Has Janus Added Value as an Active Manager?

To keep the list to a manageable number of funds and to ensure that I examine long-term results through full economic cycles, I analyzed the 15-year period ending September 30, 2016. Furthermore, when there was more than one share class of fund available, I used the lowest-cost shares that were obtainable for the entire period. In the cases where Janus has more than one fund in an asset class, the average return of those funds was used in the comparison.

The following table shows the performance data for the actively managed funds offered by Janus in five domestic equity asset classes and one international equity asset class. Funds are placed in a given asset class based on Morningstar’s style categorization.

October 2001-September 2016

*Morningstar places the fund in the small-value category. However, Morningstar also shows that the fund’s investment style actually drifted to small blend. Given the fund’s name, which I assume investors rely on, benchmarking the fund against small-value funds is the most appropriate.

The following are the most important takeaways from this data:

• In the three asset classes for which there are comparable DFA funds, the Janus active funds outperformed in one, and that was by just 0.1%.

• In the six asset classes for which there are comparable index funds from Vanguard, the Janus active funds outperformed in two.

• A portfolio of Janus’ actively managed funds, equal-weighted in the three asset classes for which there are comparable DFA funds, returned 7.5% a year. The average expense ratio was 0.69%. An equal-weighted portfolio of DFA funds in the same three asset classes returned 8.0% a year, outperforming the comparable Janus portfolio by 0.5 percentage points a year. The DFA portfolio’s average expense ratio was 0.29%. The underperformance of the Janus actively managed portfolio was slightly higher than the difference (0.4 percentage points) in the average expense ratios.

• In the six asset classes for which comparable Vanguard index funds are available, an equal-weighted portfolio of Janus’ actively managed funds returned 8.3% a year. The average expense ratio was 0.78%. An equal-weighted portfolio of Vanguard index funds in the same six asset classes returned 8.7% a year, outperforming the actively managed portfolio by 0.4 percentage points a year. The Vanguard index fund portfolio’s average expense ratio was 0.09%. In this case, the underperformance of Janus’ active funds was more than fully explained by the difference (0.69 percentage points) in their average expense ratios.

• This analysis is on a pre-tax basis. But taxes, not the expense ratio or trading costs, are often the largest expense incurred by taxable investors in actively managed funds.

The preceding analysis may help explain why Janus’ assets under management have been falling.

Factor analysis

I’ll now take another look at the performance of the 10 domestic actively managed funds from Janus included in the previous analysis using the analytical tools and data available at Portfolio Visualizer. Factor analysis provides important additional insights into a fund’s performance because Morningstar asset class categories are very broad and active funds can style drift.

The following table shows the results of the three-factor (beta, size and value), four-factor (adding momentum) and six-factor (adding quality and low beta) analysis for the firm’s U.S. funds. Due to availability, the data covers the period from October 2001 through August 2016. Each t-statistic is in parentheses.

October 2001-September 2016

When we examine the results from the three-factor analysis, we find that five of the 10 Janus funds generated positive alphas. The average annual alpha was 0.2%. None of the alphas were statistically significant at the 5% level.

When we look at results from the four-factor analysis, we again find that five of the 10 Janus funds generated positive alphas. The average annual alpha was now slightly negative at -0.2%. None of the alphas were statistically significant at the 5% level.

When we include all six factors in our analysis, we find only three of the 10 Janus funds showed positive alphas. The average annual alpha, however, fell to a negative -0.6%. Just one of the alphas was statistically significant at the 5% level, and it was negative.

To summarize, there isn’t any significant evidence in the factor analysis that Janus’ actively managed funds were adding value. In addition, their funds underperformed both Vanguard and DFA’s funds from the same asset classes. In other words, Janus’ performance didn’t justify the added cost of its active management.

Reviewing results

This article is the 16th in my series reviewing the performance of the market’s leading mutual fund families. The following table shows the performance of the portfolios I’ve constructed in my prior analyses for each of the active fund families I have examined relative to the performance of comparable portfolios from Vanguard and DFA, as well as the results from each factor analysis.

With TIAA-CREF, I did not originally perform the factor analysis. Thus, this data wasn’t in the initial article. However, I’ve now added that data, so we have the same analysis for all 16 active fund families.

The following are some highlights from the table:

• Of the 16 actively managed mutual fund family portfolios, just five (including a portfolio of Vanguard active funds) outperformed their comparable Vanguard index fund portfolios, and in one case that outperformance was just one-tenth of a percentage point. The average for all 16 was an underperformance of 0.2%. Clearly, active management was a loser’s game; only a minority of the fund families “won.”

• Compared to the DFA portfolios, just one of the actively managed fund families (American Funds) was able to outperform, and that was by the slimmest of margins, only 0.1%. There was one tie in performance (T. Rowe Price). The average underperformance for all 16 was 0.8%.

• The three-factor regressions produced an average alpha for the 16 active fund families of 0%. The four-factor regressions produced an average alpha of -0.2%. The six-factor regressions produced an average alpha of -0.9%.

• The sole actively managed fund family in the group that added value when compared to both Vanguard’s index funds and funds from DFA (although in the latter case by only the smallest of margins) was American Funds. American Funds also had positive alphas relative to each of the factor regressions. Vanguard’s actively managed funds outperformed the firm’s own passive funds, but they underperformed the DFA portfolio by an amount four times greater. Vanguard’s active funds posted positive alphas relative to each of the factor regressions as well. The Waddell & Reed funds also showed positive alphas relative to each of the factor regressions, but underperformed comparable passive portfolios from both Vanguard (by a small amount) and DFA. And finally, T. Rowe Price funds outperformed the comparable portfolio from Vanguard and matched the DFA portfolio, but also posted positive alphas relative to each of the factor regressions.

This data serves as strong evidence that, even though the markets may not be perfectly efficient, investors in most actively managed funds will not benefit from efforts to exploit supposed inefficiencies, especially once taxes are considered .

Larry Swedroe is director of research for the BAM Alliance, a community of more than 150 independent registered investment advisors throughout the country.

Disclosure: The included data and analysis is a summary of 15 other pieces related to an ongoing series evaluating actively managed mutual fund families. For a complete list of those pieces, click to search Larry Swedroe at: www.advisorperspectives.com. The exception is the Hartford fund family analysis, which can be found at www.etf.com. The corresponding portfolios are provided for informational purposes only, were constructed specifically for this review and are not portfolios that Buckingham recommends. The returns data included is from Morningstar, and the factor analysis tool was provided by Portfolio Visualizer: www.portfoliovisualizer.com/factor-analysis. Performance is historical and does not guarantee future results. Information comes from sources deemed reliable but its accuracy cannot be guaranteed. It should not be assumed that any of the securities listed were or will prove to be profitable.

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