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Fund in Focus: Janus Risk-Managed Stock Fund

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Getting an Edge On the S&P 500

Aug. 5, 2003 — The Janus Risk-Managed Stock fund does not have lofty goals, says Robert Fernholz, who developed the investment process used to run the portfolio.

The fund, which was launched by Janus in February, employs a mathematical formula in an effort to beat the Standard & Poor’s 500-stock index.

Using a computer model, “we’re able to improve, slightly, on the performance of the index,” says Fernholz, the chief investment officer and CEO of Enhanced Investment Technologies LLC (INTECH), a subsidiary of Janus Capital Group (JNS). “It’s a modest improvement.”

The strategy tries to top the return on the index by one to four percentage points and “can do this on a reasonably regular basis,” Fernholz says. While a slight gain like this may not seem like much in the short term, over time, say 20 years, it can add it to “a pretty interesting number,” he adds.

The idea behind the methodology is to pick stocks that have high volatility compared to the index and low correlations to each other; that is, they don’t move in the same direction at the same time. It also seeks to outpace the index with less risk.

In general, the Janus fund holds only about 80% of the stocks in the S&P 500 and is biased towards its smaller components, according to Fernholz.

The INTECH team that oversees the fund does not analyze individual companies, nor does it try to predict how the stock market will move. “We don’t actually know what the companies do,” says Fernholz. “But we know very well how they fit into a portfolio,” and how modifying their weight in the fund can change its performance.

While the strategy is aimed at outpacing the fund’s benchmark, it won’t prevent losses in a bear market, Fernholz says.

While the performance figures aren’t entirely meaningful since the $49-million fund just went live, it has lagged its bogey so far. Since its launch on February 28, the fund was up 13.5% through yesterday, versus 17.7% for the index over the same period. However, INTECH’s institutional funds, which use the same strategy as the Janus fund, have outpaced their indexes over the last ten years, according to the firm’s data.

The expense ratio on the Janus fund is 1.26% a year, versus 0.62% for the average S&P 500 index fund, and 1.29% for the average large-cap blend fund.

Janus Risk-Managed Stock is the first quantitative fund offered directly to investors by Janus. Before the fund’s debut, Janus added two other INTECH-managed quantitative funds to its Advisor series of products that are sold through financial intermediaries.

The enhanced index funds are seen by Janus as more attractive than index funds because they have the potential to beat market gauges with less risk, says Janus spokesman Blair Johnson. Also, Janus views the Risk-Managed Stock fund as more conservative than its traditional growth-oriented fare, he says.

The Risk-Managed Stock fund is best suited for long-term investors, and because it is not intended to be tax-efficient it is makes more sense to own it in a tax-free account, like a retirement account, Fernholz says.

In any case, the fund’s performance “is not going to be terribly exciting,” he says.