Why Janus investors are fleeing

In 2000, Janus Capital Group's assets under management reached $321 billion, making it one of the largest investment managers in the world. The firm's commercials, which filled the airwaves, touted the quality of Janus' research. The idea was that Janus dug deeper and more exhaustively than other firms to discover stocks the market had undervalued.

Unfortunately for Janus, 2000 was to be its peak in assets. By March 2012, assets under management had fallen virtually in half to $164 billion. But that wasn't to be their nadir. Despite the market's strong performance in 2012 and 2013, Morningstar reports that as of June 2014, total assets under management at Janus had fallen almost another 40 percent to $103 billion. The most recent performance of its mutual funds hasn't helped matters any.

I took a look at the Morningstar performance rankings for some of Janus' larger funds during the five-year period ending Aug. 18. Two of its flagships funds are the highly concentrated Janus Twenty Fund (JNTFX), with $9.4 billion in assets, and the less concentrated Janus Forty Fund (JARTX), with $2.6 billion in assets. JNTFX ranked in the 94th percentile, and JARTX ranked in the 97th.

Another domestic flagship fund, the Janus Fund (JANDX), with $7.5 billion in assets, did somewhat better, ranking in the 81st percentile. The firm's leading international fund, Janus Overseas (JNOSX), with $4.1 billion in assets, "outdid" its other relatives, posting a ranking in the 98th percentile.

Another one of its leading funds was Janus Worldwide, which two years ago had $2 billion in assets. That was down from a peak of about $45 billion at the height of the Internet bubble. The fund's record was so poor that it was merged into the smaller Janus Global Research fund, and the evidence of its terrible performance magically vanished from Morningstar's website. The poor returns that investors experienced, of course, did not similarly disappear.

It's hard for me to discuss Janus without commenting on those earlier TV commercials. They've always provided a good laugh. For example, one would show Janus researchers checking to see how many lights were on and how many cars were parked at some hotel. Another would show researchers checking to see how many optical fiber cables were being laid in the ground.

The folks at Goldman Sachs (GS), Morgan Stanley (MS) and others never thought to do such things in their efforts to find undervalued stocks. Only the researchers at Janus were smart enough to figure it out. At least that was what the firm was trying to get you to believe. Apparently, it presumed that investors really are that ignorant.

The outflow from Janus' funds is indicative of a major trend: Investors are abandoning active strategies (and their high costs) and moving to passive strategies (such as indexing). An Aug. 20 article in The Wall Street Journal (subscription required) used Morningstar data to note that "Investors poured a net $336 billion into passively managed stock and bond funds in 2013, handily beating the $53 billion invested in traditional mutual funds of the same type."

During the first seven months of this year, investors put a net $177 billion into stock and bond passive funds. That's far more than the $74 billion they added to actively managed funds over the same period.

John Rekenthaler, vice president of research for Morningstar, recently provided further evidence (registration required) of this growing trend toward passive management. He tallied the net sales for all passive mutual funds, exchange-traded funds and active mutual funds during the 12-month period ended June 30 and found that passive mutual funds and exchange-traded funds together accounted for 68 percent of the market share.

Rekenthaler wrote: "Passive investing is now the mainstream approach." He added that, aside from alternative investing, "there's no place remaining where active managers are safe from passive competition."

A second, and related, major trend is occurring. Investors are abandoning broker-dealers (who provide only a "suitability" standard of care) as their investment or financial advisors and are moving their assets to Registered Investment Advisors (who provide a "fiduciary" standard of care, a much higher level).

Both of these trends are like powerful waves that have been gathering strength. They're almost certainly set to continue as more and more investors become educated about the reasons behind the persistently poor performance of actively managed funds and begin seeking advice that's solely in their interests. No force is strong enough to defeat an idea whose time has come.