Small-cap stocks had rebounded from a poor 2014 performance before the latest round of selling and lower exposure to global markets meant they were less hampered by a stronger U.S. dollar and the economic slowdown than their large-cap counterparts. Recent selling in the equity market has hit small-caps harder as they tend to be more volatile, but when the selling subsides, they should resume their leadership. Strong gains in the biotech sector and exposure to technology are key in lifting this segment of the market.
A beneficiary of this strong market performance has been the Janus Venture Fund (JAVTX). This small-cap growth fund seeks capital appreciation by investing at least 50 percent of assets in smaller companies whose size falls within the range of firms listed in the Russell 2000 Growth Index, the fund’s benchmark. The four-star Morningstar-rated fund may also invest in larger companies that have the potential for strong growth or capital appreciation as well as foreign shares, including investments in emerging markets. It is closed to new investors, but those who hold it can add to their positions. We will also identify a number of funds that deliver similar exposure for those investors who may not be able to access JAVTX.
Investment Strategy
Jonathan Coleman has been at the helm of the Janus Venture Fund since May 2013. He is supported by six small- and mid-cap analysts who together average 9 years of experience at Janus. Coleman also has more than $1 million personally invested in JAVTX. The fund’s impressive return in 2014 surpassed more than 85 percent of its small growth category peers as well as its benchmark Russell 2000 Growth Index. Although the fund’s focus has not changed, Coleman has increased the number of holdings and lowered the concentration of individual positions to create a more diverse portfolio. Top holdings will rarely exceed 2 percent of assets. The fund’s metrics for profitability, such as returns on assets and equities, as well as its debt/capital ratio are less stringent than the category averages. The fund manager selects stable performers and rarely overpays for stocks with rapid growth and higher valuations. Coleman is a patient investor with experience utilizing this risk-conscious approach. Management selects potential candidates from the bottom up; each company is screened to ascertain whether it is consistent with the fund’s objective while providing an attractive investment opportunity. The team looks for companies with growing revenue streams that generate high returns on invested capital and have a proven ability to expand their profit margins. They also seek companies with other competitive advantages, such as pricing power and high barriers to entry.
Portfolio Composition and Holdings
With $2.8 billion under management, JAVTX has an 89 percent exposure to domestic stock and a 6.40 percent investment in foreign issues. The balance of 2.42 percent is held in cash. The fund is slightly underweight domestic stocks and overweight foreign shares when compared with the benchmark index. JAVTX has exposure to the United Kingdom, Developed Europe and Africa/Middle East. The fund currently has no direct exposure to China, Japan or the rest of Asia. The portfolio is allocated 33 percent in mid-cap shares as well as 52 percent and 15 percent in small- and micro-cap shares, respectively. The result is a portfolio with an average market cap of just over $2.5 billion, while the benchmark average is only $1.67 billion.
The fund is overweight the industrial and technology sectors and underweight healthcare and consumer cyclicals. The top 10 holdings comprise 17 percent of assets. The major holdings in descending order are SS&C Technologies, Sensient Technologies, Rexnord, EnerSys and Cadence Design Systems. These five are followed by Broadridge Financial Solutions, HEICO Corp., Euronet Worldwide and NICE Systems Ltd. The fund has a P/E ratio of 25.77 and a price-to-book ratio of 3.20.
Historical Performance and Risks
The fund’s approach of focusing on high-quality stocks has enabled it to surpass its small-cap category average over the past 1-, 3-, 5- and 10-year periods. Over these time frames, JAVTX has generated total returns of 5.50 percent, 13.81 percent, 15.26 percent and 8.98 percent. This compares to the category performance of 2.43 percent, 11.18 percent, 12.14 percent and 7.04 percent, respectively. These returns are a direct result of the management team’s focus on investments in the industrial and biotech sectors. Top contributors include Synageva BioPharma, Dyax Corp., Eagle Pharmaceuticals, Blackbaud Inc. and Atmel. Stocks that detracted from the overall performance were Pernix Therapeutics, Puma Biotechnology, Solera, Wolverine World Wide and top 10 holding Rexnord. September weakness in the biotechnology sector has the fund trailing its category in 2015.
JAVTX garnered a below-average risk rating from Morningstar. The fund’s 3-year beta and standard deviation are 0.85 and 12.67. These compare to the 0.82 and 14.12 average ratings, respectively, for the small-cap growth category.
Investment Options
JAVTX has an overall low expense level rating from Morningstar and charges 0.93 percent, but the fund is closed to new investors. There are other share classes available, such as JVTAX, but it has an initial front-end load of 5.75 percent, a 12b-1 fee of 0.25 percent and an expense ratio of 1.17 percent. Although it is a good fund, those fees are enough to dissuade us from recommending it.
A similar fund is Strategic Advisers Small-Mid Cap (FSCFX). With an expense ratio of 0.37 percent, the fund is much cheaper than the Janus fund, but it has trailed the category average over the past 1-, 3-, 5- and 10-year periods. PIMCO StocksPLUS Small (PCKDX) has better returns than FSCFX, but has trailed JAVTX. It is also more expensive, with a 1.09 percent expense ratio. The best alternative is Fidelity Small Cap Growth (FCPGX), which charges a similar 0.90 percent expense ratio and has returns that are very competitive with JAVTX.
Outlook
By maintaining its focus on companies with resilient business models, JAVTX should be well positioned to weather a variety of market situations and experience moderate growth. The fund’s management team bases their approach on an improving U.S. economy as well as an increase in volatility and a lower aggregate return in the coming months. The manager anticipates continued high valuations for small-cap stocks, which can be offset if companies demonstrate appreciable earnings growth going forward.
While the firm’s hiring of Bill Gross may benefit its fixed income funds, it is still too soon to determine if there will be a positive impact on the equity side. The recent turnover in fund managers and the need to hire additional outside talent has led Morningstar to rate Janus a D for its corporate culture and a neutral for the Venture fund. As the fund is closed to new investors at the moment, sticking with a Fidelity option makes sense for similar exposure.