Janus markets US REIT

A US equity product with a high income sparks interest despite the groupÆs PR debacle.

Janus International, a unit of Denver-based Janus Capital Group, is promoting a real estate investment trust focused on the US market to Asian investors, hoping its hot product will compensate for a public relations disaster in the United States.

William Schaff, a portfolio manager based in Oakland, California, has completed a Hong Kong visit en route to Tokyo, the main focus of his Asian tour to promote the Dublin-listed US Reit Fund.

"We're marketing this in Asia because of the product demand, especially in Japan, where investors need US equity product with a high income," Schaff says.

The visit coincides with a decision by funds rating agency Morningstar to stop recommending funds from Janus and three other fund managers (Bank of America, Bank One and Strong Capital) named in an investigation into mutual-fund trading practices. Morningstar officials have been quoted as singling out Janus, saying the Janus fund family does not deserve investors' confidence because of the questionable practice of making some of its funds available to a US hedge fund, Canary Capital, for market timing. New York attorney general Eliot Spitzer launched the investigation, alleging such market-timing measures were contrary to shareholder' interests.

Morningstar continues to provide star ratings for Janus funds, however. And while Janus won't comment on the fracas, it does point out that its performance in the US has been good. It was one of the most highly rated fund houses by Morningstar's measurements in 2002.

(The firm's spokesman does say: "Janus US fund trustees have hired an independent outside firm to determine if the discretionary market timing arrangements had any impact on those fund shareholders. To the extent that those fund shareholders were adversely affected, Janus will provide restitution to them. Janus will also return to those shareholders in the affected funds all management and advisory fees it received from the market timing activities. Until that investigation is complete we obviously cannot comment further.")

Janus comprises many units, one of which was formally known as Bay Isle, an equity Reit management specialist founded by Schaff and acquired by Janus two years ago. Schaff met with potential distributors in Hong Kong such as HSBC, Hang Seng Investments, Merrill Lynch and Pacific Life. He says their main questions involved the US housing market and the impact of an interest-rate hike on the Reit industry.

Schaff's basic response is that Reit funds have plenty of scope to diversify investments, thus safeguarding investors from downturns in specific areas. Housing can range from apartments to luxury homes, while commercial space varies even more. Moreover, 'speciality' sectors are emerging, such as timber fields, golf courses, parking lots, restaurants - anything that can be securitized.

That means if a rise in interest rates pricks the housing bubble, demand for apartments will go up, so Schaff has recently increased his exposure there. The product can weather gradual changes in interest rates, because lease terms are adjusted for inflation. He concedes rapid, dramatic changes in interest rates would create a duration mismatch, but says a fund manager can still adapt by focusing on companies with the best management, or by sector.

He says as a relatively small player - his fund has $170 million in assets, and Janus has $400 million in Reits, versus a US Reit market of $170 billion - he is nimble enough to shelter in more exotic 'specialist' segments if need be.

"Everyone's worried about a backup in rates, so where do you get yield in a structure that won't collapse in a rising interest rate environment?" he says. "Investors in Asia think of housing when they think of the US real estate market. Yes, I think housing prices will decline next year. But other sectors are coming out of a trough, like office space, where I think there will be price recovery by 2005 and share prices will anticipate that next year."

Overall his fund has been enjoying a 6-7% dividend yield. Plus the underlying property leases are stable and rising in line with inflation; given the leverage his fund employs, that adds another 3-4% cashflow increase. "At the end of the day you'll get 9-11% annual yield, and that is sustainable," he says.

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