Marketwatch recently published an article “Wealth Creators Versus Wealth Destroyers”, which reported that Janus Capital Group was the greatest wealth-destroying mutual fund firm of the last decade:
To learn that your mutual-fund firm’s lineup posted negative returns over a decade is one thing; to realize that almost $60 billion of investors’ wealth was wiped out is another matter entirely.
That’s what happened at Janus Capital Group Inc. from 2000 through 2009. The fund giant’s offerings collectively saw 10-year asset weighted total return of minus 1% a year, which translates into $58.4 billion of investment losses.
Janus was the worst “wealth destroyer” in a study released this week from investment researcher Morningstar Inc. Results were not much better at Putnam Investments, which shredded $46.4 billion of shareholder wealth in the period, while mutual funds at AllianceBernstein Holdings and Invesco Aim, a unit of Invesco Ltd. lost shareholders $11.4 billion and $10.1 billion, respectively.
To me, this criticism of Janus is unfair. Mutual funds have to follow the rules in their charter. Most Janus funds provide high-beta, focussed vehicles with a growth orientation. So they tend to outperform their peers during bullish periods and underperform during bearish periods.
Most of the blame for the heavy losses belongs not with Janus, but with faulty investment approaches without proper risk management. If someone owned Janus funds using a reasonable exit strategy (trailing stop loss, falling below a moving average etc), they could have minimized the large drawdowns in 2000-2002 and 2008 and been profitable using Janus funds over the last decade.
Let’s look at automobiles for an analogy. The accident rates for the Alfa Romeo are higher than for the Ford Taurus. But the blame largely belongs with the driver, not the car manufacturer. Alfa Romeo owners drive faster, are more aggressive in changing lanes and use much less “risk management” in their driving style than a typical Ford Taurus driver.
The same applies to mutual fund investors. If an investor buys a hot mutual fund with little or no risk management (e.g. no exit strategy), they will suffer more “accidents” or major portfolio drawdowns. I do assign some blame to mutual funds that charge high exit redemption fees for extended time periods. This makes it difficult for investors to apply proper risk management controls. I almost always avoid these funds. Selling a mutual fund with onerous exit redemption fees is a little bit like selling a car with faulty brakes.