Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Gary Black - CEO

Greg Frost - EVP and CFO

Jonathan Coleman - Co-Chief Investment Officer and Portfolio Manager

Gibson Smith - Co-Chief Investment Officer

Analysts

Michael Kim - Sandler O'Neil

Robert Lee - Keefe, Bruyette & Woods

Marc Irizarry - Goldman Sachs

William Katz - Buckingham Research

Hojoon Lee - Morgan Stanley

Cynthia Mayer - Merrill Lynch

Kenneth Worthington - JPMorgan

Craig Seigenthaler - Credit Suisse

Janus Capital Group, Inc. (JNS) Q3 2008 Earnings Call Transcript October 23, 2008 10:00 AM ET

Operator

I would like to welcome everyone to the Janus Capital Group third quarter 2008 Earnings Call. (Operator Instructions).

Before the company begins, I would want to reference their standard legal disclaimer, which also accompanies the full slide presentation located in the Investor Relations area of janus.com.

Statements made in the presentation today may contain forward-looking information about management's plan, projections, expectations, strategic objectives, business prospects, anticipated financial results, anticipated result of litigation and regulatory proceedings, and other similar matters. A variety of factors, many of which are beyond the company's control, affect the operations, performance, business strategy and results of Janus, and could cause actual results and experiences to differ materially from the expectations and objectives expressed in those statements.

These factors include, but are not limited to the factors described in Janus reports filed with the SEC which are available on their website, www.janus.com and on the SEC's website, www.sec.gov.

Investors are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date on which they are made. Janus does not undertake to update such statements to reflect the impact of circumstances or events that arise after the date these statements were made. Investors should, however, consult any further disclosures Janus may make in its reports filed with the SEC.

Thank you. Now it is my pleasure to introduce Gary Black, Chief Executive Officer of Janus Capital Group. Mr. Black, you may begin your conference.

Gary Black

Welcome to our third quarter earnings call. With me today is Greg Frost, our Chief Financial Officer and Jonathan Coleman, our Co-Chief Investment Officer.

Third quarter was rough for us, as it was for our other asset managers. Given the 23% drop in the S&P in the first three weeks of this quarter, fourth quarter was likely to be quiet unpleasant as well. As it seemed from our press release, we are taking actions now to better align our cost with our sharply lower assets under management, and I am confident that Janus can weather the storm and emerge stronger.

Turning to the presentation, on slide 2, third quarter earnings was $0.16 per share which was sharply lower than the $0.40 per share that we reported in the second quarter. Our third quarter did include additional $0.08 per share impairment charge on the Stanfield Victoria Securities, we took on to the balance sheet at the end of last year. If you exclude that, the earnings per share would have been $0.24 which is inline with consensus.

Long-term flows held up… I'll say reasonably well versus many of our peers. We had net long-term outflows of $1.1 billion which is annualized organic decay of about 2.5%. If you look at the Janus ex-INTECH long-term flows, they were down about $1.3 billion which is an organic decay of about 4.4% which does mirror the overall equity funds in the industry.

INTECH flows were positive in the quarter, about $0.2 billion as performance continues to bounce back nicely. Our assets under management was down, roughly 16% from second quarter. The vast majority of it due to the market, but we also had about $4 billion of institutional money market outflows.

Our long-term relative performance remains quite strong. 65%, 75%, and 83% of our funds are beating peers over one, three, and five years respectively. We're not pleased with our short-term relative performance, particularly on some of our larger Janus products. Jonathan will talk to that in his comments.

Let me say though, that I have tremendous confidence in the depth of our research and the discipline of our investment process, and in the risk management that we have built over the past few years.

Turning to slide 3. As I said upfront, net flows held up reasonably well, minus 1.1 billion in the quarter. Investors do tend to look at long-term performance which has been quite strong, and we do have a much more diversified product platform today, and we have a much broader distribution network.

If you look at that first slide on the left, gross flows were actually up quarter-to-quarter, but this does include a $1.9 billion exchange from an INTECH corporate fund, who simply exchanged that of one product for another. If you strip this at about gross flows and redemptions, third quarter gross was down about 12% quarter-over-quarter, still up about 15% year-to-date.

On the second chart here, INTECH was up nicely, even if you back out that $1.9 billion exchange from both gross and redemptions. Again, this reflects a continued sharp reversal in performance, included in INTECH was an additional large funding, large separate account client that we brought in the second quarter.

Janus ex-INTECH net outflows were $1.3 billion inline with the industry. Again, that's about 4.4% NOI to organic decay. Perkins continues to show good relative strength. It had positive net flows in the quarter of about $600 million. Despite, the challenging market, roughly half of our Janus mutual funds posted positive net flows during the quarter.

Turning to slide 4. In our retail intermediary channel, the market volatility drove lower growth sales and higher redemptions. The broker-dealer channel was weak, we had about $200 million in net outflows versus a positive $2 billion in the second quarter. We also saw in the financial institutions channel, some weakness, we've got $100 million of outflows net versus a $1.1 billion net inflow in the second quarter.

In the supermarket channel, which is also a retail intermediary, we continue to have 16 funds on the select and guidance list at Schwab and Fidelity, we dominate that channel which is the same number as second quarter.

Looking at the institutional business, the chart in the middle, again, the same $1.9 billion exchange we pointed in the gross flows and redemptions. Importantly, we had positive flows fueled by INTECH's rebound.

On the international side, we saw relatively strong gross flows driven by existing clients, and the funding of our first Australia mandate, which was about $400 million during the quarter. Unfortunately, we had one large separate account redemption which completely offset our progress leading to overall net outflows for the quarter.

Turning to slide 5, it's fair to say that market conditions have been difficult. The US market, if you look at the S&P 500, it was down about 8% in the quarter. Global markets in some cases were up two to three times that. Obviously, the fourth quarter has been pretty terrible; from an industry standpoint, with most markets adding another 20%.

Going to the top right chart, industry flows, follow performance, you see huge disintermediation out of equities, and into cash with some case of short duration bonds. The third quarter equity outflows of $43 billion in the quarter was the worst that we can find, since we have been tracking this stuff on a percentage basis, because the asset base is much higher today, the organic decline was probably the worse since 2003 second quarter.

Looking at the bottom left, growth led value sharply in the quarter by about 600 basis points, it's now behind value year-to-date. And over in the bottom right, equity managers of all stripes saw outflows in the third quarter.

Turning to slide 6, our long-term performance remained quite strong, although our short-term performance has not been as good, but it is still respectable. If you look at the Janus managed equity side, so this is on the Janus products only, 52% of products were beating peers over the past year.

Again over this period, the S&P has dropped from 1500 to 900, so about 40%. We still have 52% of products beating peers, so it is respectable. Our three and five year numbers remain quite strong, 74% and 79%, beating peers respectively.

Middle point, I think is important. 75% of products are still rated four and five star by Morningstar. And again Morningstar looks at 3-year, 5-year and 10-year numbers. It tends not to focus on the short term. Remember about 110% of industry flows come from 4 and 5 star funds. I think this might be another reason that our flows have held up reasonably well.

If you look at the 20 largest asset managers we ranked -- on a 1-year, 3-year, 5-year, and 10-year basis, out of 20, we ranked 6 out of 20 on a 1-year basis in a terms of percentage of funds beating peers. We ranked 7th of 20 on a 3-year basis and 4th of 20 on a 5-year and 10-year basis. Still a top third were higher across the board.

Last bullet point, INTECH strategies continue to outperform their respective benchmarks, despite the extreme volatility in the market. You can see the long-term numbers, 83, 56, 100% of a 100% beating the benchmarks over 1, 3, 5, and 10 years respectively. You can't always see INTECH but I can tell you that year-to-date, 83% of the products are actually beating their benchmarks. So they have held up very well in this environment.

Turning to slide 7 since Jonathan is here with us I will let him talk to performance in more detail. Again, I think it is fair to say that our short-term performance has struggled in this market. We do not believe there was anything systemically wrong with our investment process. This feels very different to us than 2001 and we are confident in the quality and depth of our research and overall investment process.

I will point out, that Perkins and our fixed income strategies have both been in the top quartile over all time periods during this market environment. That is not true if you think about value of most of our value competitors with the largest assets under management basis. Most of those folks, as you know, have struggled.

Also then turning to slide 8 we have covered a lot of this, but the INTECH performance has bounced back nicely. If you look at the top two products Large Cap Growth and Enhanced Plus, which represents a little bit more than 50% of our assets, we have had very strong performance. This year alone, our Large Cap Growth strategy has outperformed its benchmark by about 285 basis points. Our Enhanced Plus product, has outperformed its benchmark by about 234 basis points.

One of the things that is most exciting about INTECH is we have successfully leveraged the product platform over the last couple of years. We have a Large Cap Value product. You can see down here, which has a 15 year record, which is exceptional. We launched a Global Core product about 3-and-a-half years ago, which has a very strong performance. What you can't see here we launched an International Equity product about two-and-a-half years ago which also has a strong performance.

So we're very pleased with the performance out of INTECH as well.

With that let me turn it over to Jonathan Coleman our Co-Chief Investment Officer.

Jonathan Coleman

Thank you, Gary for giving me the opportunity to talk about how our investment team is navigating these incredibly difficult times. Internally at Janus we talk a lot about what we call the 4Ps: Philosophy, process and people, all of which add up to performance, over the long term.

Our philosophy at Janus remains unchanged, since our founding in 1969. We perform hands-on research and concentrate our investments where we feel we have a differentiated view. The core of our process also remains the same. But we’ve made some refinements along the way such as the addition of risk management over the last three to four years.

We believe our business is about taking risks. Risks that are informed by the research process, and led by professional risk management teams. But by no means does this dictate what a portfolio manager can or cannot buy, but it does sure that PMs are aware of the intended and unintended risks at both the portfolio and the firm wide level.

The third P is people. We have a very strong investment team at Janus. Organized and operating across seven global sector teams in a manner that maximizes our probability of success over the long term.

If you now turn to the next slide, I’d like the talk to you about 4th P, performance. This slide shows you our short and long-term performance across all of our disciplines. In looking at this chart, there have clearly been some investments that have negatively affected our short term performance. We're working diligently to improve that. We have not been immune from the market downturn. However, I can assure you that the underperformance was not driven by something systemic to the research process, rather its systemic to the incredibly difficult market environment.

As a regular part of the risk management process, we review the top 10 and bottom 10 contributors of all Janus-managed funds with particular emphasis on each of the five largest Janus managed funds.

Hypothetically, if there were no overlap amongst those portfolios, there would be 50 individual distinct contributors and 50 individual distinct detractors among those five portfolios. If you look at performance on a year-to-date basis across those five funds there are 46 separate distinct stocks that appear as top 10 contributors. Thus there are only four stocks that were owned by two portfolios in common among the top contributors to those portfolios.

Conversely, there are 45 separate distinct stocks that appear as bottom 10 contributors. Consistent with my prior point, there are only five stocks that were owned by two portfolios in common that were bottom contributors.

To me, this demonstrates the research team is generating many investment ideas and we're well diversified across the firm. However, with correlations around the globe moving towards one, this highlights the incredible, difficult market that we're working in today.

As you can see in analyzing what drove underperformance, it is clear it is not one or two stocks or even one or two sectors. The underperformance is truly portfolio specific. I think in many respects the most relevant question right now is, what are you doing about it?

Let me assure you we're not changing the process that has delivered long term success, but we are refining it for the current environment. We're reviewing individual company’s and liquidity profiles given the stress in the credit markets. We're stressing downside scenarios in our discounted cash flow analysis. We’re reviewing all of our grass roots research efforts in an effort to gain an incremental point of view and insight.

The fixed income and equity teams are meeting together daily because so much of the tenor of the equity markets today is driven by developments in the credit markets. Despite this recent period of underperformance, I remain confident in our abilities to deliver long-term. If you look at our performance over the long-term you will see that our investment team has delivered peer beating returns. As Gary mentioned the fixed income funds are green across the board. Over the longer term more than 75% of our equity funds are beating their peers.

We understand we have to prove ourselves and we understand that is done over a multiyear timeframe, rather than just three or six short months. My message to you today is pretty simple. We continue to believe in the process, and are confident the investments we made in the team position us to continue delivering long-term.

Why am I so confident about that? Let's talk about the people that we have at Janus on the next slide. We have assembled an incredibly strong research team over the last eight years at Janus. As you can see from the upper left hand chart, the average equity analyst at Janus today has over 9 years of industry experience versus only three years at the end of 2000.

We have grown the facility team as you can see in the upper right hand chart. Most importantly the cumulative years of experience of our analyst team has quadrupled since the end of 2000. We have also added an important layer of support, in junior analysts and associates who help our research team gain investment insight.

As you can see at the bottom left, these investments have allowed us to cover more companies compared to the end of 2000, from 500 companies under coverage to over 1300 today. This allows our portfolios to be more diversified.

Lastly, at the bottom right, you can see that our PM team has almost 15 years of industry experience on average. Significantly, almost every single PM at Janus was at one point an analyst at Janus. Let me tell you a couple things about this team that I see every day that I can't convey to you in a slide. This is a team that is resilient, that has seen tough times before. This is a team that is competitive. That loves to win. /This is a team that is dedicated to delivering competitive results for our clients. We believe in the people and the process at Janus. It has worked for us in the past and we believe it will work us in the future.

And now, I'll turn it over to Greg Frost for discussion of our financial results.

Greg Frost

Thanks Jonathan, and good morning. Please bear with me, I seem to be struggling with a cold this morning but, I will try to get through these couple of slides.

On page 14, as Gary mentioned, Janus recorded third quarter earnings of $0.16 compared to the $0.40 in the second quarter, and $0.29 a year ago. The total decline of $0.24 can really be thought of as two things. One, roughly $0.05 related to the lower assets and revenue we experienced during quarter. And a $0.19 swing in below the line items, and Gary mentioned a number of these.

There was $0.12 charge in the third quarter of 2008, $0.08 related to a further impairment on the Stanfield Victoria SIV that we purchased out of the money funds in the fourth quarter of '07, and $0.04 of mark-to-market losses on our seed capital portfolio. In recalling Q2 of '08, there was a $0.07 benefit below the line, $0.06 in a one-time state tax benefit and $0.01 in mark-to-market gains.

On the SIV front, given the further decline in the overall market conditions, particularly in financial institution related debt, which was included in the SIV portfolio, we took an impairment charge of $21 million in Q3 to mark it down to $66 million from our previous mark of $86 million.

On the operations side, the results for the quarter were fairly clean. The margin impact from the approximately 9% decline in average assets and revenues was mitigated somewhat by lower litigation and other G&A spending, combined with lower LTI expenses from reduced vesting assumptions.

Turning to page 15, let me start with where our assets under management have kind of gone. From January 1st to September 30th, Janus' assets under management have declined 22%. It is important to understand that 14% of that decline occurred in the month of September alone, and as Gary mentioned, given that the market is off another 20% or more since the beginning of the month, it is fair to assume that Janus assets are off by a similar percentage. Although our operating results held up in the third quarter, it is very likely that we will see earnings pressure in Q4 and beyond, given the sharp decline in our assets.

As you all know, a substantial portion of our expense base is variable, and will flex with the decrease in assets. Other forms of compensation like the company wide bonus pool can also be reduced inline with the lower results. But at some point, the firm's fixed and discretionary cost base has to be re-aligned with the lower assets and revenues to preserve our earnings power and margins in future periods.

As such we are taking immediate action to take $40 million to $45 million of annualized, fixed and discretionary cost of our 2009 cost base, including sadly, a 9% reduction in our current work force and a decrease in overall G&A spending.

A reduction in the work force is one of the most difficult actions a management team can take. This is especially true when I look at the significant progress this firm has made over the past several years. The executive team made this decision only after careful consideration and analysis, it was not easy but we believe the result strikes a balance between sizing the firm appropriately given our lower AUM, and having the right resources to continue executing on our strategic objectives which will benefit the firm and its shareholders over the long-term.

The reduction will yield around $15 million of annualized cost savings and will result in the severance charge of approximately $7 million that we will record in the fourth quarter. Additionally, we plan to cut back on a variety of G&A expenses which totaled $25 million to $30 million. The primary areas of reduction will be in technology, non-investment and non-client facing travel, marketing and other discretionary spending.

Although we do expect the Q4 results to decline given the sharp drop in assets, excluding the severance charge, we will see some savings from the headcount reduction and other discretionary cost cutbacks that we implemented at the beginning of this month.

As we have said in the past, our long-term goal is to achieve operating margins of at least 30%. As we navigate through the current market conditions and the dramatic recent drop in our assets, there will be pressure on margins and we could see operating margins drop below 30%. However, we believe that the flexibility of our business model combined with the alignment of our fixed and discretionary cost base with asset will enable us to deliver industry competitive operating margins over the long-term.

In addition, although we fill our liquidity position, the end of September is solid with about $300 million of cash and equivalent on the balance sheets. Given us uncertain economic environment, we are suspending our buyback program for the time being to enhance our financial flexibility. We have to continue re-investing in the business and our subsidiaries as appropriate, and we need the flexibility to do so when we feel the time is right. Should the environment change, we'll reevaluate the best uses for our capital as we consistently do.

Lastly, all this being said we believe these actions will not harm our long-term ability to achieve our objectives. In this current market environment we find ourselves in, which is impacting everyone in the industry, we need to act prudently and swiftly to position Janus for future growth.

And with that I'll turn it back to Gary.

Gary Black

Thank you, Greg. Let me sum up. We believe Janus is well positioned to respond to challenging environment. It's not an environment that we anticipated, but Janus is a resilient culture. We've been here before. We are taking proactive actions to restore our earnings power. Our long-term growth performance is strong as a result of all the investments we have made in research, risk management over the past five or six years.

Despite the headwinds, we think we are well positioned for the following reasons. We have a diversified global distribution platform. We focus on intermediary and institutional channels. We have a much broader product set with a new Janus managed global international products.

We are leveraging INTECH's risk managed platform to try to capitalize on demand for Large Cap Value for global, international, and for alternative products. We are acquiring a majority stake in Perkins to allow us to try to take share from some of the deep value competitors who have not done so well recently.

As Greg summarized, we are taking immediate action to align the cost structure with our lower assets under management, our lower revenues. Most importantly, we are committed to managing the business for the long-term. We will focus on delivering great investment performance, and we'll focus on servicing and delivering for our clients while leveraging the past investments.

With that, Ashley, let me open up for questions. With us also today is Gibson Smith, our other Co-Chief Investment Officer. We can open up for questions at this point.

Questions-and-Answer Session

Q&A

Operator

[Operator Instructions]. Our first question comes from the line of Mike Carrier with UBS.

Michael Carrier - UBS

Thanks guys. First, just a question on the cost reduction program. Looking at the assets under management and looking at the pressures on the business, 5% reduction on the cost side, when assets are down about 40%, and if you look at this quarter. Just wondering, I know on the compensation side it can be more in terms of variable comp, and also on the distribution of flows or sales are down, that's going to come down. So if you kind of exclude the 5% reduction, and if you look at the expense base, just trying to get a sense of what portion of your cost you think that can be variable, given the environment that we're facing?

Greg Frost

Good morning, Mike. Clearly, as I mentioned before that we have large percentage of our cost that are variable. Some vary directly with asset under management such as portfolio management compensation, our asset-based distribution costs, etcetera. Some I would classify as almost, as variable but leading to discretionary, such as core bonus, but clearly at time like this you would scale your core bonus down to three plus at current market conditions.

We have a number of other compensations that we consider the same way. So, as we looked at it, I think as I mentioned before, the result of the goal was to strike a balance between sizing the firm appropriately, taking out the appropriate level of fixed costs and discretionary spending, letting compensation and other asset-based items flex with the lower assets, and then obviously, finding that right balance so that we have the resource to continue executing on our long-term objectives and that's what we tried to do.

Michael Carrier - UBS

Okay, thanks. And then just, probably a bigger picture question. Just given kind of the market turmoil that we're experiencing, and given some of the returns that we've seen over the past 10 years, a lot of things kind of swing-in in opposite directions when you're at the center of the storm. But I'm just trying to think like when you look over the next couple of years and based on your conversations with clients, do you expect to see any major shifts by either retail or institutional investors in terms of products?

And maybe you are away from equities and into something that is maybe safer. And then how can you position for this and probably more importantly, is taking out costs and hunkering down, the best or the only option in the near-term or is there something to do whether it is on capital structure, or M&A option whether strong big financial institutions or even on the alternative side.

Gary Black

It is Gary. Let me try to handle that. From a products standpoint, when you see bare markets like this, and again when you see crashes, defined as equity markets down more than 20% in a very short period of time. If it lasts, if the markets don't bounce back immediately, the way they started to do in say, 2001, even 1987, usually you see disintermediation out of equities into safer alternatives. We saw that in Japan in the 80s.

And people do put more money into fixed income products and into cash. That said, it is a more complicated world today. It is more institutional. The retail business is no longer direct. You got financial advisors who have been trained the way consultants have been trained to rebalance back into equities. And you see that in the institutional space. Also complicating it is the whole hedge fund and alternatives trend from the last couple of years. They have not done that well in this market downturn either.

And so it is complicated. I guess it is fair for us, to think about the world, that it may be a little different but we will continue to focus on the equity side of the business. We have a great fixed income platform and try to capitalize on some of the movement into fixing income on the short-term. But we are building out our alternatives platform, we have a great long short product. We have an INTECH long short product that has been up and running as well. And we think we could be well positioned to take advantage of the market trend wherever they go. It is also a reason I think we felt it really important to diversify its value and take an additional investment with Perkins.

In terms of balance sheet, Greg, do you want to pitch with that or that is something we really don't want to comment on? I think we will leave that one alone. We tend not to talk about our capital structures. We use money to buy back stock, pay down debt, make acquisitions as appropriate. The only thing we could talk about really is that for the time being we will suspend our buy backs just to preserve our financial flexibility..

Operator

Our next question comes from the line of Michael Kim with Sandler O'Neil.

Michael Kim - Sandler O'Neil

Hey, guys good morning.

Gary Black

Good morning

Michael Kim - Sandler O'Neil

Just to follow-up on kind of the expense cuts, can you just give us some color on how much of the headcount reductions, will be related to kind of investment professionals as opposed to some of the other areas of the business?

Greg Frost

I think the shorter answer is the investment team is seeing no reductions.

Michael Kim - Sandler O'Neil

Okay. Then secondly, with all the issues kind of surrounding the money market fund industry, more recently and given kind of your relative lack of scale, has your thinking changed in terms of maintaining that business, particularly as margin pressures seem to be rising for kind of smaller players?

Gary Black

This is Gary. In this highly uncertain period, we're focused on liquidity, and preserving capital. So it is business as usual for us. So, we don't really want to comment on it further than that.

Michael Kim - Sandler O'Neil

Okay. That's helpful, thanks.

Operator

Our next question comes from the line of Robert Lee with KBW.

Robert Lee - Keefe, Bruyette & Woods

Yes, hi. Thanks for taking my question. First, a couple of them have been asked already but one question I have is, if I look at the institutional business, or the international business, it looks like redemption rates there obviously they spiked in the quarter but they always tend to run at an accelerated, at a heightened rate. Could you maybe give us a little color on what is it about that particular product set that has reached such high redemption rates over time.

Gary Black

The international business tends to be lumpy. We have in their our institutional business and in the current quarter, we saw a significant redemption by one of our separate accounts, which we're not going to identify but we had in the quarter that’s what offset that first Australian mandate. So, it is lumpy because you have got institutional mandates that remain or if we get redemption, that causes the lumpiness but that's the big reason why it seems too volatile.

Robert Lee - Keefe, Bruyette & Woods

Okay. And maybe just a follow-up on understanding that -- this is pretty tough question -- pretty tough environment, so maybe it is not a fair question, but you had kind of a halting, start and stop in trying to penetrate the institutional business with the traditional core Janus product. And putting aside the recent environment, talking about this, kind of believing, we come when the dust settles, we come out of this, do you see that is really at this point much opportunity to jumpstart that part of your business when the dust settles or has, with the PM the part here is too much of an overhang in that part of your business to really give you an opportunity for awhile, even when the dust settles to really grow that business?

Gary Black

Yeah, I believe we can be successful in the institutional market. We’ve put a lot of resources behind it. We’ve doubled the sales effort over the last few years. We have great products with long-term track records. It is true. We haven't got much traction, among the consultant community to get buy-ratings on our Janus products. But I am hopeful, because we do have strong performance long-term. As you know the institutional business tends to be much more longer-term focused than retail investors.

And I believe that given the depth of the research we have, the discipline we’ve put in place in terms of risk management, then we can get consultant buys. We have had some successes this year. We’ve been very successful getting traction. And I also believe that when you have INTECH base, an INTECH brand that allows the sales boys to get in the door of the large pension plans, public funds, their property plans out there. We have an entry there already. I think we can be successful in that business and we're very optimistic about it going forward.

Robert Lee - Keefe, Bruyette & Woods

Okay, thank you.

Operator

Our next question comes from the line of Marc Irizarry with Goldman Sachs.

Marc Irizarry - Goldman Sachs

Maybe we could just clarify; did you say that the reductions are not going to be on the IP side and on the investment professional side and also can you talk about how the growth is compared to from the IP side portfolio managers and analysts versus noninvestment professionals?

Gary Black

The reductions are not going to be on the investment side. Just to clarify. I think he was saying IT, but I think you meant investments. Is that right, Marc?

Marc Irizarry - Goldman Sachs

Investment professionals.

Gary Black

Right.

Marc Irizarry - Goldman Sachs

And then Gary, just in terms of marking your efforts here on the margin side and the cost cutting side to market, is this going to be something on a quarterly basis you're going to be reviewing this? How often should we expect to, sort of, hear updates? And then also when did you set forth this plan? Was there something that took into account where the markets are today or how are you sort of thinking about keeping track of progress here?

Greg Frost

Hey, Marc, this is Greg. I think, as I mentioned in my comments, we started to see the pretty sharp decline starting in September and obviously it has carried through where we sit today. Although we have been thinking about this and we actually commented on prior earnings calls this year, there were looking at expenses and we were trying to do the right thing for our shareholders. It kind of all came into focus once the assets really started to decline in September and into October.

So we have been at this for a little while. I think the $40 million to $45 million of fixed and discretionary costs out of the system is something that we’ve undertook over the past three or four weeks, kind of all leading up to today. And remember, a big chunk of our cost base is still variable that will flux with the lower assets. So you are going to see saving Marc here, greater and excess of $45 million once this is all said and done..

Marc Irizarry - Goldman Sachs

Okay. Then just can you help us with your remaining balance sheet exposure to other SIVs or just SIVs overall and then also your investments, your seed capital investment balance at the end of the period?

Greg Frost

In the money market fund themselves, there is no further SIV exposure. The last remaining SIV exposure, it matured out in August. We obviously still hold the Stanfield Victoria on our balance sheet like we have talked about. We bought it out in the fourth quarter, have marked it down twice given the market event. And we had about $80 million of seed capital investment.

Marc Irizarry - Goldman Sachs

Okay, thanks.

Operator

Our next question comes from the line of William Katz with Buckingham Research.

William Katz - Buckingham Research

Good morning. Just a couple of questions if I may. The first one comes back to the headcount reduction. I'm just sort of curious, are you anticipating any type of revenue attrition in concert with the potential for the lower expense base, apart from just the market decline?

Gary Black

I don't believe so. I think we have been very careful. As Greg said, we focus on non-investment, non-compliant facing folks. And it's hard to do. I also believe that with revenues down quarter-over-quarter, dramatically inline with the market, all the other asset management firms are going to have to do the same thing. I think many have not announced it yet.

As Greg said, we have been looking at this for sometime now, when the market started to unravel this summer. And I do believe it's just a matter of time, you'll see other folks follow what we're doing and I know, one other firm announced last night they are going to be doing layoffs. It's just something that is going to become very common in the industry. So, I think we're all going to be in the same boat, and I would bet most firms will do the same thing we're doing and focus not on investment side, and not on the client facing side.

William Katz - Buckingham Research

Just as a follow-up to that. On the G&A side, just sort of looking at what you reported for the third quarter and you annualized that. I mean, so to take out a 100% of what you think you're going to get, that seems like a very deep cut, even beyond just the markets being down. Is there any worry that? And I appreciate you saying it on the client facing side. But is there any worry here that you're cutting a little too deeply relative to maybe impinging your recovery ability if markets return?

Gary Black

We feel we have to do it. As Greg said, there is a lot of flex in the business model on the investment side and the sales facing side. It tends to be more variable on the administrative side; it tends to be more fixed. And we feel it's something we have to do given that the markets are down 40% year-over-year.

William Katz - Buckingham Research

All right and my last question for John, if that's okay. I appreciate what you said in terms of the 4P's, I'm just trying to counterbalance that against the slide that shows your returns on one to three-year basis. It seems like since September of '07, the one-year performance has really fallen off a cliff. I know it's coming from very high level, so I appreciate that. But how do you reconcile the relative slippage to your peers, to your bottoms up review? Is this potentially something more systemic either to an equity market or more concentration to make what meets the eye?

Jonathan Coleman

Well, as I said in my comments, we have done a very extensive review looking at concentration, looking at overlap. And I do very strongly believe that what you're seeing is a very difficult market environment, correlation is moving towards one around the globe. If you are predominantly long only, equity investor around the globe, you're down on the order of 35% to 60%, wherever you've invested.

If you look going back to September of '07, I'd say, before 12 months or so into a bare market, the first six or seven months of that on a relative basis, we performed reasonably well. And then, really the last three to four months has been a more difficult period for us. I think that's a result of again, a rotational bare market. That's been difficult for everybody.

William Katz - Buckingham Research

Okay, thank you very much.

Operator

Our next question comes from the line of Hojoon Lee with Morgan Stanley.

Hojoon Lee - Morgan Stanley

Good morning. Thank you. It looks like INTECH's long-term performance over a one-year period looks strong versus benchmarks. Could you help us bracket how performance here compares versus the peer group and other comparable products?

Gary Black

Yeah, this is Gary. We don't get the actual third quarter… it's mostly institutional separate accounts. We won't get the numbers for another week or two. My guess is, it's going to appear to be very strong. Just because relative to benchmark, you assume the average manager just hits their benchmark? My guess is, it will be above medium but hard to know because we don't get the data for another couple weeks.

Hojoon Lee - Morgan Stanley

Okay. And just a follow-up. Based on your discussions with your customers, if the high levels of market volatility persist, would you expect institutions to increase or reduce allocations to mathematical cost of equity strategies compared to let's say more traditional equity products?

Gary Black

There are a couple of schools of thought on that. One is you've got every pension plan in America looking at severe under funding now, because expected returns obviously being negative.

Hojoon Lee - Morgan Stanley

Sure.

Gary Black

And on the liability side, interest rates have gone down. So the liabilities are valued at a higher amount. So pension plans have got to figure out what to do. One tactic, for a lack of a better word, is if you've got a lot of index type products, you can get some additional returns by going more into enhanced index products with fees. And when you have a product like INTECH that's got strong performance that shows it can deliver returns consistently than exceed their fees. It's sometimes an easy sale.

On the other hand, you get people rebalancing out of equities into fixed income or out of US equities into alternatives; you might say that that would cause it to not do as well. Net-net, I think we're going to have increased demand for INTECH products because enhanced mix I think can do well. I think we can gain share from our deep value comparison because people just like in 2000, 2001, started seeking out risk management in growth space, they will seek out risk management in the value space.

We have a great global product and a global ex-product platform, we are already getting a lot of traction on it. We've got market neutral with good performance. We've got an international product with good performance. So net-net, I think we will see pretty strong demand for INTECH going forward.

Hojoon Lee - Morgan Stanley

Thank you.

Operator

Our next question comes from the line of Cynthia Mayer with Merrill Lynch.

Cynthia Mayer - Merrill Lynch

Hi, good morning. Just wondering if you could talk a little bit about whether you see any capacity constraints with Perkins products since they are doing well? And probably, some are small-cap, mid-cap?

Gary Black

We've had our small-cap value product was closed for a long time. And it was re-opened to institutional clients more recently. In the mid-cap value side, we have capacity. There is not unlimited capacity with mid-cap value obviously, but we feel we do have some capacity, we don't disclose how much capacity we have. Probably the biggest growth lever now for Perkins is the Large Cap Value product that we just introduced, and it's gotten off to a good start. And again, you can look at a lot of the deep side competitors with a lot of assets under management without going by name, they've had severe underperformance in this market. And we believe that with the INTECH risk managed value product, and the Perkins new Large Cap Value product, that we're going to get traction.

Cynthia Mayer - Merrill Lynch

Okay. And then, I wonder if you could talk a little bit about the flow trends by channel, and particular, how is the direct channel holding up? I know you mentioned, you've got 16 funds on Schwab select and guidance lists, but what kind of contribution to flows or outflows are you getting from direct?

Gary Black

Cynthia, we don't break it out as you know, but, it's been negative. The direct business has, people have moved away from trying to do it themselves, that is continuing when you see a market downturn like this. That usually accelerates that trend as people realize they can't do it themselves. And just like in 2001 when people increasingly turn to advisors, I believe that as a result of the markets being down 40% year-to-date, you will see another shift toward advisors, and particularly toward independent advisor that aren't affiliated with any of the big houses. So I think you're going to continue to see movement into the advisor base away from the direct channel.

Operator

Our next question comes from the line of Ken Worthington with JPMorgan.

Kenneth Worthington - JPMorgan

Hi, good morning. On cost cutting, I guess my concern is that previous cost cutting drove a significant portfolio manager and officer departures. What we're hear this time is that there is a focus on distribution. Should we be concerned that you'll see some meaningful attrition on the sales side, given the cost cutting that you're going through right now?

Greg Frost

Hey Ken, this is Greg. We're not going to breakout where all the costs are coming from. It's not coming from investments and in fact, on the sales organization the cuts are very, very small. So, I wouldn't categorize this as a distribution focus cost initiative.

Kenneth Worthington - JPMorgan

Okay. Thank you. And then maybe for Gibson and Jonathan, thank you for the disclosure on the risk management process. I guess where I am still uncomfortable is that the deterioration and performance is across all your growth funds, seems like all at the same time. And I hear the explanation that if you look at the top stocks that are adding and detracting from performance they are all different this time. But maybe it is the problem that the bets that you're making even if they are on different stocks like a weak dollar bet or a commodities bet, which could be made through like a Canadian bank or an Australian bank, for example, there really is a concentration of bets being made. So even if the process is functional, maybe the structure is not, or am I just barking up the wrong tree?

Jonathan Coleman

I think is a good question. I would say that we do have a number of products that are performing quite well even in the current environment and our top quartile year-to-date. Our Enterprise fund, or top half year-to-date. Enterprise fund, Trident fund. Global tech, Global opportunities. So, we do have some products that are performing quite well. But I think it really is an issue of the macro environment. And as I have said before, that has overwhelmed individual stock selections and the fact that global markets are down, 35 to 60% across the board. It has been a very tough environment, as you well know.

Kenneth Worthington - JPMorgan Securities

Okay, thank you very much.

Operator

Our next question comes from the line of Craig Seigenthaler with Credit Suisse.

Craig Seigenthaler - Credit Suisse

Good morning.

Gary Black

Good morning.

Craig Seigenthaler - Credit Suisse

Strong risk management, you guys highlighted that a number of places. I am just wondering how the procedures in the risk management process can relate to a portfolio manager making big sector bets?

Jonathan Coleman

Well, we certainly look at sector bets by across the firm. We look at them on an individual portfolio basis. Certainly we have certain products that are concentrated and part of their mandate is to go anywhere and to concentrate their investments where they find the best ideas. But when you look at corporate wide, or Janus wide, I should say, you don't see significant bets all in the same direction in terms our sector exposures. It is not empirically supportable when we look at that through the risk management process.

Craig Seigenthaler - Credit Suisse

Are there any limitations placed on the sector overweight positions?

Jonathan Coleman

That would depend on the portfolio. Certainly certain products that might be institutionally focused, and targeted to that market might have certain constraints placed on them. But that is not universally the case for all of our products.

Craig Seigenthaler - Credit Suisse

Okay, I guess there is a process in place that makes sure that all the funds aren't you know overweight, if you select economic sectors and see them on a style and size basis?

Jonathan Coleman

Absolutely.

Craig Seigenthaler - Credit Suisse

Got it. A separate topic. I am wondering on Victoria structure investment vehicle, if you can remind us after the current negative mark where that asset is actually being valued as a percentage or part? And also was there any event that triggered reevaluation here because it seems like there is not much liquidity in this market. I am wondering what caused you to mark it down again?

Jonathan Coleman

There is a couple things that happened during the quarter. One as I mentioned in my comments, the financial institution related debt, obviously I saw a big decline in the third quarter. That Stanfield Victoria SIV did have some of those positions in it. And two, the people in charge of the enforcement or the de-liquidation of the SIV have established a reserve to handle legal and other administrative expenses which we had not factored into our valuation. So both of those events caused us to look at it. We look at it monthly anyway and we marked it down to $0.66 on the dollar.

Craig Seigenthaler - Credit Suisse

Got it. And actually, if I can just ask one more question on the Perkins Wolf investment. I wasn't sure if that closed in the fourth quarter or the third quarter, because I believe there is actually a few adjustments to make on the modeling side in terms of a higher AUM. Probably a little higher fee rate because that business is a little more profitable than your average in-force and maybe a modification of margins in the fourth quarter?

Gary Black

We believe it will close in the fourth quarter.

Greg Frost

Let me take one more question.

Operator

And your final question comes from the line of Roger Smith with FPK.

Roger Smith - Fox-Pitt Kelton

Thanks a lot. I just want to go over a couple things on the long-term deferred comp incentive amortization schedule here. It looks like we are going to have fourth quarter expenses looking similar to what that was on the third quarter. I am just a little bit curious on what we should think about for 2009 grants in light of what we're doing on the severance side.

Greg Frost

I think your comment on Q4 is accurate. We do have, there are still grants out there that are performance-based, and thus we reduced our assumptions on that in the third quarter, so you saw a little pick up there. I am not going to necessarily comment on what we think for ’09. Clearly we're looking at all aspects of our business model right now, including compensation. And we may flow some of those through the LTI line in '09, but more to come there.

Roger Smith - Fox-Pitt Kelton

Fair enough and then just so I am clear. Is all the severance actions have already been taken; is that correct?

Greg Frost

They have not, they will be taken by the end of next week.

Roger Smith - Fox-Pitt Kelton

By the end. Okay. And then on the G&A expense side is that going to be something that is going to take another couple of quarters to get through to this run rate or are these real costs that you think you can cut out in really short order?

Greg Frost

We think we can cut them out in short order. In fact as I mentioned in my comments we have already undertook a number of the initiatives in Q4.So this is something we should start seeing right away.

Roger Smith - Fox-Pitt Kelton

Okay. Great. And then my last question is really just, you know, on the stock buyback, or halting it. And I know you guys talked a little bit about building liquidity but this really is a cash flow generating business. Is there anything that is really in the debt covenants that are causing you to be a little bit more cautious about using the liquidity, or really, what are you building the liquidity for?

Greg Frost

I mentioned in my comments, we think we have a strong balance sheet. We’ve got $300 million of cash that we can use. We do have some acquisitions. We have Perkins coming, we have our normal, could call relationship with INTECH coming and we want to make sure we have the flexibility to do those the right way. Clearly when assets are down as sharply as they are, we know that EBITDA will fall. And we just want to make sure that we're being prudent. I don't think this is a signal one way or the other. We're just trying to be smart.

Roger Smith - Fox-Pitt Kelton

Great. Thanks a lot.

Operator

And there are no further questions at this time. Do you have any closing remarks.

Gary Black

Yes. I just want to clarify something I said about the direct business, Cynthia's question. We believe the flows will continue to move in both the advisory side of the world and also the independent channel. We believe both will have strong growth, we just think they will continue to have even stronger growth on the independent side, which you seen in the last couple years but we continue to put a lot of resources towards the advisory side and we think you're still going to see a lot of flows into that side of the business.

Just let me make a comment about just the markets and where we're going with it. This is challenging, it has required us to make some difficult decisions. But I am confident that we're going to continue to execute our strategy. That the firm has positioned for long-term success. The most important thing is our performance remains extremely strong long-term across the board.

We also do not believe that the reduction in workforce will impede our goal to execute on our strategic objectives.

So thank you for joining us today and we look forward to talking with you next quarter.

Operator

This concludes today's conference call. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Janus Capital Group, Inc. Q3 2008 Earnings Call Transcript
This Transcript
All Transcripts