The Janus Performance Fee Proposal

The Janus fund fee (“performance fee”) recently pitched by Janus Funds is a good example of gamesmanship for higher stakes than seen in your typical RPG or RTS. We don’t usually talk about financial matters here at Game Writer Central, but I believe that it’s important to recognize game elements in all environments, especially when those elements are subtle and insidious.

Just like the manufactured financial instruments that were a large part of our recent economic meltdown, mutual fund fees are arbitrary structures that exist only on paper. Like the rules of a board game, mutual fund fee rules don’t come from any governing body — they’re agreed-upon between the shareholders and the fund management, and they can be changed by a simple vote. Like the Janus fund fee that’s being proposed for their Janus Forty, Janus Fund, Janus Global Opportunities, Janus Overseas, and Janus Twenty Funds.

Janus Funds wants to change the usual percentage management fund fee to a base fee plus or minus a performance-based amount. If they beat their benchmark index (an unmanaged group of similar investments), they get more money; if they don’t they get less.

The Janus Fee: Fair or Fail?

This sounds great until you realize that Janus is never going to pitch something that’s not in their best interests. A little investigation on the Janus fund fee proposal reveals it isn’t really in the shareholder’s best interests:

• A simple Google search yielded this article from Smart Money that cites a NYU/Fordham study showing that performance-based fund fees actually caused fund managers to take abnormal risks. Unsurprisingly, when given short-term goals, people often sacrifice what’s best for all to grasp at the dangling carrot. If you ask me, this kind of thinking infects Wall Street in general: CEOs sacrifice the company’s well-being for quarterly earnings, because the CEO plans to cash out ASAP and ride his golden parachute away from the smoking ruins.
• Benchmark indexes are by nature mixed bags. They’re representative of a certain slice of the market, and they contain dogs as well as stars. Although it’s true that many managed funds struggle to beat the S&P 500 on an year-over-year basis, sector indexes are often much more motley. Here’s an example: Janus Overseas Fund is benchmarked to an index that it consistently beats. Of the eight sample periods shown on Janus Funds’ own website, the Janus Overseas Fund beats the index six of eight times, including the entire past decade.

So… this is some interesting game design. If you’re an investor, do you want to change the game rules so that the game scalps up to 15% more off your hard-earned winnings with that kind of frequency? Or do you vote to keep the rules the same?

Of course, if fund management takes abnormal risks and performs badly, the fund could perform worse than its historical tracking and be penalized by the Janus performance fee. But if the Janus fund fee is ticked down, so are your earnings. That’s a lose-lose game, with you holding the bigger share of the risk.

Don’t Play Hooky On Fund Fee Proxies: Your Power Is Your Own

It’s my opinion that we Americans as a nation often fail to look out for our own best interests because it often requires a bit of painful research and thought. Whether it’s investigating the track record of a politician or taking the time to vote on school board elections, we don’t like doing our homework. And as a result, we get “gamed” by the entities we’re supposedly overseeing.

Keep this in mind the next time you get a boring fund fee proxy statement in the mail. If they’re asking for your signature, you have power. Signing blindly isn’t as dramatic as kneeling in fealty to a demonic end-game boss, but the consequences can be more dramatic for you and your family.