"Your clients can feel more comfortable getting back in the market," coos a recent full-page ad from Janus Capital Group, pitching the new Janus Protected Series-Growth fund to financial advisors who could get paid for recommending it.
That’s right, the Denver-based mutual fund company--known in the late 1990s for its go-go tech-heavy growth funds--has gotten into the “downside protection" investment business. Now the nation’s 16th-largest mutual fund company, with $170 billion under management, Janus launched the new fund in May just before the recent stock mar- ket carnage. With insurance as a back- stop, Janus declares, the fund’s net asset value can fall to no less than 80% of its peak value, less distributions.
The novel fund seems designed to at- tract the sort of nervous-Nellie money that has been drawn recently to vehicles like indexed annuities. So far Janus Protected has drawn $50 million. But it’s hard to see how it makes sense for an average investor. While it carries the "growth" label, the new fund states in documentation that its holdings can vary between 100% stocks and 100% cash and that it intends to buy stocks as markets rise and sell them as they fall.
Should the fund drop to 80% of its peak value, it terminates, and investors are paid off. So those who bought at the top are stuck with a 20% loss, while others, depending on the price they paid, would have smaller losses or even gains. So much for timing your own losses and gains for tax purposes.
Moreover, if investors wanted to stick with the market to take advantage of the recovery that usually follows a sharp decline, they’d have to take their cash and rush to invest it elsewhere.
With the fund’s built-in plan to head for cash when markets are falling, is that 20%-off insurance even needed? Ah, we’re now talking about marketing, and it doesn’t come for free. Janus Protected carries a stated annual expense ratio that can be as high as 1.64% of assets (a small portion is waived now), roughly double the average Janus tab. (That expense is on top of the 5.75% load some broker-sold classes of the shares carry.)
Nearly half the annual expense fee is being paid to a unit of the French bank BNP Paribas for the insurance. This is a bit ironic, considering that thanks to the European debt crisis the bank’s stock is off 34% since it started insuring Janus Protected. Indeed, among the nine pages of stated risks in the prospectus is that BNP Paribas might not be good for the guaranteed payoff if there’s a crisis.
Meanwhile, the fund’s investing methodology and expense drag virtually guarantee its performance will lag in an up market, especially when compared to the much larger ($7.4 billion) flagship Janus Fund. After all, buying high and selling low is the opposite of the traditional advice for amassing wealth.
Janus Fund and Janus Protected share the same manager: Janus Co-Chief Investment Officer Jonathan Coleman. Since its May inception Janus Protected is off 10.6%. That’s worse than the S&P 500’s 9.2% hit and the Janus Fund’s 9.5% drop.
Not that the downside protection is totally worthless, mind you. To some degree, the structure of Janus Protected resembles an out-of-the-money put--an option that gives you the right to sell a stock at a preset price that’s less than what it’s trading for now. Janus argues the fund is cheaper than buying puts or using other hedging strategies. Perhaps.
Still, if you’re a long-term investor, you could probably get much the same result or better with a simple asset allocation between low-cost stock and bond index funds and by rebalancing your portfolio.