Big Gains, Big Pain


Big Gains, Big Pain

Janus Overseas has been on a roll this year, but its heavy weighting in emerging markets might hurt you.

I know what you're thinking: My portfolio is in the tank, and that pain in the back of my striatum [the part of your brain that throbs after a financial loss] won't go away. Even Extra Strength Tylenol doesn't help. But something like Janus Overseas (symbol JAOSX) might be just what the doctor ordered.

Year-to-date through July 16, the fund gained a rousing 46%, nine percentage points more than the MSCI EAFE index, a measure of developed foreign markets. Overseas' long-term record is respectable -- an annualized 9% over the last ten years, compared with a 1.24% loss a year for EAFE. Manager Brent Lynn, who holds undergraduate and graduate degrees from Stanford, scours the world for fast-growing companies nestled in growing countries. And, as luck would have it, the fund reopened to new investors in December.


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Don't pull the trigger just yet, Tex. The fund reopened because its assets fell during 2008 from nearly $11 billion to $3.5 billion. The decline was so dramatic because the fund lost 53% last year, and many shareholders responded by voting with their feet.

Janus Overseas is not a bad fund, and you may want it for your portfolio. But first you need to decide if you can handle the risks. For starters, Overseas feels as much like an emerging-markets fund as it does a general international fund. At last report, Lynn had 45% of the fund's assets in Hong Kong, India and Brazil. (MSCI considers Hong Kong to be a developed market, but let's not forget that the island belongs to China and that many mainland Chinese companies trade in Hong Kong.) The fourth-largest weighting is the U.S. -- curious for a foreign fund, but Janus managers are known for defying convention.


As you'd expect, investing so much in developing markets raises volatility. In fact, Overseas is about as volatile as the MSCI Emerging Markets index. Over the past five years, Janus Overseas and the index were about half again as volatile as Standard & Poor's 500-stock index, which itself was no kiddie ride.

An investment in a fund such as Janus Overseas is, above all, a bet on the manager. Overseas has done well under Lynn, having returned an annualized 15.5% over the past five years, a period that roughly coincides with Lynn's tenure as chief manager. But consider the dismal performance of another Janus fund, Worldwide (JAWWX). It lost 1.4% annualized during the same period, and Janus recently sacked its manager, Jason Yee.

Yee and Lynn had the same resources behind them, and both were schooled by legendary foreign-stock picker Helen Young Hayes. And like Hayes, Lynn rarely speaks to the press -- and didn't speak to Kiplinger's for this article.

So, if you can take the volatility and have faith in Lynn's record, consider Janus Overseas. It could fill the corner of your portfolio reserved for high-risk foreign stocks -- say, 5% to 10% of your stock allocation.


But also consider this alternative: iShares MSCI Emerging Markets Index. In the past five years, the exchange-traded fund has returned a respectable 14.5% annualized. It's much more diversified than Janus Overseas and doesn't rely on the talents of a single manager -- skills that have a nasty habit of evaporating when you least expect them to. You won't have to worry about the manager leaving or the fund growing too large to manage efficiently, a common hazard for successful, actively managed funds but one that generally isn't an issue with index funds. The iShares fund holds $28.8 billion, or about five times the assets of Janus Overseas.

But whatever your decision, brace yourself -- and your striatum -- for more anguish. Although emerging-markets stocks have had a strong run the past few years (except, of course, for being cut in half during the latest bear market), they are sure to inflict pain again.