DON PHILLIPS became known in the fund industry for calling things as he sees them.
As Morningstar Inc.'s first-ever analyst, he helped bring the Chicago research and data company to prominence. Today, as managing director, he oversees a company with a ratings system that can make or break mutual fund companies.
What Phillips says carries weight in the industry and should with individual investors. Last week, this column was devoted to some of his more general comments on the industry. This week, from the same interview, Phillips talks about some high-profile fund firms and more.
On prospects at Janus, a Denver-based firm that has suffered through the bear market: "The odd thing is that Janus became known for high-growth investing, when the history of the firm had actually been something different. The whole notion of Janus being the god that looks both ways was historically how the company operated. ... Yes, they were growth investors, but they wouldn't go over the edge and get into the really high-growth stuff.
"Then they had such great success when they gave up the caution that had been a hallmark of theirs over time.
"Janus has to decide if it will conform to what is increasingly an institutional expectation of them to be a high-growth manager, or do they return and redefine themselves as a growth manager but with more moderation as a trademark."
"There are a lot of smart people there and a lot of resources being applied to the problems, so I think Janus will come back, but it may not be quickly ... and it may not be soon enough to convince some investors to stick around."
On Putnam Investments, the Boston-based load-fund giant that has been equally scarred by the downturn: "One reason why the American funds are so beloved by brokers is that they never created a fund that they had to apologize to brokers for representing positively to a client. Putnam can't say that today with the Putnam OTC Emerging Growth Fund, which has disappointed a lot of people.
"Putnam has had very good international performance and done quite well in value, but they became known for their higher-momentum funds - the ones that have been terrible in the bear market - and such a disproportionate part of their assets got thrown in there that for a lot of investors it was the only place they touched Putnam. Many investors who had multiple Putnam funds were all in high-growth funds - just like Janus investors who owned several Janus funds - so they're feeling burned.
"It takes a long time to re-establish credibility with investors and the brokerage community once you have disappointed them, and both Putnam and Janus are finding that out now, because they are facing a lot of resentment from investors.
"Their performance has earned that resentment."
On fund firms he admires: "I admire the ones that do what it takes to increase the likelihood that people will use their funds right, where there is truth in labeling and they go out of their way to make sure people use their funds wisely.
"T. Rowe Price and American Funds, for example, meet those standards in spades."
On fund firms that upset him: "The ones that irritate me the most are the ones where people have the least chance of using the funds well. The Rydex funds, some of these highly leveraged funds or funds that are shorting the market come to mind. Funds that are either extremely conservative or aggressive are the ones people have the least chance of using successfully, so they get under my skin because they have gotten far away from this notion of fiduciary trusteeship. They may have created very powerful tools, and it's nice to give people access to them, but that's moving away from the trusteeship some.
"What they are doing is like saying, `We just make guns; we're not responsible for how people use them.' There is some validity to that, but it's a long way from the spirit of the law and trusteeship that I think should be the hallmark of the industry."
On the role of fund directors: "I talked to a director of a major fund complex who is also a director of a Fortune 500 company. He says, `With the company, I get a dozen letters from shareholders every year voicing their concerns. Frankly, that has made me a better director.' And then he says, `I have been a director of a fund complex for over a decade, and I have never gotten a single letter from a shareholder.' "If you never hear from shareholders, how can you purport to represent their interest? There has to be a way to make directors more visible and more central to the process of running a fund and communicating with shareholders."
Chuck Jaffe is mutual funds columnist at The Boston Globe. He can be reached by e-mail at firstname.lastname@example.org or at The Boston Globe, Box 2378, Boston, Mass. 02107-2378.