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Too soon to go all-in in stocks-Janus CEO

02/06/2013 | 10:06am US/Eastern
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ANCHOR (OFF-CAMERA) ENGLISH SAYING:

Well, we've had a very interesting start to the year. When you see what's happening, does this seem to be the turn that retail investors have finally decided to get a little bit more aggressive and stay there?

RICHARD WEIL, CEO, JANUS CAPITAL (ENGLISH) SAYING:

I think it's too early to make that call. Early last year, we saw some green shoots of optimism and then problems in the United States with our governmental systems, problems in Europe with dealing with their debt crisis, it really slowed down and we had a much, less resilient year than we'd hope for in the first quarter. So I think it's too early to call the turn. We know in the long term, investors can't possibly reach their goals saving for retirement without some more substantial exposure to equities. But in the short term, I think a couple of weeks of positive data is really too small a set to call the turn.

ANCHOR (OFF-CAMERA) ENGLISH SAYING:

So how are you responding to this fact that I think even the retail investor probably knows that bonds will not do it for them long term. What are you trying to do to either instill confidence or provide new product offerings or have the investor change the way they're thinking about things?

RICHARD WEIL, CEO, JANUS CAPITAL (ENGLISH) SAYING:

We're telling our clients that you need to be constant in your asset allocation. What's happened to too many clients is they've gotten afraid with the market volatility, they've withdrawn and gone into cash perhaps, and they're facing a difficult problem with zero real yielding cash, with perhaps too much exposure to bonds. When bonds are becoming increasingly risky, they've inadvertently allowed fear to dictate their asset allocation. Most institutional investors, I think, are in a better spot with more discipline. But both really need to stay the course. You need to have a conservative asset allocation which understands that the world is a volatile place and there's downside but you need to maintain a consistent exposure to equities. After all, equities have returned better than 100% since early 2009. You can't afford to miss those periods with fear-based market timing. You've got to stay constant in your asset allocation.

ANCHOR (OFF-CAMERA) ENGLISH SAYING:

So tell me about some of the products that you're introducing that addresses asset allocation in perhaps a more unique way than some are familiar with.

RICHARD WEIL, CEO, JANUS CAPITAL (ENGLISH) SAYING:

Thank you. The newest thing that we're delivering to the asset allocation front is a product called Diversified Alternatives built off our liquid risk premia platform. And the idea here is investors have a problem. They've been sold asset allocation which is diversified by name. They have equities, they have small-cap, large-cap, US, non-US, they have bonds of all different flavors. Perhaps they have some alternatives and they have some commodities. But when you add all these things up, while the labels may be very different, underneath it all, the return streams are highly correlated. In fact, equity usually explains for most investors, equity risk premia broadly defined, usually explains almost 90% of the variants in their portfolios. So even though the names are diversified, underneath it's not diversified. So we have a new fund, our Diversified Alternatives Fund and we have a new liquid risk premia platform that we're offering investors access to things like small- versus large-cap stocks, growth versus value. If you put together a portfolio of this kind of bets, each of which is independent of movements in the stock market, each of which is independent of rate risk, you can end up with a very controlled risk product with good risk return that is not correlated with stocks, not correlated with bonds and really helps people fill out their asset allocation in a way that is helpful because most of us frankly have too much equity and rate risk and we're concerned and we're looking for places to get other and there aren't that many good places to go which are reasonably priced, which are liquid, which are transparent. And that's what we're offering people.

ANCHOR (OFF-CAMERA) ENGLISH SAYING:

So how do you sell that to somebody who's going to argue, you know, I'll just buy a couple of ETFs, passively-managed ETFs- Right. -I'll buy a bunch of different slices of ETFs and I'll be just fine.

RICHARD WEIL, CEO, JANUS CAPITAL (ENGLISH) SAYING:

Well, I think there are two problems with that argument. The first problem is when you buy a bunch of different slices of ETF, broadly speaking, all you're getting is sort of one risk which is broadly defined equity risk. And we think for proper asset allocation, you need to have some diversified risk. That's the first thing. The second thing is I think people are enamored with this idea that they can buy passive through ETFs and win the game. In the last couple of years, we've seen equity markets post-2008 crisis at really high correlation levels. Correlations among stocks, stocks all moving in the same direction on the same day has been at record highs. It hasn't been that high since 1937. So 2010 and 2011 were record high stock correlation years. What does that mean? It means that's a really terrible environment for active managers. It's therefore unsurprising that looking at recent history that these passive investments have done well compared to active managers. But in 2012 and continuing, correlations have come way down, and they're much more consistent with normal historic levels. In that environment, active managers do much better against passive managers. And so, if your investors look to recent past, they may say, 'Hey, I can just buy these passive indices and I'll beat most of the active managers and I'll do fine.' But I think if you're not looking backwards, if you're looking forward, then you understand the correlations involved. When stock market correlations are at a more normal level, you should expect much better returns from your active managers and I think that's what you're going to get which is why we're optimistic at Janus.

ANCHOR (OFF-CAMERA) ENGLISH SAYING:

Very briefly, let me ask you the biggest risk you're worried about this year, whether internally for the company or externally.

RICHARD WEIL, CEO, JANUS CAPITAL (ENGLISH) SAYING:

The biggest risk I'm worried about this year would be that Europe goes back into crisis and really damages the growing confidence in the equity markets.

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