The new-and-improved Jim Craig: after several years of mediocre investment results, the manager of Janus fund made big changes. Look out, world

Kiplinger's Personal Finance Magazine, July, 1998 by Fred W. Frailey

After several years of mediocre investment results, the manager of Janus fund made big changes. Look out, world.

Last autumn superstar fund manager Jim Craig faced some unwelcome facts: Janus fund--his baby since 1986 and the $21-billion launching pad for the entire Janus family of funds--was delivering poor results, and had been for years. The last year it had beat the overall stock market by more than a hair was 1991. Janus had even trailed its peers among long-term-growth funds each of the past three years. How long could this go on? Had Janus grown too big for its britches, or was there another reason?

Alabama-born Craig, 41, calls himself a conservative growth-stock investor. He was allergic to price-earnings ratios greater than a company's rate of annual profit growth. And in an interview for Kiplinger's Mutual Funds '94, he said: "I'm the world's worst technology investor. Product cycles are so fast it's difficult for them to make money." As a consequence, Janus fund went through the early years of this decade low on tech stocks and high on cash holdings.

Well, that Jim Craig wouldn't recognize Janus fund today. Craig has stuffed it with technology issues--Microsoft and Cisco Systems are its biggest holdings. High-P/E stocks? They're all over the portfolio. Pfizer, a major holding, sports a trailing 12-month P/E of 63. Idle cash is a thing of the past, because for the first time in years Craig is fully invested. And for the first time in years, Janus fund is a market beater. For this year to May 1, it led Standard & Poor's 500-stock index by 2.3 percentage points, 17.4% to 15.1%.

Seldom do big-league investors admit that they altered their criteria because their old ways weren't working. How, then, would Craig explain what happened? Very persuasively, it turns out, in this interview conducted in Denver.

Kiplinger's: You hated technology stocks, now you love them. You once were cautious, now you're bold. You were drowning in cash, now you're fully invested. What came over you?

Craig: What I did was start to eliminate the slow-growth, high-P/E stocks--steady Eddies such as Colgate-Palmolive, Coca-Cola and Computer Sciences. Their P/E's won't expand much in the future. I needed something extra. I concentrated the fund on stocks that I thought would generate terrific returns going forward, and that meant companies in technology that had new products, or companies that were changing dramatically to increase their growth rate.

In the past I've said technology companies did not have strong franchises. Look at Bill Gates--even he didn't see the Internet phenomenon coming. And you didn't know whether Cisco or a competitor would come out with the big product that would flatten everybody. Today you can identify winners that dominate their industries. Cisco, for example, bought up all its networking competitors. In other words, technology companies developed franchises that I did not think they had five years ago.

Did all this occur to you at once?

It wasn't as if I woke up one day and decided to sell my stocks and look for others. I came to the realization that I needed to include in the fund's portfolio companies undergoing big changes in their growth prospects. Last fall I was also given something I hadn't had in a long time: a break in the market due to one event, and that was Asia. Asia broke the technology stocks. It was a golden opportunity to play on the fear that was felt in the market, and that really got me stoked.

Of course, Cisco Systems as of today has a trailing PIE of something like 58. The old Jim Craig would have fled from it, franchise or no franchise. It's fascinating, this change in you.

Okay, would I rather pay 17 times earnings for a bank that, through share repurchases, can increase its earnings 10% or 11% per year, or 32 or 33 times 1999 earnings estimates for a Cisco that's growing 30%? Today, I can have some confidence in that 1999 estimate because of the dominance of the company, where-as five years ago you couldn't look forward more than three months. That's a big difference.

In other words, there's no day of reckoning on the horizon for stocks?

Not right now. Could we have a 10% break in the market? Sure. All it might take is for Microsoft to miss its earnings one quarter, or for the government to do something. But capital scarcity pushes up interest rates, and the excess capital being generated by developed nations is so great that right now there is no way interest rates can rise dramatically.

Do you regret saying in that 1993 interview with us, "I've never known anyone who did well in this business by changing their discipline to fit the market?"

No. I believe that 100%.

Doesn't that describe you, though, just a little bit?

I haven't changed my discipline one-bit. I changed my criteria to get the portfolio onto a higher growth rate. But my discipline--doing my own fundamental research, visiting companies, digging through the numbers, going with companies whose growth will exceed Wall Street's expectation--that hasn't changed one iota.