Fidelity Contrafund FCNTX manager Will Danoff is back to running a more than $100 billion threshold once more. A few years ago, Fidelity handed one of Danoff's three funds to another manager in order to cut his workload. However, his continued success, a market rally, and the inflows that his funds have drawn have him managing more than $100 billion combined again in Contrafund and Fidelity Advisor New Insights FNIAX, which have $84 billion and $19 billion, respectively. Contrafund was one of the industry's largest funds 15 years ago (with approximately $25 billion in assets at that time). Even with its heft, the fund has one of the best 15-year records to show for it, a 9.25% annualized gain.
Danoff is the exception rather than the norm, however. To put Danoff's task in perspective, I pulled together a list of solo managers running actively managed domestic-stock funds and ranked it by assets. In fact, Danoff is running twice as much as the next manager on the list, Steve Wymer at $44 billion in Fidelity Growth Company FDGRX, and three times as much as number three on the list, Rob Bartolo of T. Rowe Price Growth Stock PRGFX.
My first thought was that it's really, really hard to achieve what Danoff has done. Running really large sums has pummeled many good managers. My second thought is that it will be a challenge for all of the managers on this list to run their funds over the coming years. The good news is many have strategies and experience that give them a pretty good chance of continued success. That hasn't always been the case.
To see the table, click here.
Asset bloat causes a number of problems for a fund manager. It reduces the exposure a fund can gain to smaller, less-liquid stocks. It's not uncommon to see a fund have tremendous success with small-, mid-, and large-cap stocks only to grow so large that it has to be almost exclusively large cap. In addition, the costs of trading stocks go up because the fund will have to trade more stocks just to get an equivalent position--so that it is driving up its purchase price and down its selling price. Even making those adjustments, managers often have to spread out their portfolio among more names so that their favorite names have less impact and they have to do more research on more companies.
To understand just how tough this task really is, check out Table 2, which lists the managers running the most money solo 10 years ago. Six of the funds on that list have gone on a forced diet as they are smaller today than they were 10 years ago even though the stock market has gained an annualized 4.5% over that time. Fidelity Magellan FMAGX has shrunk by $55 billion, Fidelity Growth & Income FGRIX is down $26 billion, Janus JANDX is down $14 billion, Fidelity Equity-Income FEQIX is down $12 billion, Fidelity Blue Chip Growth FBGRX is down $5 billion, and Fidelity Dividend Growth FDGFX is down $7 billion from that time. Those six funds also have had at least one manager change over that 10-year period. The changes and asset drop tell me investors haven't had a good experience.
To see the table, click here.
The performance figures back that up. Four of the funds suffered bottom-quartile performance over the past 10 years. One, Fidelity Growth & Income, actually is in the red for the past 10 years. On the plus side, four funds cracked the top quartile led by Danoff.
The results underline the importance of fund companies closing funds before they grow to unmanageable sizes as there aren't enough Will Danoffs to go around. Of those in the current top 10, only three are closed to new investors. I'd rather see more of them closed, but U.S.-equity funds are not drawing big sums of inflows at the moment, so the time to close may come at a later date. For example, Contrafund just moved to positive flows this year.
From an investor's perspective, you should be particularly wary of manager changes at giant funds. It also helps to consider how well a strategy can be adapted to larger assets, how strong the resources are behind a fund, and a firm's track record of closing.
Asset size is a real handicap, so you should raise the bar before buying or sticking with a big fund with a solo manager.
Janus Global Research Joins 500
We are adding Janus Global Research JARFX to the FundInvestor 500. Below is Greg Carlson's analysis on the fund.
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Investors should shed their typical distaste for analyst-run funds when it comes to Janus Global Research.
This fund is a feather in Janus' cap. While flagship funds Janus JANSX and Janus Twenty JAVLX have struggled in recent years and the previously red-hot Janus Overseas JAOSX had a wretched 2011, this fund keeps chugging along. It's beaten at least 80% of its world-stock peers over the trailing one and three years through Mar. 15, 2012. And since it took on its global mandate in February 2006, the fund has outpaced 90% of its peers and trounced the MSCI World Index.
The fund's success stands in contrast to the results of a number of other research funds. Some are benchmark-huggers, and others have faltered due to analyst turnover. What's the secret sauce here? An all-cap approach has certainly helped the fund versus the broad category: For much of the six years its strategy has been in place, smaller companies have led the way--and the vast majority of world-stock funds are heavily focused on large caps. However, the fund has also performed much better than most of its peers that sport similar market-cap profiles. That's due in part to excellent stock-picking from the firm's small- and mid-cap team (witness the strong results of Janus Triton JATTX and Janus Venture JAVTX) and the international team.
Jim Goff, this fund's one named manager and the head of Janus' research department, deserves a good deal of credit. He's beefed up the analyst team during his decade, running it while also hiring analysts with some experience under their belts, establishing a career track for analysts, and reducing personnel turnover. The challenge will be for Goff to maintain the analyst team's stability at a firm where managers often retire young or leave (thus leaving holes that are often filled by in-house analysts). The large-cap U.S. team will eventually have to pull out of its current slump for the fund to continue to do well. But the fund's structure and the expertise behind it, along with a modest 1.1% expense ratio, inspire confidence.
Process Pillar: Positive
Janus' equity analysts are divided into seven sector teams. The teams choose stocks within their respective sectors by consensus, and each one chooses 15-25 stocks for the fund. (It recently held a total of 138 stocks.) Although they don't all have to agree on each stock, those favored by a bigger percentage of the analysts tend to get higher weightings in the fund.
The fund's sector weightings are kept close to those of the MSCI World Growth Index. Although the fund is broadly diversified, most of the analysts are attuned to the firm's traditional growth-style of investing. They're looking for companies that boast strong returns on invested capital and have relatively solid balance sheets, yet don't sell at excessive valuations. Thus, the fund consistently lands on the growth side of the Morningstar Style Box. They're looking for companies of all sizes; large caps predominate, but the fund often holds a healthy slug of small- and mid-caps. Indeed, its average market capitalization was recently half the world-stock category norm. Finally, the analysts try to look out several years when determining valuing companies but will trade around positions and dump them quickly if the stocks get pricey or firms run into serious problems. Thus, portfolio turnover has generally ranged from 70%-90%.
This fund usually doesn't shift gears too quickly. Its broadly diversified portfolio and modest position sizes, along with the team's reluctance to make big sector bets versus its benchmark (the MSCI World Growth Index), assure that. The fund also isn't likely to take big stakes in emerging markets, again preferring not to stray too far from its benchmark. In the second half of 2011, the fund sold 30 stocks and bought 31; each group represented about 20% of the fund's assets, and none of the individual sales and purchases hit even 1.5% of assets. The three biggest sales over that period were building-related plays: homebuilder NVR NVR, glass fiber and composites maker Owens-Corning OC, and construction equipment seller Ritchie Bros. Auctioneers RBA. On the purchase side of the ledger, the names are more disparate: The top three were metal fabricator Precision Castparts PCP, gaming company MGM Resorts International MGM, and airline United Continental UAL.
Performance Pillar: Positive | Greg Carlson 03/20/2012
Returns here haven't been stellar on an absolute basis, but the fund has beaten the vast majority of its world-stock peers through a turbulent period for stocks. Since it took on its current name and mandate in February 2006, it's gained an annualized 6% through March 14, 2012; the group norm over that stretch is just 2%. Over rolling 36-month periods during that span, the fund has finished in the world-stock category's top quartile 74% of the time (and in the second quartile the rest of the time) and beaten both the MSCI World Index and MSCI World Growth Index (its bechmark) 100% of the time. Even over single calendar years, the fund has only landed in the category's bottom half once--in 2008's sharp decline, when its all-cap look and a cyclical tilt worked against the fund.
The consistency of the fund's relative returns stems from its diversification--it typically holds 100-150 stocks and its sector weightings don't stray too far from those of its benchmark. It's a testament to the analysts' stock selection that the fund has managed to stand out from the pack despite these risk controls. True, the fund's well above-average stake in smaller-cap firms has made it a bit more volatile than its peers and the index, and it's captured 107% of the downside of the MSCI World Growth Index. But it's made up for the latter figure by capturing 117% of the index's upside.
People Pillar: Positive
The sole named manager here is Jim Goff, the head of Janus' research team since 2002. He joined Janus in 1988 and spent 10 years as the manager of Janus Enterprise JAENX (which put up mediocre results during his tenure) before moving to his current position.
The team Goff oversees is made up of 37 equity analysts divided among seven sectors. The majority of the analysts focus on either U.S. large-cap, small/mid-caps, or foreign firms within their sectors. The rest cover their sectors on a global basis.
The analysts have an average of 11.3 years' experience and an average of 6.4 years with Janus. Roughly two thirds of the analysts are on career tracks. A number of others are portfolio manager/analyst hybrids, such as Carmen Wellso, Julian McManus and Guy Scott of Janus International Equity JAIEX. (Goff says the hybrids spend the majority of their time on analyst duties.) Four or five other analysts want to become portfolio managers in the future but don't run any money yet outside of the research funds.
The team has been fairly stable during the life of this fund. True, three analysts left in 2011--one was essentially pushed out, another left due to a lack of portfolio manager openings and a third relocated. But Goff reports that for the prior six calendar years, the firm lost an average of just one analyst per year.
Parent Pillar: Positive | Kathryn Young 03/03/2012
Janus has undergone extensive change in recent years. Gary Black, a controversial CEO, stepped aside in 2009. PIMCO alum Dick Weil succeeded him in 2010. Many high-profile managers have departed in recent years, leaving scant manager tenure at the firm's flagship equity funds and a depleted analyst bench.
Arguably, these changes were necessary, even if painful. Weil appears to fit in much better than Black did. And some managers quit as the firm tried to downplay the role of star managers and emphasize collaboration with analysts. Both changes could foster a more stable investment culture, and the hallmarks of Janus' style, including its growth leanings, remain. Other factors, including strong manager ownership of fund shares, demonstrate a shareholder-oriented culture.
Still, performance at several flagship funds has lagged, indicating that turnover could be taking a toll. Time will tell whether these improvements have legs.
It's worth noting that Perkins Investment Management is included under the Janus Parent umbrella. Perkins is majority-owned by Janus but operates as an independent boutique. Its culture exhibits some of the industry's best practices. The firm has retained its analysts, providing crucial stability, and the managers invest heavily in their funds. Perkins' stewardship profile is topnotch.
Price Pillar: Positive
The bulk of this fund's assets are in its D and T shares. Their respective 1% and 1.1% expense ratios each rank below-average for no-load world-stock funds. The institutional share class, which holds virtually all of the remaining assets, charges 0.96%--also a below-average figure.
Portfolio turnover at the fund has been roughly average within its category, so its trading costs likely have neither helped nor hindered the fund compared to its peers.