We are removing shares of Janus Capital from our Best Ideas list as a short as the stock has now:
- Appropriately discounted minimal impact from the Bill Gross hire;
- Out year estimates have dropped to near our $1.00 number for '16;
- The stock has dropped -20% from the $19 range.
In addition, short interest has been rebuilt to over 17% of float as of the most current reading which means that pessimism is peaking and now there is risk to the upside in a short covering rally. We are not gone for good on finding profitable spots to short JNS as we are still concerned that Credit, one of the main sources of growth at the firm, will start to struggle again. In the meantime there are incremental positives that should reinflate shares to higher levels (especially in light of higher short interest balances) where they will have a better risk/reward as a new short position:
- Slight market share growth - Despite the ongoing worst start in history for active equity mutual funds trends (see the latest ICI survey here), the firm is gaining market share which means it is not as exposed to broader industry trends as other equity platforms. The retooling of its PM teams at Janus 20 and 40 has worked on the margin and forward performance has improved versus benchmark which is allowing trends to be more resilient than the overall industry.
- Delevering - The firm continues to delever its balance sheet and is ensuring that it is self funding as the investment environment becomes tougher. This is not the Janus of past cycles which walked into the Bear Market of 2000 with substantial leverage AND middling investment performance. The firm reduced long term debt by ~$50 million during the quarter and extended the duration of its long term credit from 2017 to 2025. Debt to EBITDA is now just 1.8x versus over 3.0x before the Tech Wreck in early 2000 where the firm's liquidity was called into question. Simply put, the firm is managing its balance sheet at the right time.
- Gross discounted - The Street and even company commentary now calls Bill Gross a "contributor to brand equity" and not a real asset gatherer as was implied in the substantial stock jump that started shares moving higher from $12 to $19 upon his hiring. Street estimates quickly zoomed up over 20% assuming a substantial AUM impact of between +$20-30 billion. With Street estimates now back to the $1 per share range for '16, Gross has been appropriately discounted.
- Performance fee seasonality - With slightly better investment performance during the course of the year and less follow through of broader industry weakness via the ICI data, 4Q is likely to bring some incremental performance fees to boost returns. Over half of the firm's separate account performance fees hit in the last quarter of the year so seasonally this treatment could help shares in the short run.
We think there is risk to the upside at this juncture and are sidestepping putting fresh money into a short position for now. When short interest has returned to lower levels and pessimism normalizes, we will revisit the Bear case. The credit book at this point is our biggest cause for concern. It has been the main driver of AUM growth over the past 5 years, but performance in this product has become volatile. High yield spreads are now at 2011 levels, and any incremental decay will be worrisome for JNS. We think the credit exposure at the firm is under appreciated and any further blood letting in the asset class is cause for concern. We are moving shares from our Best Ideas list to our short bench but are looking for a better entry point to lay out shorts if fundamentals don't turn substantially higher.
Short interest balances have been re-built to over 17% of the float which means pessimism is now peaking again:
A downright frightening drop in fixed income (credit) performance starting in 4Q14 has corrected itself, with 75% of Janus credit products now back above benchmark this quarter. Volatility in credit performance is worrying though as this is arguably the most important segment for the firm's growth. The company's long struggle with Quant products (at least on the performance side) thawed in the quarter as well with Intech making positive strides in 3Q15 across duration for now:
The real driver of growth at Janus has been its Credit (fixed income) strategies which is why the perk up in performance this quarter is important. With high yield markets however having backed up hard in the latter half of 2015, Janus has a less recognized reliance on the continuing performance of corporate credit. This segment of the firm is the only silo that has been consistently growing the past 5 years with fixed income AUM having grown from 5% to 19% firmwide currently:
Jonathan Casteleyn, CFA, CMT
Joshua Steiner, CFA