Smart Beta ETFs & The Active Manager

April 22, 2016

[This article appears in our May 2016 issue of ETF Report.]

Janus Capital Group, one of the world’s best-known active management firms, stepped into the ETF space with a splash when it acquired VelocityShares more than a year ago. It recently moved beyond the legacy products from that purchase with the launch of two “smart growth” ETFs. Like many other active mutual fund managers, it rolled out smart-beta ETFs—the Janus Small Cap Growth Alpha (JSML) and the Janus Small/Mid Cap Growth Alpha (JSMD)—but its Head of Exchange Traded Products Nick Cherney says they won’t be a part of a traditional ETF family.

Can you give a big-picture overview of what Janus’ plans are in the ETF space?

The business strategy is to build out our offerings in three categories. The first one is tactical trading products, which really is our legacy VelocityShares business that’s been growing and is successful, and we’ll continue to build on that business.

And then on the Janus brand, we’re working on two categories of products. One is actively managed ETFs, which we obviously don’t have today, but we view that, where it makes sense in an ETF wrapper, we’ll be trying to bring clients actively managed products.

The last is what we call “enhanced beta.” The term “smart beta” has been retroactively applied to a wide range of products, and it means a lot of different things to a lot of different people. We’ve intentionally decided to call our products enhanced beta. And what that really means to us is that we’re focused on trying to develop ETFs that can help clients beat market-cap-weighted benchmarks. So I think the enhanced-beta category for us is one where we’re going to put a fair amount of effort into, and JSML and JSMD are the first new products that we launched in that category.

They're definitely a different take on the smart-beta concept. Can you talk about what the impetus was behind that methodology?

I think the reason they're different is because they're coming from a totally different perspective. A lot of what you see happening in smart beta is people trying to start from a market-cap-weighted benchmark and make some sort of tweak to it to make a modest improvement on that. Our approach was really the opposite; we have a 45-year franchise of fundamental, bottom-up stock picking, with teams of CFAs doing really traditional analysis, rooted very, very heavily in fundamental, single-company analysis. That's where Janus has made its bones.

The small- and midcap space is an area where we thought there was an opportunity to try to build a systematic process that was driven by an informed fundamental active process. And so really, these are trying to take much of the active process that we go through in Venture and Triton, which are the two actively managed small- and midcap Janus funds that have been very successful, with Venture going back over 30 years. They're five-star Morningstar funds and closed to new investors. We asked if there is some portion of that process that we can replicate in a more systematic way, and therefore offer it in an ETF, with the lower costs and the tax efficiency.

We sat down with that team and asked them, “What is it you look for?” There's a team of 15 analysts that’s out there interviewing CEOs and doing a lot of subjective analysis that we can't replicate. But we’re dealing with the universe of 2,000 or 2,500 stocks. And so there has to be some common themes among these companies, the things that they're looking for, from a fundamental perspective, that they think are going to drive long-term value in small-caps.

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