April 19, 2005 -- Janus Mercury Fund (JAMRX) underwent a manager change three years ago and has been repairing poor past performance following the excesses of the late 1990's. David Corkins began reshaping the portfolio in February 2003 after taking over from Warren Lammert as lead manager. Lammert had run the portfolio for ten years prior. Corkins previously piloted the more conservative Janus Growth and Income Fund (JAGIX).
For the twelve-month period ended March 31, Mercury returned 3.8%, versus a gain of 1.8% for the average large-cap growth fund, and 6.7% for the S&P 500. For the three years ended in March, it registered an annualized return of 1.8%, versus a loss of 0.5% for its peers, and a gain of 2.7% for the S&P 500. Over the five years ended in March, the fund compares less favorably to its peers, having recorded some of its worst performance from 2000 to 2002. It lost 13.6% on average over the period, underperforming its peers, which fell 9.0%, and the S&P 500, which lost 3.2%. The Russell 1000, which is used as a benchmark by the fund, shed 3.0%.
A concentration in the technology sector and the implosion of the dot-com industry contributed to the poor performance following the market's peak in 2000. With double digit losses against the S&P 500 and Russell 1000, Janus began to make amends as Mercury, and other of its growth offerings, fared poorly. Adding fuel to the fire, Mercury and other Janus funds were cited among those involved in the rapid-fire trading scandal in 2003. Janus has since reached a final settlement with regulators, and has taken measures to compensate investors.
Mercury was upgraded to 4 Stars from 3 by Standard & Poor's in February 2005, outperforming its peers on a risk-adjusted basis over the 36-month period. Recent better-than-peer performance can be attributed to opportunities in a number of market sectors where Corkins is invested.
In selecting securities, Corkins invests with a long-term mindset, seeking consistent returns over time. Despite his less aggressive approach versus the fund's previous manager, he is still able to invest in dynamic companies with little limitation on location, size, or industry. Since Corkins took over, he has reduced the number of stocks in the portfolio to 70 from around 100, a more manageable size in his opinion. He selects high-quality firms with good management teams focused on free cash flow and return on invested capital.
Three quarters of the portfolio invests in stocks of large-cap growth companies, while the remainder tend to be in what Corkins calls "fallen growth names," or weaker companies that have done well in the past, and are expected to return to their traditional growth status due to a catalyst such as new management. Corkins believes the approach provides a good balance within the portfolio. "Generally, when the economy is doing well, growth stocks outperform, and in turn, three quarters of the portfolio does well," he explains. "When the economy is sluggish and value stocks are doing well, then the remaining quarter of the portfolio outperforms."
At the end of February, top holdings included Liberty Media Corp. (L) at 4.50%, Roche Holding A.G. with 3.60% Berkshire Hathaway, Inc. (BRK-B), 3.59%, and Tyco International, Ltd. (TYC) 3.57%. Corkins notes that "Tyco is one of the weakening stocks in the portfolio." Added in 2003, the company reorganized its management, and is now focused on improving cash flow. A general turnaround took place as the company restructured its balance sheet, divested businesses, and bought back stock. "They're benefiting from strong economic trends right now," Corkins adds, but recognizes that it's not as strong a value as it was when originally added to the portfolio. Corkins is value conscious: "Risk-reward is starting to change, and so we're taking a slight cutback."
The manager isn't optimistic about financials either, and previously reduced some of his positions in the sector, but believes there are a few attractive opportunities for patient investors now. Within the portfolio, JPMorgan (JPM), Berkshire Hathaway, and Goldman Sachs (GS) are unique cases. "They're actually benefiting, despite market conditions," he said.
Typically, Corkins doesn't allow one sector to make up more than 20%-25% of the portfolio at a time. Overseas investments don't exceed that level either. Sectors in which Corkins is currently invested include healthcare, consumer discretionary, technology, and industrials. Finding the large-cap pharmaceutical category weak, the manager is more interested in small companies focused on oncology, medical supplies and devices, for example.
With a more manageable portfolio at hand, Corkins can focus on minimizing risk and searching for new opportunities. He believes knowing individual stocks well helps control risk. Compared to its peers, Mercury does have a higher Sharpe ratio, 0.02 versus -0.12. Portfolio turnover is lower than its peers, and volatility is just slightly lower. Corkins sells mainly when he believes stocks are fully valued.
Overall, Corkins believes that "great companies have three things in common: strong management, a good business and predictable earnings." With a thorough understanding of each and every company that's sparks his interest, Corkins is looking to gain from growth that others might miss.
Contact Bob Keane with questions or comments at: firstname.lastname@example.org.