THE BEAR market has left the entire fund industry with some explaining to do, but some firms have a lot more to answer for than others.
Last week, this column started breaking down the question of which big fund company has the most to prove, with the finalists for the dubious distinction being Janus, Putnam and AIM.
As detailed previously, Janus had the worst dollar-weighted performance, where all stock assets are lumped together and the loss was measured from the peak of the market through May. The Denver firm also had a much better track record than the other two, which is a double-edged sword; the long-term return numbers are much more admirable than those of the other firms, but the big numbers set investor expectations which the firm failed to meet.
But owing investors an explanation is about much more than performance.
For all three firms, part of the problem was just how hard they latched on to the growth trends of the 1990s. All three firms catered to the wild, give-me-the-growth bent of investors - and it's not a fund company's fault if shareholders ignore warnings to diversify - and did little to put the brakes on, creating fund after fund that overlapped with existing issues but that could be rolled out to a hungry investing audience.
Janus had the worst overlap issues, Putnam the most expansion of new product and AIM the most drift toward an all-growth, all-momentum investment style.
All three firms saw the worst damage in their flagship and biggest-reputation funds, which is a bit unusual in an industry where standard-bearers usually are managed for stability.
Investors found no shelter in Janus and Janus 20, Putnam New Opportunities or Voyager, AIM Weingarten or Charter.
In a contest of the truly miserable, Putnam OTC Emerging Growth is the worst fund from among the three firms. It was the firm's attempt to scoop up hot money (that part worked), and it imploded because the management style was outside Putnam's biggest area of expertise.
In any and every facet of performance, this fund's a bomb, separated from the other big bear-market stinkers - like a Janus 20 - in that analysts believe it has little or no hope of bouncing back.
Where the firms start to separate and become distinct, however, comes in attitude.
Janus and Putnam, in particular, both believed their own press clippings.
"When a fund company becomes arrogant about how they are handling your money, when they think they're smarter than everybody else, that's a real problem," says Jerry Tweddell of Tweddell Investment Management in Sonora, Calif.
Putnam and AIM generally appear to have had the cockiness beaten out of them.
Both firms have made significant research and operational changes that should, on paper, make them more immune to wild company-wide performance swings in the future.
Janus managers have been humbled, but still believe they will return to the performance summit when the market sees a return to growth. Their strong returns this year have some observers believing they may be right.
Ultimately, the fund firm with the most explaining to do is a neck-and-neck race between Janus and Putnam, with the former winning (or losing) by a nose.
Simply put, Janus never warned do-it-yourself investors about overlap concerns and suggested more than the others that its managers would be able to top the charts in all conditions.
The question that remains is how these funds will repair their reputations and their shareholders' broken account balances.
Putnam has taken the biggest steps toward improvement: consolidating funds, stepping up risk management, and altering and improving its research capabilities. The effort seems aimed at reestablishing the focus on style purity and consistency.
AIM, too, has put a little more focus on stock valuations into its process, backing away from earnings momentum and moving more toward fundamentals.
That's a key step in the direction of protecting shareholders, especially if the market keeps muddling along.
Janus is the firm with the most current uncertainty, due to the defection of long-time managers such as Helen Young Hayes and Warren Lammert, and the open position of chief investment officer.
The person who gets that job will go a long way toward determining how the company positions itself to take advantage of the rebound.
For remaining investors, the key thing to watch is that management delivers on its promises for improvement.
"It's not like a Janus investor is feeling good because they're not invested in Putnam or AIM," says Christopher Traulsen, senior fund analyst for Morningstar Inc. "But management has convinced people to hang on.
They'll answer for their problems if things get better relative to peers in the future. If the market is turning and these companies can't get back to having above-average performance, the big losers will be the people who believed those promises and stuck it out."
Chuck Jaffe is senior columnist for CBS Marketwatch. He can be reached at firstname.lastname@example.org or Box 70, Cohasset, Mass. 02025-0070.