In our Q1 2015 letter to clients, we present our views on stocks and bonds in addition to the goings on in our portfolios. Below is a link to a PDF version of our Q1 letter.
Dr. Bill Conerly has spoken at numerous events sponsored by Northwest Investment Counselors (NWIC) and continues to write about the national and local financial markets. Below are his most recent charts on the U.S. economy, U.S. financial markets, and the local Oregon economy. The charts also provide a comment by Dr. Conerly on his expectations or an insight on the subject.
We are pleased to provide Dr. Conerly’s charts to our clients. Please see his website for additional details. www.conerlyconsulting.com
What do we do when we are not managing your money? Chances are you can catch one member of the team out volunteering, that’s what. While prudently managing your money is our number one job, we also believe that giving back to our community is just as important. Not only do we sponsor organizations such as the Oregon Children’s Theatre where John Woolley has been a past board President and Treasurer, we volunteer hours in our community (frequently with our children).
John and his wife, Karen, have lead mission trips to Rwanda working with street orphans and resettlement refugees. Their last trip was in 2009. He is now helping two of his daughters prepare for their trip to Managua, Nicaragua where they will be working with Forward Edge International. While in Nicaragua they will be helping repair the Villa Esperanza facility which is a safe haven for girls trying to escape their life in the garbage dump/landfill of Managua and the horrors that life in the dump entails.
Beth Craven puts in many volunteer hours at her girls’ high school, Jesuit. She has also accompanied her daughters as they fulfill Jesuit’s numerous required volunteer hours at places such as an elderly hospice house in SE Portland and The Boys & Girls Club.
Christel Turkiewicz can frequently be found at many elementary schools around the city teaching students the basics of personal finance through her work as a volunteer with Financial Beginnings. While living in Thailand during 2008-2010 she helped teach an English camp in northern Thailand for under privileged girls. She also volunteered this year at the Oregon Food Bank with her son as he completed a community project for his People to People Student Ambassador program.
Not to be outdone by the others at Northwest, Mark Scarlett will head out in July for two weeks in Zambia with a group from Lake Grove Presbyterian Church in partnership with World Vision. He will be working in an extremely impoverished area called Sinazongwe in the southern part of Zambia where they will focus on agricultural development/food security, clean water, HIV/AIDS and education. Mark made his first journey there in 2009. His wife, Anita, and their two oldest daughters are involved in many philanthropic events as part of the National Charity League organization.
We appreciate your business, and we appreciate the community both locally and globally we live and work in.
We have added Janus Capital Group, Inc. (JNS) to the Smaller Companies portfolio. Janus manages approximately $173 billion through various mutual funds and separate accounts for retail and institutional accounts. In recent years, Janus has diversified away from a focus on the growth style of investing by purchasing Perkins Investment Management (a value based manager) and INTECH Investment Management (a quantitative based manager). Janus has also been growing their fixed income management (9% of AUM). Currently, quantitative assets under management are about 25% of the total and value assets under management are about 12% of their total.
The chart presents the history of Janus’ assets under management at year end since 1996. Janus was a darling of the dot-com era with their successful (and aggressive) growth style of investing. Janus peaked at $250 billion in assets under management in 2000. Not surprisingly, Janus’ stock performance since 2000 has been dismal and there has been a fair amount of senior management and portfolio manager turnover.
What is our thesis? Despite a rocky ten years for Janus, the asset management business is still a good business and Janus is a mid-sized competitor with a narrow economic moat around their business. Janus’ return on tangible invested capital (ROIC) is over 200%. Management, in recent years, has improved Janus’ balance sheet with net debt down to around $100 million. The Board of Directors upped the annual dividend to $0.20 per share from $0.04 (not that we focus of dividends in the Smaller Companies portfolio, but if the Company pays it out, management cannot waste it on acquisitions). Currently, the stock is trading at an unlevered operating income (OP) to market value of invested capital (MVIC) of about 20% or a 5x multiple of MVIC/OP. Based on our discounted cash flow (DCF) and economic value added (EVA) analysis, we estimated that Janus is worth around $14 per share.
We also recognize that there are some fundamental changes in the asset management business with the advent of exchange traded funds (ETFs). We expect that it will be much harder for small and mid-sized mutual fund firms like Janus to compete in the coming years. While management is attempting to broaden Janus’s scope and scale (and we hope they succeed), we would prefer the Board of Directors put Janus up for sale. In this case, our analysis indicates a possible value of $18 per share or about 100% gain on our investment (click table below).
Did you know that registered investment advisors (RIAs) and broker/dealers (representatives) are held to a different standard of care when it comes to their clients? RIAs must meet the “fiduciary” standard as regulated by the Investment Advisers Act of 1940 whereas brokers and dealers must meet the “suitability” standard as governed by the Securities Exchange Act of 1934 and FINRA (The Financial Industry Regulatory Authority).
Should you care? Of course you should. When you get a recommendation from a registered representative (a broker), they must ensure that their recommendation is suitable for you. In other words, the security must be appropriate for you given your financial situation. However, it doesn’t mean that the security would necessarily meet the needs of your overall portfolio. It is more of a transactional focus rather than an advisory focus. An RIA, on the other hand, must ensure; that the clients’ needs are placed first, that they act in the best interest of the client (does it meet the client’s portfolio needs), and that all conflicts of interest are disclosed.
There is pending legislation to try and establish a universal standard for all financial professionals, however it would appear that it is far from reaching the floors for a vote in either the house or the senate. So what can you do as an investor? Simply knowing what type of relationship you are involved in with your financial professional is a great place to start. You know the saying, “Caveat Emptor,” Let the buyer beware.
Northwest Investment Counselors is an independent Registered Investment Advisory firm.