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| | Mutual Funds
2 scandal-tainted fund firms rise again
Growth specialists Janus and MFS redeem themselves as their style of investing returns to the forefront. PBHG isnt so lucky.
By Timothy Middleton
Two years after scandal rattled some of the mutual-fund industrys top names, some of them have made great strides not only in reforming bad practices but also in delivering excellent returns to their shareholders.
These firms have overcome both the stain of scandal and tough times for their specialty of growth investing.
Janus Funds has arisen like a phoenix and resumed its longtime role as one of the most successful fund complexes in the industry. MFS Funds has also clawed its way out of the investor doghouse, with its hallmark MFS Research Fund A (MFRFX) shining once again.
But the highest-flying of the scandal-tainted firms, PBHG Funds, is melting away. Corruption there went all the way to the top, and the firm is shattered. Its flagship, PBHG Growth (PBHGX), has done worse than 90% of its peers over the last three years.
The winners at Janus and MFS are their shareholders, and the rest of us when were shopping for new ideas. Firms that can do well against a fierce headwind can really perform when the wind is at their back, and growth is showing signs of emerging from five years of slumber.
Related news and commentary on MSN Money
Janus Funds
This Denver-based shop, whose moniker recalls the Roman god of beginnings for whom January is named, took advantage of the scandals of 2003 to reform its practices as well as its management.
The scandals centered in part on rapid-fire trading in fund shares, which damages other shareholders and is usually forbidden by fund prospectuses. In its settlement, Janus agreed to pay $100 million in shareholder restitution, $125 million in fee cuts over a period of five years and $1 million to the state of Colorado.
Redemption fees were imposed to discourage rapid trading, or hopping in and out of funds to capture short-term gains. The former chief executive resigned, and top management was overhauled. Compensation was tied to performance rather than attracting assets. The staff of security analysts was beefed up 60%.
Janus was and is best-known for its high-growth style of investing, which hurt its funds in the bear market of 2000-2002. Since then, however, 34.5% of Janus funds have performed in the top quarter of similar funds, according to Morningstar. By comparison, 31.5% of Fidelity Investments funds have such excellent records.
The firms standout has been Janus Growth & Income (JAGIX), which this year, as of Dec. 7, has delivered 12.3%, twice the return of the S&P 500 ($INX). It beat that benchmark by an average of one and a half percentage points in each of the last three years.
The manager, Minyoung Sohn, is a former Janus analyst who was made portfolio manager two years ago. He made heavy and successful bets on technology and health care as well as energy.
Half of Sohns tech holdings are semiconductor makers, but the fastest-growing segment now is software, including Microsoft (MSFT, news, msgs) and Oracle (ORCL, news, msgs).
Sohn says that Microsoft is entering an earnings sweet spot with the success of its Xbox 360 game platform and the coming release of new versions of the Windows operating system and the Office suite of applications. (Microsoft publishes MSN Money.)
Oracle shares the enterprise software space with SAP AG (SAP, news, msgs) of Germany. The latter company has a much higher price/earnings ratio, however. There is a huge valuation difference with Oracle, Sohn says.
MFS Funds
MFS Funds agreed to settlements totaling $350 million over rapid trading in 11 of its funds. That amount included $125 million in lower annual expense charges to shareholders.
MFS likewise shook up its top management in the wake of the scandals, naming Robert Pozen, formerly the No. 2 official at Fidelity, its chairman. It also instituted internal reforms. In the last three years, 20.5% of MFS funds have ranked in the top performance quartile.
One of the firms best-known funds, MFS Research, has recovered from significantly lagging during the bear market to significantly beating the S&P 500 in each of the last two years. This year its ahead 7.1%, a point and a half more than the benchmark index.
MFS Research pools the best investment ideas of MFSs analysts. MFS declined to make the funds manager, Katrina Mead, available for interview, but Morningstar analyst Laura Pavlenko Lutton says, Our confidence in MFS Research is growing.
She says the fund has put even more stress on the stock-picking skills of MFSs analysts. In a recent report, she wrote, The fund has done well despite its preference for growth names, which generally have underperformed value names.
The funds top holdings include Total (TTFNF, news, msgs), the French oil company; Goldman Sachs Group (GS, news, msgs), the investment banking firm; Bank of America (BAC, news, msgs) and Altria Group (MO, news, msgs), formerly Philip Morris.
PBHG Funds
If two of the best mutual fund complexes swept into the scandals have come back strongly, the boutique operator of PBHG funds has been seriously, and possibly fatally, wounded. Last year the management company changed its name to Liberty Ridge Capital, and this year it was dropped as adviser to PBHGs funds. It continues to sub-advise some funds, but those contracts are now in doubt as well.
Founders Gary Pilgrim and Harold Baxter paid some of the most severe penalties in the fund scandals, $80 million each, and their firm paid an additional $90 million, all to be refunded to fund shareholders. Among other things, Pilgrim allowed the fund he managed, PBHG Growth, to be rapidly traded by a hedge fund owned by a friend.
Demoralized and seemingly directionless, PBHG funds went into a tailspin from which they have not recovered. A single one of the firms 17 portfolios has ranked among the top 25% of similar funds over the last three years. PBHG Growth, the firms flagship, has trailed the performance of the Russell Mid-Cap Growth Index every year since 2000.
PBHG declined to comment for this article.
Scrubbed of the PBHG association, the funds are changing their name to Old Mutual Advisor Funds II. Old Mutual Plc (GB:738992, news, msgs), a London-based insurer, bought PBHG along with a score of other money management firms in 2000.
The success of the Janus and MFS funds signal a strengthening market for growth stocks, as well as the restoration of their excellent reputations. Growth is synonymous with bull market, suggesting the current weak rally could gain strength next year.
At the time of publication, Timothy Middleton didnt own any securities mentioned in this article.
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