The wise fund investor watches top management

Your Funds

Dollars & Sense

November 04, 2001|By CHARLES JAFFE

ALWAYS keep an eye on top management. When a mutual fund firm is hot, everyone worries that management will leave. When the firm is lagging, no one seems to care.

That has to be why Janus Fund founder Tom Bailey's recent sale of his ownership stake in the firm caused barely a ripple in the industry. In 2000, before the current market decline dropped Janus to the bottom of the performance heap, investors were panicked that Bailey might leave and take a bunch of managers with him.

Bailey, the firm's chief executive officer, was involved at the time in a nasty fight for control of Janus. Kansas City Southern was spinning off its financial assets, including the fund firm. Bailey didn't want Janus to be part of the deal, which created Stilwell Financial.

The spinoff simply gave Janus a new holding company in Stilwell. But investors still worried that the change would have an impact on money management at Janus.

Fast forward to a few weeks ago, when Bailey sold his remaining stake in Janus back to Stilwell for $600 million.

Bailey - who sold the first half of his Janus stake to Stilwell in January - took advantage of a "look-back" provision in his deal with the holding company, which allowed him to sell back his shares at a price that was in effect in 2000.

Given the market's decline since peaking in March 2000, no one can argue the financial sense of the move. Bailey made a lot more money selling now, before the provision expired. You can't fault him for that, but it's interesting that the deal went virtually unnoticed.

Bailey will remain Janus' chief executive, but he no longer will be able to appoint independent directors for the firm. Given the tempestuous relationship he had with Stilwell, however, it's reasonable to wonder how long he'll actually stick around and how his departure might affect Janus.

It's not like he took a big chunk of his $600 million and, say, invested it in Janus funds. He simply cashed out.

As Russel Kinnel, director of fund analysis at Morningstar Inc. noted: "Seeing a CEO bail out when the funds are enduring an awful year isn't exactly the right message to send to shareholders."

Bailey isn't the first leader to sell out.

Michael Price sold his Mutual Series funds to Franklin Templeton and stuck around to run them for a while, but most observers would agree that the funds were forever changed.

Former Janus manager Tom Marsico sold his eponymic fund family, but he has stayed on board and observers notice no real change. He also threw $100 million of the upfront money he got for selling the firm right back into the Marsico funds.

At some point, every fund family changes its leadership. It may be via merger, retirement or even tragedy.

Regardless of the situation, investors need to pay attention to these changes, to see whether there will be a major shift in how the fund family operates.

Bailey, for example, hasn't run a fund for years, so the impact of his departure would be muted. He's highly involved, but no one should expect Janus' fortunes to soar or falter simply because he pulls the rip cord on his golden parachute.

The bigger issue is how such a change might impact the firm's culture, the style that led to its run at the end of the 1990s.

How a fund firm does business - what it values in stock-picking - should not be overlooked.

Consider the Alger funds, which lost company President David Alger and three-quarters of its research team in the World Trade Center Sept. 11. The return of Fred Alger, the founder, leads many shareholders to believe that the firm will be able to maintain its stock-picking values and capabilities.

In the wake of the tragedy, Fred Alger was quick to note that the bulk of his own monies and his family's fortune is invested in the company. That creates tremendous incentive to keep things running smoothly.

So long as management teams remain in place - particularly if their financial interests are aligned with their customers' - there is no reason for an investor to panic and sell. But if a management change is accompanied by structural moves - outsiders being brought in to upgrade key research departments, sudden changes in assets or increased turnover rates among funds - that could be a warning sign.

Fund companies get into at least as much trouble when things are going against them as when things are good; investors need to keep an eye on management at all times.

Chuck Jaffe is mutual funds columnist at The Boston Globe. He can be reached by e-mail at or at The Boston Globe, Box 2378, Boston, Mass. 02107-2378.

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