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401(k) Fund Spotlight: Janus Triton

Summary Janus Triton is a small to mid capitalization growth stock fund. Triton has consistently beaten the Russell small capitalization growth indexes, but not the higher quality S&P 600 Small Cap indexes. Triton is overweight the technology sector, which comprises about 31% of the fund. A look at some of the fund’s largest technology holdings reveal the manager is true to the fund’s promise of investing in companies with “differentiated business models”. Introduction I select funds on behalf of my investment advisory clients in many different defined contribution plans, namely 401(k)s and 403(b)s. I have looked at a lot of different funds over the years. 401(k) Fund Spotlight is an article series that focuses on one particular fund at a time that is widely offered to Americans in their 401(k) plans. 401(k)s are now the foundational retirement savings vehicle for many Americans. They should be maximized to the fullest extent. A detailed understanding of fund options is a worthwhile endeavor. To get the most out of this article, it is helpful to understand my approach to investing in 401(k)s . I strive to write these articles for the benefit of the novice and professional. Please comment if you have a question. I always try to give substantive responses. Janus Triton Fund The Janus Triton Fund has the following share classes: I will assume the “T” shares for this article, since that is the share class that holds the most assets of the fund. It is also the primary share class used by Janus to evaluate historical calendar year returns. The net expense ratio for the T shares is .93. Evaluating Historical Performance Triton is a small/mid capitalization (“cap”) growth fund. Janus compares the fund’s historical performance to the Russell 2000® Growth Index and the Russell 2500™ Growth Index and it comes out favorably, as shown on the following table: as of September 30, 2015 1 Year 3 Year 5 Year 10 Year Janus Triton – T Shares 5.1% 14.2% 14.1% 11.4% Russell 2500™ Growth Index 3.4% 13.8% 13.9% 8.4% Triton Outperformance (Underperformance) 1.7% .4% .2% 3.0% Russell 2000® Growth Index 4.0% 12.9% 13.3% 7.7% Triton Outperformance (Underperformance) 1.1% 1.3% .8% 3.7% Triton has outperformed both growth benchmarks over all four of these time periods. Most notably, Triton’s outperformance in the important (for long term investors at least) 10-year category ranged from 3.0% to 3.7%. This particular 10-year period is also noteworthy, because it included one of the worst bear markets in U.S. stock market history. However, taking a step back, it is important to ask the question: “Are the Russell indexes the best for comparison?” Perhaps they are if your fund is always outperforming them. There are other widely used small cap indexes from S&P that have outperformed the Russell small cap indexes over time. (This article explains the difference between the two.) The S&P Small 600 Index tends to hold a bit higher quality stocks. For example, it requires index members to have at least four consecutive quarters of positive earnings. I drew up a chart of Triton versus the SPDR S&P Small Cap 600 Index ETF (NYSEARCA: SLY ) and the SPDR S&P Small Cap Growth Index ETF (NYSEARCA: SLYG ) since March 1, 2009 (arguably the approximate date of the current secular bull market). Here is what it looks like: JATTX Total Return Price data by YCharts A:JGMAX C:JGMCX I:JSMGX N:JGMNX S:JGMIX R:JGMRX T:JATTX Out of the three, the SPDR S&P Small Cap 600 Growth Index ETF was the winner, but only slightly. Overall, I think it could be said that all three have pretty much been running neck and neck throughout this bull market. According to Barrons , Triton has outperformed 89% of its peers, as measured by the Lipper Small Cap Growth Index, over the last five years. I think the fact that it beat such a large percentage of its peers, but still trailed the S&P Small Cap 600 Growth Index ETF during this bull market, really speaks to the quality of the S&P Small Cap 600 indexes. Overall, the fund has a solid performance track record. If available in a 401(k), I would likely choose either of the similar S&P Small Cap 600 Indexes though instead. The index gives you a lower expense ratio, so you have a slight advantage right out of the gate. Triton, like so many other mutual funds, is so widely diversified that it really cannot stray to far from the index as long as it remains fully invested. The problem is not so much that the fund holds 120 different stocks, it is that there are only four stocks that comprise more than 2% of the fund each. Other Noteworthy Tidbits Triton does have a substantially overweight position in information technology (31% of the fund as of October 31, 2015) compared to the Russell 2500 ™ Growth Index’s (21%). The fund may present a good angle for investors interested in having more exposure to the sector without going overboard. However, the overall fund has a forward Price to Earnings (“P/E”) multiple of 24, which is very high. I suspect that some of the information technology stocks it holds are widely overvalued. Let us dig a little deeper. The industries the fund has most exposure to are Software (12% of fund) and Information Technology Services (9%). The following table lists the fund’s largest holdings within these two sectors and their trailing twelve month (“TTM”) and forward looking P/E multiples (taken from Yahoo! Finance). Company P/E Multiple (Last 12 Months) Forward P/E Multiple SS&C Technologies Holdings ( SSNC ) 98 22 BlackBaud ( BLKB ) 121 36 Cadence Design Systems ( CDNS ) 30 19 Euronet Worldwide ( EEFT ) 44 22 Broadridge Financial Solutions ( BR ) 24 18 Jack Henry & Associates ( JKHY ) 30 26 I tend to focus on forward looking multiples and most of these are too high for my liking, although I was a bit off on my speculation of wild overvaluation. They are not in the extreme territory of some overplayed growth stocks. Janus states in the Triton fund description that: “The Fund invests in small-cap companies with differentiated business models and sustainable competitive advantages that are positioned to grow market share regardless of economic conditions.” Glancing at the business descriptions of just these six companies leads me to believe that Triton’s manager is following through on this promise. These companies strike me as those that are not going away anytime soon and could continue to experience solid growth in their niches (e.g., payment processing for small financial institutions and designing web solutions for non-profits). Conclusion The Janus Triton Fund is a solid option for 401(k) investors looking to get exposure to small/mid cap growth stocks. I would not choose the fund over the S&P Small Cap 600 Growth Index, but that is rarely a choice. Triton has consistently beaten the comparable Russell growth indexes and most of its peers. I would likely choose it, or at least give it a higher allocation, than other such available options. Investing Disclosure 401(k) Spotlight articles focus on the specific attributes of mutual funds that are widely available to Americans within employer provided defined contribution plans. Fund recommendations are general in nature and not geared towards any specific reader. Fund positioning should be considered as part of a comprehensive asset allocation strategy, based upon the financial situation, investment objectives, and particular needs of the investor. Readers are encouraged to obtain experienced, professional advice. Important Regulatory Disclosures I am a Registered Investment Advisor in the State of Pennsylvania. I screen electronic communications from prospective clients in other states to ensure that I do not communicate directly with any prospect in another state where I have not met the registration requirements or do not have an applicable exemption. Positive comments made regarding this article should not be construed by readers to be an endorsement of my abilities to act as an investment adviser.

Am I Too Overweight In Mutual Funds?

As investors, one of our favorite words is diversification. We are taught to diversify our portfolios to avoid exposure to any one particular investment or sector of the market and achieve balance. One of the easiest ways to achieve diversification is through purchasing mutual funds, which I did at the beginning of my investing career. However, now that I have grown as an investor and now own 30 individual stocks, I wanted to take a look back at my current mutual funds to determine if too much of my portfolio is allocated to these diversified holdings. It is time to take a look at the five mutual funds I hold and determine if ACTION needs to be taken. The Mutual Funds Currently, I own five different mutual funds . In total, the mutual funds total $16,200, or 25.5% of my total portfolio. These five funds are located in two different accounts, which impacts the accessibility of the capital if I were to decide to make a move. Roth IRA Three of the funds are located in my Roth IRA. I opened these positions during the infancy stages of my dividend growth investing career. At the time, I wanted both dividend income and diversification, so focusing on dividend paying mutual funds sounded like a great idea. So I took the capital I had and divided it evenly among the three funds listed below. ACLAX – 119.803 Shares; MV $1,994; 3.0% of Portfolio – This fund is a four star, silver rated fund on Morningstar. Some of the top ten holdings include: RSG , EMR (One of our favorites), NTRS , OXY , IMO , and CAG . The major selling points on this fund were the diversification, historical performance, strong/consistent management team, and the fact that the fund has a mid-cap focus but still pays a strong dividend. The one major downfall of this fund is the expense ratio, which is slightly over 1%. However, I knew that a fund centered on finding mid-cap funds would cost more than others due to the extra research and time needed to manage the lesser-known stocks. OIEIX – 138.551 Shares; MV $1,916; 2.9% of Portfolio – Another fours star, silver rated fund. This fund does not mess around and is focuses on large cap, value stocks. Some of the largest holdings include: JPM , XOM , JNJ , MO , AAPL , PNC , PFE , and HD . My favorite aspect about this stock is that it pays a monthly dividend. While my check usually isn’t that large on a monthly basis, as evidenced in last month’s dividend income summary, it is nice to see your position grow on a monthly basis. Isn’t that right Realty Income shareholders? MEIAX – 55.556 Shares, MV $1,952; 3.0% of Portfolio – Also a four star, silver fund. This fund has some overlap with OIEIX as some of the top holdings include: JPM , JNJ , PM , PFE , LMT , USB , and MMM (one of my favorites). However, unlike OIEIX, this fund pays a quarterly dividend and has a lower annual fee than the other two above. Since these funds are held in a personal retirement account and are not affiliated with my employer sponsored retirement account, I have the ability to trade these funds without restrictions and liquidate my positions at any moment. Employer Sponsored Roth 401(k) Accounts Like most of us that are still working for an employer, we have a 401k plan that allows us to select from a small pool of mutual funds or the company’s stock. For my company, we are allowed to select from a wide variety of Vanguard mutual funds. Vanguard funds are nice because of the extremely low expense ratios. In this account, I own two different mutual funds. VWNAX – 149.224 shares; $9,726.42; 14.9% of Portfolio. This Vanguard fund is a large-cap value fund with an expense ratio of just .27%, significantly lower than the three funds disclosed above. Some of the top ten holdings include JPM , MDT , PFE , BAC , OTCQB:MFST , WFC , PM , and PNC . If you recall, I left my current employer in March and returned later in the year. This was the mutual fund that I contributed to in my first stint at my current employer and I am no longer contributing to this mutual fund. Therefore, the only changes in value/shares owned are related to changes in market price and the receipt of dividends. Another interesting nugget about this fund is that it pays a semi-annual dividend in June and December. So it doesn’t pay frequently, but when it does, the dividend income checks have a huge impact on my monthly dividend income figures. Want proof? Check out my dividend income summary from the last time I received a payout. VINIX ­- 224 shares; $9,726.42; .8% of portfolio very similar to the last mutual fund. However, two small differences. First VINIX focuses on mirroring the S&P 500 versus investing in dividend stocks so the yield is slightly lower. Second, VINIX pays a quarterly dividend versus a semi-annual dividend. When I re-joined my old company, I thought it might be a good idea to invest in a new mutual fund to diversify my holdings. Since this position will keep growing, I didn’t want to become too overweight in one mutual fund. So now I will share the wealth in Vanguard and continue to max my contributions in this fund so I can receive the full benefit of my employer’s 401k match, which can be a very powerful tool for dividend investors. Analysis As I compiled the section above, there were a few things that jumped out at me. Here are some of the thoughts that came to my mind. There is a lot of Overlap ­- This became evident when I started listing out some of the major holdings in each fund. Outside of ACLAX, which focuses on mid-cap dividend stocks, there is a lot of overlap in holdings in the other four mutual funds. Which makes sense considering that these funds are focused on generating a dividend from large cap stocks and there are only so many stocks to select from. However, if my goal is to achieve diversification among these holdings, do I really need four different funds investing the same pool of stocks? Wouldn’t one suffice? Why am I paying Such High Expense Fees – Is it terrible that my answer is “I don’t know why?” At the time of investment, it made sense to invest in mutual funds. But I wasn’t as much of an expense hawk as I am now so I was willing to overlook the high expense ratios to achieve my goal of diversification. In this day in age, with ETFs designed to achieve the same goal as mutual funds with minimal fees, why on earth am I voluntarily paying this annual fee? A stupid/reckless mistake on my part. I understand paying a fee for a mutual fund that invests in mid or small cap stocks because these companies require more time and research to identify/trade successfully. But paying a fee to invest in a pool of highly covered large cap stocks seems ridiculous going forward. Lack of REITs in Holdings – This one kind of surprised me, especially considering I selected these funds with a dividend-focused attitude. I did not see one REIT in any of the mutual funds I own. I am sure there is some reason why and the tax rules may be too unfavorable for fund families. This was just an interesting observation to me so I wanted to share it all with you. Where do I Go From Here? Based on my analysis and observations above, I think the answer to the title of this article is yes. Holding five mutual funds, which account for over 25% of my portfolio , seems a little heavy. Especially considering that many of the mutual funds invest in the same pool of stocks and are accomplishing the same goals. Well, first things first. Let’s talk about the liquidity of these funds. Since two of my mutual funds are in an employer-sponsored plan, there isn’t much I can do outside of investing my capital in a different mutual fund. And trust me, Lanny and I have performed plenty of research on the available plans in the portfolio and we have selected two of the best. So as of now, I am not going to touch the two Vanguard funds and I will continue to invest in VINIX with each paycheck. Our employer matches 50% of all contributions, so I will continue to contribute the maximum amount each paycheck that will allow me to receive the full employer match next year. Plus, the expense ratio is very low, which is a huge positive compared to the other funds. While I can’t liquidate my two Vanguard funds, it is a completely different story for the three mutual funds in my Roth IRA. I have the freedom to trade these funds as I please. When I initially invested in these funds, I was at a different stage of my investing career and I needed the diversification. However, now that I have grown as an investor, owning 30 individual stocks, there is no need to diversify through owning independent mutual funds. The fees are too high and diversification is achieved through my employer’s plan. So after I receive my capital gain distribution in December, which always results in a nice payout, I am most likely going to sell these funds and use the ~$6,000 to invest in some powerhouse dividend stocks. Which stocks will I invest in? I’m not entirely sure yet. I’m going to special screener in the next month unique to this situation that will help me identify how I should allocate the $6,000 in capital when it becomes available. The screener will look to identify great companies with a long-term track record with a yield in excess of the yield I am receiving on these dividend-focused mutual funds. I’m not certain yet, but I believe one of the moves I am going to make is to invest half in Realty Income based on the results of my last stock analysis. Another option is to focus on one of the stocks on my “Always Buy” list or one of the high yielding stocks on our foundation stock listing. What are your thoughts on my strategy? What percentage of your portfolio are allocated to mutual funds? Do you think I am overweight? Should I consider investing in ETFs in lieu of mutual funds or dividend stocks with the capital to maintain the diversification? Do you have any recommendations for stocks that I should consider?

Why I Sold Pimco High Income Fund

Summary PHK has managed to attract a premium near its historical average before its dividend cut. Although another cut is unlikely in the near term, the current premium is overly generous. Historical price trends have created clear buy and sell signals which indicate PHK is too pricey at its current premium. However, if PHK can continue its recent and opaque increase to NAV, a new higher price target may be in order. Pimco High Income Fund (NYSE: PHK ) consistently paid out the same dividend for over a decade, until a 15% cut that management insisted was reflective of the secular stagnation argument for lower global growth that has come to quietly dominate many economists’ thinking. In management’s words: “Generally, the changes in distributions for PHK, PCI and PDI take into account many factors, including but not limited to, each such Fund’s current and expected earnings, the overall market environment and Pimco’s current economic and market outlook.” The market’s response was unsurprising – the fund reached a 52-week low of 6.87 and saw its premium to NAV – once the highest in the CEF universe – fall to zero. This was a tremendous buying opportunity and I heavily added to my position before encouraging investors to not worry about a dividend cut anytime soon . A dividend cut remains unlikely. Since October, the new payout has remained steady. In November, NII covered distributions by 92%, and NII has remained just a hair under 10 cents since April, when NII fell precipitously to about 7.2 cents per share, as it also was in March and January. 92% is still not full coverage, leaving some investors concerned about PHK’s future payouts. However, PHK is preparing for an interest rate hike and the ability to buy new issues at new, higher rates. Prepping for the Rate Hike The duration of PHK’s holdings has fallen to 4.7 years as of the end of September, down from over five years earlier in 2015. The fund has been cutting the duration of its holdings for a long time in anticipation of raising rates, which actually hurt performance in 2014, as management acknowledged in its semi-annual report from September 2014 – and which management attempted to rectify by buying swaps: “Despite the Fund’s short exposure to the long end part of the curve, which has hurt the performance, overall increased duration exposure with interest rate swaps contributed positively to performance as Treasury rates declined.” Now the fund seems to be doubling down on its expectation of an interest rate hike. If Yellen does raise rates in December or early 2016 and high yield issues offer higher yields as a result, PHK will be able to churn into higher yielding debts and fully cover dividends more easily. (For more on how higher rates can be good for PHK, please see my two earlier pieces on the subject: Part 1 and Part 2 ). A Safe Payout – So Why Sell? The market seems to have accepted that PHK’s new distribution is about as safe as the old one, and may last just as long before being cut again. Yet I sold the fund because the market has overpriced the value of PHK’s new payout. As of November 25th, the fund’s premium over NAV was 24.65%, almost at the average premium the fund enjoyed over its lifetime before the dividend cut: In other words, the market is roughly pricing the fund’s ability to fund future payouts at the same premium as it has priced that fund’s future payouts before the dividend cut. At best, the market is punishing PHK with a premium that is 5% below its historical average. Is that sufficient for a 15% dividend cut? The Technical Concern There also is a technical argument to be made against buying PHK now – but keeping it on a watch list in the future. Since 2010, when the fund’s premium to NAV remained sustainably high, PHK has followed a steady pattern of slow appreciation to a peak, followed by a decline, and then a steady appreciation again: (click to enlarge) This pattern held for most of 2014 until the high yield market began to see serious risk aversion and a tightening of credit spreads at the end of the year, partly due to the strong dollar, partly due to rising oil prices, partly due to fears of collapsing liquidity, and partly due to fears of higher defaults resulting in an increase in interest rates: (click to enlarge) While I believe short-term speculation on asset prices is almost always a losing game, in the case of PHK the return to form seems to be congealing, and since the dividend cut the slow appreciation followed by a steep drop-off seems to be coming back to the name: (click to enlarge) However, we are currently not seeing a steep sell off as we did in the middle of September and earlier in November. This trendline, its historical performance, and its new payouts have all given me clear price targets to buy, sell and hold this stock which are currently telling me to wait until returning to the name. A Silver Lining? There is hope for PHK, however, which may help it close the gap on its current premium. In the last few days the fund’s NAV has shot up to its highest point since its dividend cut and the first sign of an increase in NAV since the beginning of 2015: (click to enlarge) It’s unclear how the NAV for PHK shot up so quickly in such a short period of time. Because bonds, especially high-yield bonds, are particularly illiquid, this could be the result of a new mark-to-market for a holding that was temporarily mis-priced due to thin trading. Alternatively, it could be a result of a cumulative appreciation of the high yield market as the fears of earlier in the year briefly fade. A third option is that the fund made a new purchase that was particularly undervalued by the market. In any case, the fund’s NAV shot up after the spread between high yield and U.S. Treasuries widened, giving more opportunities for fund managers to find high-yielding assets to fund distributions: (click to enlarge) This could mean PHK will find more ways to increase its NAV and close that gap between its current premium and the premium that it deserves after a dividend cut. I will continue to watch PHK closely to see if its ability to increase NAV is sustainable, or if the market decides to under-price the fund again. Until then, I’m waiting on the sidelines.