Killing of top fund comes as surprise, but makes sense

Your Funds

Your Money

July 18, 2006|By CHARLES JAFFE | CHARLES JAFFE,MARKETWATCH

Investment companies sometimes bury their mistakes, killing off their evil spawn, the funds that never produced good results, or which once attracted attention but have since fallen and can't get up.

But when Janus unveiled plans last week to kill its Olympus fund by merging it into Janus Orion, industry watchers did a double take. This was not some mercy killing of a lackluster fund, it was the end to a name that has been in the top 10 percent of all large-cap growth funds over the last decade, and which has been in the top third of its peer group for the past five years.

There were no warning signs; Olympus had even recently appointed a new manager, not coincidentally the guy who runs the money at Orion.

When you dig deeper, however, the situation not only makes sense for Janus, but for Olympus shareholders. Orion investors might not be quite so pleased, and all fund investors can learn a little lesson from the entire situation, just in case more fund firms develop a conscience and start to tighten their management focus.

The situation starts with Olympus (JAOLX), a $2.2 billion fund that needed a new manager after Clare Young announced her retirement. In June, Ron Sachs, manager of the $1.1 billion mid-cap growth Orion fund (JORNX), was put in charge and outwardly it looked like he would run both funds.

Internally, however, Janus was already planning the merger. Officials couldn't discuss the inner workings of the deal, but some insiders suggest that marketing officials were reluctant to give up the Olympus name. Fund firms usually hang on to successful funds forever, often long after management has lost its edge.

One holdup to making the move right as Young retired involved tax accounting; Olympus had some tax-loss carryforwards that management, to its credit, wanted to keep and move to Orion. The timing of the deal - which must be approved by shareholders at a meeting Oct. 2 before becoming effective Oct. 20 - apparently maximizes the benefits shareholders keep from previous losses. That will pay off as Sachs most likely will sell some Olympus holdings and realize gains as he combines the $3 billion in assets into one fund.

While Olympus is better known - an annualized return of 10.5 percent over a decade does that - the younger Orion has been better, near the top of Lipper's multi-cap growth category (Olympus has been middle-of-the-pack of late). With both funds having a charter that allows the manager to go anywhere, the deal simplifies management, which is always good for investors.

(An evaluation of the two funds using Overlap software shows that the about 20 percent of each fund's portfolio is invested in the same stocks.)

While investors must approve the merger, mark the deal done, as there's no foreseeable situation where this gets voted down. A shareholder who wants to hold Olympus - or who prefers a smaller Orion - should start adjusting to that reality by considering options.

The additional $2 billion in assets will change Orion. The fund currently gravitates toward mid-cap and even some small-cap stocks, but experts suggest Sachs will have no choice but to tilt toward large-cap issues to put the additional money to work.

Olympus investors are likely to see a fund that has lower turnover and that is more concentrated, but otherwise should expect the fund not to be radically changed. Shareholders who weren't concerned when Sachs was named manager last month should not be upset now.

Olympus didn't really start as a large-cap fund but morphed into one over time. Orion is likely to undergo that same transformation.

"If investors in Orion enjoyed the fact that Sachs could be opportunistic and could delve into a lot of small- and mid-cap stocks to make money, they should realize that the fund they'll have after the merger won't be able to do that," says Christine Benz, director of mutual fund analysis for Morningstar.

"That doesn't mean those investors should sell. Most Orion investors probably bought the fund more to be an aggressive kicker in their portfolio, rather than to cover the mid-cap space; it will still be aggressive, but it will be different. They might want to add something else to the portfolio to do more with small stocks."

In the end, it appears that Janus did an honest assessment of what it could do best at this point, something investors typically don't see from fund companies. More funds - even those with good records - should probably be merged to death, if only to simplify the management process and allow consumers to build better, easier-to-understand portfolios.

Investors in any merger must do an equally blunt assessment, because they may want to bury their individual investment mistakes rather than allowing a fund manager to dictate which fund lives or dies in their portfolio.

Chuck Jaffe is senior columnist for MarketWatch. He can be reached at jaffe@marketwatch.com or at Box 70, Cohasset, MA 02025-0070.

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