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).