Hiring of Gross sprinkles star power on Janus shares

By Ross Kerber and Jessica Toonkel

BOSTON/NEW YORK (Reuters) - Janus Capital Group shares surged 38 percent on Friday as investors bet that famed bond manager Bill Gross will bring his old star power to the small mutual fund company, even though his last months at Pimco were tainted by infighting and heavy investor outflows.

In the surprise hire by Denver-based Janus on Friday, Gross, who earned the moniker the Bond King, is moving from one of the great whales of the U.S. mutual fund industry to a relative minnow.

Janus ranks as the 22nd largest U.S. mutual fund company, according to Morningstar Inc. At $178 billion (109.57 billion pound), its entire assets under management are less than the $222 billion that Gross oversaw at Pacific Investment Management Co's flagship Total Return Fund, the world's largest bond fund.

Ariel Investments, Janus' second largest shareholder with an 8 percent stake, welcomed the move.

"We think it's fantastic news," Ariel portfolio manager John Miller said in a telephone interview. He acknowledged that Gross' arrival took markets by surprise and called it "clearly a black swan event" for a company he said that some consider tarnished.

"Here you have one of the best investors of all time," Miller said. "For him to join a firm like Janus, that says a lot about the brand."

As Janus' second-largest investor, Ariel trails only Japan's Dai-ichi Life Insurance Co, which holds 20 percent.

Gross will take over leadership of the Janus Global Unconstrained Bond Fund, a new fund that has only about $13 million in assets.

Shares of Janus, whose once high-flying stock funds took big hits in the technology crash and later in the financial crisis, rose $4.2674 to $15.38 in afternoon trading on the New York Stock Exchange.

In a note to investors, Credit Suisse analyst Craig Siegenthaler said he expects Gross' arrival to lead to significantly higher bond inflows at Janus. He raised his 2015 earnings estimate for Janus to $1.02 per share from 96 cents.

In other quarters, there was more skepticism.

Some financial advisers who own Pimco funds said that Gross' departure will lead them to move their money, but not necessarily to Janus, whose chief executive officer, Dick Weil, had once worked with Gross at Pimco.

“I was looking to make a switch before but now this could be the tipping point,” said John Daly, a Chicago-based independent financial adviser with about $4 million with Pimco. Daly said he may move the money to funds run by Loomis Sayles like its Core Plus Bond Fund.

"I haven't owned Janus funds in over 10 years," he said.

Azim Nakhooda, managing principal of Cedar Brook Financial Partners, a Cleveland-based financial advisory firm, said he may make a similar shift away from Pimco. He said he is worried about portfolio turnover at Pimco creating inefficiencies such as added tax liability from capital gains.

For those same reasons, Nakhooda said he would not move clients' money into Gross' unconstrained bond fund at Janus.

Pimco Total Return had net outflows of $3.9 billion in August, bringing the fund's net cash withdrawals to almost $70 billion since May 2013, Morningstar said earlier this month. During that investor unrest, Gross also had a public spat with his top lieutenant, Mohamed El-Erian, who left Pimco earlier this year.

(Reporting by Ross Kerber in New York and Jessica Toonkel in New York; Editing by Tim McLaughlin and Leslie Adler)