, Janus Contrarian, Janus Adviser Risk Managed Stock and Janus Adviser Mid Cap Value funds.

The company filed a preliminary proxy statement with the Securities and Exchange Commission indicating the board had reviewed the short-term and longer-term performance of each fund by comparing them to funds and peer groups identified by Lipper of New York as having the same benchmark. Janus concluded that most of the funds were doing well and those that have not done so well have recently improved.

The trustees found "that the performance of most funds was good to very good," according to the filing. "Although the performance of some funds lagged that of their peers for certain periods, they also concluded that Janus had taken appropriate steps to address the under-performance and that the more recent performance of most of those funds had been improving."

In fact, most of these Janus funds have outperformed their benchmarks, according to Morningstar of Chicago. Janus Contrarian has beaten its benchmark index, the S&P 500, by 4.7 percentage points through Aug. 31. In 2004, the fund beat the index handily by 11.7 percentage points and the year before, by another 24.6 percentage points. The Janus Adviser Risk Managed Stock fund is 4.6 percentage points above its benchmark through Aug. 31, and the fund trounced it by 6.9 percentage points in 2004. For its part, the Janus Adviser Mid Cap Value Fund is 4.7 percentage points above its benchmark through Aug. 31, and it beat the index by 7.1 percentage points in 2004.

Only the Janus Adviser Worldwide Fund has trailed its benchmark, although the gap has narrowed to negative 4.1 percentage points this year, down from negative 15.5 percentage points in 2004 and negative 15.8 percentage points in 2003.

Don Cassidy, senior analyst with Lipper, viewed the proposed change as a strong message to shareholders. "Janus [is tying its rates to performance] to show the world that they have their own objectives aligned with those of the investor. This is a good way to do it," Cassidy said. "This proposal demonstrates that Janus is confident in its recent changes to management and strategy and that the funds will outperform their benchmarks."

Depending on the success of the proposed change, the new performance-based fee structure might be extended to more funds, said Janus spokeswoman Shelley Peterson. Cassidy expects Janus will eventually apply performance-based rates to all of its funds.

If approved, Janus will begin to gauge the performance of the 13 funds on Jan. 1 and in 13 months' time, adjust fees for every 50 basis points of differentiation from a fund's benchmark, for a maximum of 15 basis points up and 15 basis points down.

These new rates are on the more generous side of performance-based fees, according to Lipper data. Of 341 funds and classes of equity funds using incentive fees, 134 have a maximum exceeding 15 basis points. Eight, before Janus' proposed 13, have a maximum equal to 15 basis points, and 199 have a maximum of less than 15 basis points.

But only about 3% of stock and bond funds in the nation use performance-based fees, including funds at Vanguard Group, Fidelity Investments, Constellation Ventures and Gartmore Global Investments. Fidelity has 34 funds that have fees that move up and down based on how well they do against market averages.

But as Dan McNeela, an analyst with Morningstar, sees it, the new fees are not going to have a tremendous impact on overall expense ratios for Janus investors.

And while Cassidy believes the new fees send out a positive message to investors, he does not foresee Janus's new price break attracting that many more assets. "It should be a mild positive, yes, but not a huge difference-maker," Cassidy said. "There may be a very small number of registered investment advisors out there who may base decisions entirely on alignment of interests, or who strongly prefer such, but it must be a very small number."

As to whether Janus's new fees are a harbinger of a new trend, Cassidy believes not. "I foresee performance-based rates may become slightly more commonplace, but by no means no huge tide," he said. "First, performance fees by nature make corporate revenue and earnings of the management company less stable. Corporate America is risk-averse rather than risk-seeking on the whole."

"Second, the reality is that a majority of funds under-perform their benchmarks in most years, so adopting performance fees would be a losing bet more often than not," Cassidy added.

Janus has been recovering from losses due to the industry trading scandal, which caused investors to run, back in 2003. Janus settled with federal and state regulators in 2004, paying $226 million in restitution and fines, although the company continues to face civil lawsuits. Today, Janus's assets under management are 57% less than the $300 million it had under management at the height of the bull market in March 2000.

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