The stock market sent a wake-up call recently to investors in the Janus Funds, but most investors probably hit the snooze button and ignored the whole thing.
One day is almost never significant over the life cycle of an investment, but in this case it presented a good lesson in how you might not be diversified if you own several funds from one company. What’s more, it hinted at how big a problem this shortcoming could become if the market hits the skids.
Here’s what happened: On July 27, Nokia, the world’s leading maker of mobile phones, said third-quarter earnings wouldn’t be as good as its second quarter. Nokia’s U.S. stock lost 25 percent.
Plenty of funds have huge stakes in Nokia, but no one seems to be as fond of the stock as Janus. According to Morningstar Inc., 17 Janus funds held Nokia as of the funds’ most recent portfolio disclosures. In eight of those funds, Nokia was at least 5 percent of all holdings; in Janus Twenty and Janus Mercury, Nokia made up more than 10 percent of the portfolios.
As a result, Janus Twenty and Mercury each lost roughly 4.5 percent in one day. Other big Janus funds — Olympia, Overseas, Worldwide, Global Technology — each lost more than 3 percent. Even the Janus funds that are relatively light on Nokia (Janus Fund, Janus Equity-Income and Janus Growth & Income) lost more than 1.5 percent for the day.
Because the market was having an “ordinary day,” lacking in wide or violent swings in the Dow or Nasdaq indexes, it is a reasonable assumption that Nokia was the primary reason for the bigger-than-normal fall in the Janus funds.
It is an equally reasonable bet that had Nokia’s loss been much worse — and in these days of market volatility, big-name stocks have lost 40 to 60 percent of their value in less than a week — the Janus funds’ losses could have doubled.
Consider someone who felt diversified by splitting his money evenly between Janus Twenty, Janus Mercury and Janus Overseas (a portfolio a good number of readers have owned up to in the last few years). That portfolio lost more than 4 percent on July 27.
Had the money been split among three fund families (including Janus), the Nokia problem would have been minimized.
“By owning several funds within any fund family, but especially Janus, where they share one approach and so many investment ideas, you effectively are buying just one portfolio,” says Ed Noonan of Triad Investment Advisory in Hingham, Mass. “You’re not really diversifying.”
That point becomes obvious when Janus funds are examined under the microscope of Overlap software, a program designed to see how similar two funds are. The Janus fund has roughly 50 percent overlap with both Growth & Income and Equity-Income. That means if you buy Janus and Janus Growth & Income, half of your money is invested in the same stocks, giving you less diversification than you would expect from two funds.
Further, the Janus fund has roughly one-third of the same holdings as Balanced, Mercury, Olympus, Twenty and Worldwide.
All of that overlap does not make Janus funds bad performers, nor does it in any way diminish the company’s superior long-term record. It simply points out that when an aggressive, concentrated investment approach such as Janus’ eventually falls out of favor, lack of diversification will be painful.
John Rekenthaler, director of research at Morningstar Inc., has expected Janus funds to stumble for more than a year, and has mostly been wrong. “But,” he says, “it’s inevitable that a fund family with a pronounced investment style will hit a rough patch and disappoint people and that anyone holding multiple funds within that family will be at the most risk.”
That being the case, if your portfolio is overly heavy on Janus (or any other fund company), consider diversifying across company lines. In general, such moves will expose your portfolio to additional investment styles and smooth out the ride.
It’s not that you can’t stay the course and hold onto multiple Janus funds (presumably hoping for a return to past form, since 2000 has been a lackluster year for the company), but you need to wake up to the risks involved in such a decision.
That’s the lesson to be learned from Nokia.
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Charles A. Jaffe is the mutual funds columnist at The Boston Globe. He can be reached at The Boston Globe, Box 2378, Boston, Mass. 02107-2378 or by e-mail at jaffe@globe.com.
