(November 17 – 08:45 ET) – Merrill Lynch has initiated coverage of Stilwell Financial with a short-term Neutral, long-term Buy rating.

Stilwell owns about 82% of the Janus funds, along with other investment families. Merrill calls Stilwell “the dominant domestic retail equities fund manager and king of the direct sales channel the past several years thanks to its ownership of Janus.”

But despite this dominance, Merrill is not wholly enthusiastic because of risks inherent in Stilwell’s direct model and undue reliance on the growth strategy in Janus’ funds.

“Growth and aggressive growth equities comprised about 95% of Janus’ retail equity managed assets. Although both Janus and Stilwell Financial are diversifying, a sustained market broadening might have an outsized adverse impact on organic growth. In fact, a rotation may be at hand, as value is now meaningfully outperforming growth, yet the industry’s assets and net inflows are skewed toward growth.”

But growth has fallen out of favour aand after “two years of unparalleled success, investment performance for Janus’ flagship funds is turning problematic. Not surprisingly, net inflows are slowing precipitously,” Merrill says. “Ongoing underperformance might prove particularly troublesome since the direct sales channel is performance sensitive.”

Investors may be waiting for further talent to take flight from Janus in light of recent resignations and a seemingly cool ongoing relationship with Stilwell Financial, says Merrill. The infighting sstems from strategic differences prior to the spinout.”

On the upside, Merrill notes that Janus has a strong brand and scale. “When retail investors think growth, they think Janus — Stilwell Financial has accounted for an unprecedented over 20% of the industry’s long-term fund inflows during the past 20 months. Stilwell Financial is now among the largest domestic based asset managers, with the newfound scale likely to play an increasingly important role in efficiently reinforcing brand, building out products and leveraging distribution.”
-IE Staff