Investment companies sometimes bury their mistakes, killing off their evil spawn, the funds that never produced or that once attracted attention but have since fallen and can’t get up.
But when Janus unveiled plans last week to kill its Olympus fund by merging it into Janus Orion, industry watchers did a double take. This was not some mercy killing of a lackluster fund, it was the end to a name that has been in the top 10 percent of all large-cap growth funds in the past decade and in the top third of its peer group for the past five years. There were no warning signs; Olympus had even recently appointed a new manager, not coincidentally the guy who runs the money at Orion.
When you dig deeper, however, the situation not only makes sense for Janus but for Olympus shareholders. Orion investors might not be quite so pleased, and all fund investors can learn a little lesson from the entire situation, just in case more fund firms develop a conscience and start to tighten their management focus.
The situation starts with Olympus, a $2.2 billion fund that needed a new manager after Clare Young announced her retirement. In June, Ron Sachs, manager of the $1.1 billion mid-cap growth Orion fund, was put in charge, and outwardly it looked like he would run both funds.
Internally, however, Janus was already planning the merger. Officials couldn’t discuss the inner workings of the deal, but some insiders suggest that marketing officials were reluctant to give up the Olympus name. Fund firms usually hang on to successful funds forever, often long after management has lost its edge.
One holdup to making the move right as Young retired involved tax accounting; Olympus had some tax-loss carry-forwards that management, to its credit, wanted to keep and move to Orion. The timing of the deal – which must be approved by shareholders at a meeting Oct. 2 before becoming effective Oct. 20 – apparently maximizes the benefits shareholders keep from previous losses. That will pay off, as Sachs most likely will sell some Olympus holdings and realize gains as he combines the $3 billion in assets into one fund.
While Olympus is better known, the younger Orion has been near the top of Lipper’s multi-cap growth category (Olympus has been middle-of-the-pack of late). With both funds having a charter that allows the manager to go anywhere, the deal simplifies management, which is always good for investors. (An evaluation of the two funds using Overlap software shows that about 20 percent of each fund’s portfolio is invested in the same stocks.)
As with any merger, shareholders should have some concerns.
While investors must approve the merger, mark the deal done right now, as there’s no foreseeable situation where this gets voted down. A shareholder who wants to hold Olympus – or who prefers a smaller Orion – should start adjusting to that reality by considering options.
The additional $2 billion in assets will change Orion. The fund currently gravitates toward mid-cap and some small-cap stocks, but experts suggest Sachs will have no choice but to tilt toward large-cap issues to put the additional money to work.
Olympus investors are likely to see a fund that has lower turnover, and is more concentrated, but otherwise should expect the fund not to be dramatically changed.
Olympus didn’t start as a large-cap fund but morphed into it over time. Orion is likely to do the same.
“If investors in Orion enjoyed the fact that Sachs could be opportunistic and could delve into a lot of small- and mid-cap stocks to make money, they should realize that the fund they’ll have after the merger won’t be able to do that,” says Christine Benz, director of mutual-fund analysis for Morningstar. “That doesn’t mean those investors should sell. Most Orion investors probably bought the fund more to be an aggressive kicker in their portfolio. … It will still be aggressive, but it will be different. They might want to add something else to the portfolio to do more with small stocks.”
In the end, it appears that Janus honestly assessed what it could do best at this point, something investors typically don’t see from fund companies.
Investors in any merger must carry out an equally blunt assessment, because they may want to bury their individual investment mistakes rather than allowing a fund manager to dictate which fund lives or dies in their portfolio.
Chuck Jaffe is senior columnist for MarketWatch. He can be reached at jaffe@marketwatch.com or at Box 70, Cohasset, MA 02025-0070.
