UPDATE 2-Janus reports small profit after charge

* EPS ex-items 15 cents, matching Street view

* Funds report small outflows

* Shares off 8.5 percent (Recasts; adds details, background, byline, share move)

By Svea Herbst-Bayliss

BOSTON, Oct 22 (Reuters) - U.S. asset manager Janus Capital Group (JNS.N) reported a 68 percent drop in quarterly profit on Thursday as investors' appetite for bond funds hurt the company, which specializes in stock portfolios.

Janus shares fell 8.5 percent in morning trading, making it the worst performer among its peers.

Several investment managers reported earnings this week and said they saw fresh demand for their fixed income funds. But Janus, which specializes in stock funds and is known for its growth-style portfolios, said investors took money out during the quarter.

Janus said clients removed $600 million in assets after adding $2.3 billion during the second quarter, when stock markets rallied broadly.

Denver-based Janus said third-quarter net income fell to $8.2 million, or 5 cents per share, from $26 million, or 15 cents per share, a year earlier.

It took a charge of $26.8 million in the latest quarter to cover a legal settlement and severance pay for its former chief executive, Gary Black, who left the company in July.

Excluding the charges, it earned 15 cents a share, matching analysts' average forecast, according to Thomson Reuters I/B/E/S.

Revenue fell 17 percent to $227.6 million. Investment-management fees declined 15 percent to $185.4 million, while expenses rose 8.7 percent to $198 million, fueled by a 15 percent jump in compensation.

Assets under management stood at $151.8 billion at the end of the third quarter, up from $132.6 billion at the end of the second quarter but below the $160.5 billion of a year earlier.

Janus is looking for a permanent successor to Black, a former Goldman Sachs executive. Tim Armour is serving as interim CEO.

Janus shares were down $1.34 to $14.42 on the New York Stock Exchange. They have nearly doubled in price since January. (Reporting by Svea Herbst-Bayliss, editing by Gerald E. McCormick and John Wallace)