Janus' Kozlowski seeks stocks immune to market malaise

BOSTON (Reuters) - Concerned that trends in the economy may not help stock prices much, Janus Capital Group’s Dan Kozlowski is looking for companies that can help themselves.

As manager of the $4.2 billion Janus Contrarian Fund, Kozlowski has posted strong returns by buying companies that take transformative steps, like changing executives or going through mergers to get an edge in a slow-growth era.

“When the economy is not growing the top line, companies have to be creative,” Kozlowski said in a recent interview.

The fund’s largest holding at June 30 was specialty drugmaker Endo International PLC, which Kozlowski started buying shortly after it named a new chief executive officer last year. His third largest position was pharmaceutical maker Mallinckrodt Plc, spun off from medical device maker Covidien Plc, a change Kozlowski said should give Mallinckrodt executives more flexibility in areas like compensation and strategy.

Meanwhile, Kozlowski said a stock market correction was possible, and that low interest rates have sent investors looking for yield, boosting some shares to questionable levels. He declined to name individual stocks but said investors seemed to be valuing some consumer and telecommunication companies based too much on their dividend yields.

The dynamic, he said, “has driven up the value of good-but-not-great companies to levels that could be vulnerable.”

For the 36 months through Aug. 6, Kozlowski’s fund was up 22 percent, beating 96 percent of its peers, according to researcher Morningstar. That is a big turnaround from 2010, when the fund besting just 16 percent of peers, and from 2011, when it was almost dead last.

Kozlowski, 42, took over the fund in 2011 and shuffled holdings, paving the way for its performance turnaround. He had worked for Janus from 2000 to 2008, before leaving for three years to start a hedge fund.

Morningstar analyst Greg Carlson said Kozlowski deserves credit for the fund’s improved performance, but noted some holdings have a lot of debt and that the fund must still prove itself during a market downturn. “We’re looking to see how things hold up when things turn south,” Carlson said.

One company with a relatively high debt load is the fund’s fourth largest position, United Continental Holdings Inc. Kozlowski said the airline was still attractive for its strong network of airport hubs and for the pricing power it was gaining following the combination of the two airlines.

United’s story resembles that of Delta Air Lines Inc, Kozlowski said, which he bought for the fund in late 2012, when it was still around $10 a share, after a long period finishing its own merger with Northwest Airlines. He sold Delta through late last year, when it was around $25.

Another new name in the fund is Citigroup Inc. Kozlowski said he expected CEO Michael Corbat, who took the helm in 2012, to improve areas like operations and capital allocation.

Reporting by Ross Kerber; Editing by Richard Valdmanis and Jeffrey Benkoe