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Executives

Gary Black - CEO

Greg Frost - CFO

Analysts

Michael Kim - Sandler O’Neil

William Katz - Buckingham Research

Craig Seigenthaler - Credit Suisse

Ken Worthington - JPMorgan

Robert Lee - KBW

Marc Irizarry - Goldman Sachs

Michael Carrier - UBS

Cynthia Mayer - Bank of America

Roger Freeman - Barclays Capital

Hojoon Lee - Morgan Stanley

Roger Smith - FPK

Janus Capital Group Inc. (JNS) Q4 2008 Earnings Call January 22, 2009 10:00 AM ET

Operator

Good morning. My name is Kate and I will be your conference facilitator today. I would like to welcome everyone to the Janus Capital fourth quarter 2008 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. In the interest of time, questions will be limited to one initial and one follow-up per person. (Operator instructions.)

Before the Company begins, I would like 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 plans, projections, expectations, strategic objectives, business prospects, anticipated financial results, anticipated results of litigation and regulatory proceedings, and other similar matters.

A variety of factors, many of which are beyond the Company's controls, affect Janus' operations, performance, business strategy and results, and could cause actual results and experiences to differ materially from the expectations and objectives expressed in its statements. These factors include, but are not limited to, the factors described in Janus' reports filed with the SEC, which are available on its website at www.janus.com and on the SEC's website at 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

Good morning and welcome to our fourth quarter earnings call. As always, with me today is Greg Frost, our Chief Financial Officer. As you can see from the results, the quarter was difficult, but I think Janus more than held its own versus its peers. Fourth quarter earnings was $0.05/share. This includes $0.07/share seed capital losses, the result of the markets being down some 20% in the quarter. Going forward, we have hedged our seed accounts.

The full year earnings number was $0.86. That includes about $0.15 a combination of seed capital losses, the write-down on our SIV, offset by some tax credits from the State of Colorado.

Net flows held up reasonably well. Fourth quarter flows were actually down about $3 billion, but for the full year, we were only down $0.6 billion, and most of these declines came in October, when the markets plunged and those were actually flattish. November and December reflected our much broader product platform, the distribution investments we've made over the last few years, and our strong long-term performance.

Speaking of performance, I think it's been very good. We did see some short-term weakness in the Janus equity franchise year-on-year. That has rebounded nicely since the market hit bottom in November. Overall 55%, 79%, 83% of our funds are competing with our peers over one, three and five years respectively. If you look at those numbers relative to the top 20 firms that bought assets, that would rank us 12th of 20 on a one year basis, 1st of 20 on a three year basis, and 2nd of 20 on a five year basis. So again, I think it's why we haven't been hit as much on the flow standpoint. People see our long-term numbers and our short-term numbers are what I would call okay.

Finally, we did complete the purchase of an additional 50% interest in Perkins, which brings our interest up to 80%. As you can see in the results, the Perkins franchise is a huge opportunity, given its exceptional performance, very strong flow momentum and a lot of disarray among many of our classic value competitors.

Turning to Slide 3, our number one goal, we have to deliver for our clients. As I've mentioned, despite some of the short-term challenges in the Janus equity side, our long-term performance remains strong. On the Janus-managed equity side, 74% and 79% are beating peers over three and five years. These numbers are still near the top of the industry. Even on the short-term side, 41% are beating peers, so we're slightly below the median and, as I said, the performance has rebounded. Just speaking on that street, our clients know what they get when they hire Janus. In a severe market environment, we'll hold our own; but in a normal market, an up-market, which is 7 out of 10 years in the past, we have outperformed nicely.

INTECH's performance continued to rebound sharply since 2008. Eighty-three percent of the strategies were ahead of the benchmarks for the one year-ending December 31, 2008, but the long-term performance remains exceptional. As I mentioned on the Perkins side, the mid cap value, small cap value top 15 percentile plus all periods. We launched a large cap value product at the end of the year, which we think will capitalize on this area of performance we've seen, and some of the turnover we've seen among our deep value competitors.

The investments we've made in distribution are clearly paying off. On the retail intermediary business, the actual intermediary business, except for the broker-dealer business, we've added significant headcount. In that broker-dealer business, we saw about $2.5 billion of positive flows in 2008. Overall, we were positive on the retail intermediary business for overall business in 2008. The international business had another great year, as of about $1.7 billion for all of 2008.

We continue to broaden our product lineup through the launch of Janus regional products, global products and INTECH-launched global products and alternative products, which have gotten off to good performance records. On the Janus side, we launched a Europe equity product during the year. On the INTECH side, we launched several global products; in most of the major markets, we have global capabilities today. If you look in the back, you'll see that our global INTECH product, since inception, is beating its benchmark by about 270 basis points annualized. If you look at our INTECH market neutral product, compared to other hedge funds or hedge fund-like products we are actually up about 4% in 2008.

On the Perkins side, in addition to launching the large cap value product, we hired CEO Peter Thompson, who has a very strong distribution experience in the industry, and is very well known in the industry. I'm very excited about that. As Greg will discuss, we did, I think, act very proactively to reduce costs to reflect the lower asset levels that help preserve our future earnings power.

Yesterday, we announced to clients that Janus plans to wind down its institutional cash management business. It's a tough environment. We want to focus on what our core competencies are, which is long-term investing and a zero interest rate environment. Now the business requires scale. We didn't have scale. We exited this business with about $6 billion in assets. It does help us mitigate some risk to our balance sheet. But it will cost us about $0.02/share in earnings in 2009. Of course, that number is going down, with interest rates close to zero. So we don't think it really has broad financial impact, but it does alleviate some of the risk on your balance sheet.

Slide 4. Total 2009 net flows were negative $0.6 billion; again, this reflects the diversified product line we have today with Janice, INTECH and Perkins. That overall is an organic growth rate of about 0.3% in the negative. I'd say this is okay. When you compare it to the industry average in '08, the organic decline in equities was about 1.5%. So we are doing better than the industry and, as I mentioned, as we exited the fourth quarter, flows were relatively flat.

Looking at the pieces, on Janus, we were negative $1.2 billion for the year. Obviously, this is the result of more challenging market conditions, our retail heritage. Retail investors pulled assets out of equities at the fastest pace since 2002. Despite the difficult market, 42% of our mutual funds posted positive net flows last year, lead by Janus 40 and enterprise.

On the INTECH side, we had negative 1.7 billion in flows that was driven by decreased gross sales, as many of you know. Pension plans just froze their decision-making in the third and fourth quarters. There aren't a lot of searches going on; earlier in the year, we saw a lot of asset allocation away from U.S. equities toward alternatives. That has actually stopped; we believe, given the short-term performance problems, that a lot of the hedge funds suffered at the end of the year.

We do believe that pension plans will rebalance back into equities. They always have in the past, after market plunges. We do think that the bloom is off the rose on the alternative side, so we think INTECH will benefit from that as we get into 2009. The Perkins flows were, as you can see, positive 2.3 billion. Very strong performance across the board and, again, with a lot of our competitors not doing well on the value side, we think that momentum could continue.

Turning to Slide 5, looking at this by channel, as we do, the retail intermediary business, as I mentioned up front for the year was up. It was up 0.8 billion, lead by the broker-dealer segment, which I mentioned up front, was up about $2.4 billion. On the supermarket retail side, we still have 16 funds, which is about the same number we were at on the select list of Schwab and Fidelity.

The institutional business had a rough year. Redemptions from INTECH clients earlier in the year, which we discussed in the past, but the bigger issue was the sharp reduction in the new mandates in the second half. As I mentioned, we expect that this will change as we get into 2009; we've heard the pension plans want to continue to rebalance back into equities.

We invested heavily in the channel in 2008. We've hired five new sales people, and so we're optimistic that now that we have a full team in place, we can capitalize on some of the disarray in the marketplace.

On the international side, 2008 was the tenth consecutive year of positive flows. Big wins on both the Janus side and the INTECH side in the fourth quarter. This number actually would have been higher. We had a billion dollar redemption in the year by a large government fund and the enhanced index class, but continue to have a lot of momentum on the international side.

Turning to Slide 6, obviously the markets were challenged in the fourth quarter. The 22% or so decline in the S&P, is the sixth worst quarter on the index since 1930. It was the worst since 1987. On the top right, long-term mutual fund flows in the fourth quarter were about $150 billion negative. That's an annual decay of about 8.5%. That was the worst three-month period for the industry since at least 1992, which is the farthest we've got data going back on.

On the equity side, the outflows were about $90 billion for the quarter. That was an organic decay of about 7%. This was the second worst period, going back to 1992. On the bottom left, you can see that both value and growth did poorly. Value did slightly better than growth, but that's not really much to talk about. On the bottom right, you can see that the flows, both growth and value, are poor, but growth is much worse than value.

Incidentally, sometimes we do look at our market share. One of the things we looked at, is our top 20 firms by mutual fund assets, how we did in the fourth quarter. Our market share was 13th of 20 firms, so again, I think we held our own in the fourth quarter. If you look at the 12-month period, we're right in the middle, 10th of 20 firms.

Turning to Slide 7, we talked about this; performance again has remained strong. Morningstar 50% of our funds remain four and five star ratings. That's down from where we were in the seventies, but again, these are based on three and five year and 10 year numbers were particularly strong.

I gave you the Lipper numbers up front; 55%, 79%, 80% beating years on a one, three and five year basis respectively. That would rank us twelfth of 20 on one year, first of 20 on a three year, second of 20 on a five year, fifth of 20 on a 10 year. On the Janus equity side, again, the three and five year numbers remain near the top of the industry. The one year numbers, at 41%, are below our lower expectations, but certainly within line, given the severity of the equity markets and the way we invest. INTECH performance, as we said, were very strong in 2008, and Perkins strategy strong across the board. You can see that graphically on page 8, as was shown in the past.

Going to Slide 9, the INTECH strategies continue to do very well. Where we had some issues in 2007, large cap growth and cost strategies have rebounded very nicely, did very well; bucking the trend of a lot of the quantitative managers out there, obviously INTECH was mathematical.

The batting averages are something that institutional clients look at. These are, again, numbers that would rank at the very top of the industry. The way you interpret that chart is over any one year period, three year period, five year period, as of 1231. Into the percentage of periods, where we're beating the benchmarks looking back one, three and five years, you can see those numbers on a one year basis, in the seventies, three and five year, mostly 80% to 100%.

I just want to call out some of the products, because we've invested in them over the last couple of years. As to our global core product, where there's so much demand in the marketplace, we were ahead of the benchmark by about 360 basis points in 2008 since inception, about 270 annualized. Those numbers rank at the top of your sheet. That product now, the deposit now has a four-year life.

As to our international product, which is not shown here, an inception date on that was November 6. That was ahead of its benchmark by about 230 basis points in 2008 since inception, about 450 over the benchmark, so it is very strong. Our market neutral product, which has an inception date of December ‘06, returned 4% on an absolute basis; so again, much better than many of the long strategies out there.

As to our broad large cap value products, we talked about Perkins, but INTECH has a very strong product as well, and we believe that, given some of the severe underperformance by many of the large value products. I have seen a lot of those, a lot of which have a lot of the assets. We believe that the embrace of risk-managed value type products in the marketplace will take place. We've already seen more interest in that product, so we think we'll get some traction there. That performance was up about 220 basis points versus its benchmark in 2008, so overall, very strong performance continuing from INTECH.

Gary Black

With that, let me turn it over to Greg, who will take us through the financial side.

Greg Frost

Thanks, Gary. Good morning. Janus recorded fourth quarter earnings per share of $0.05, compared to $0.16 in the previous quarter, largely due, obviously, to the significant decline in assets and revenue experienced in the quarter. The fourth quarter did include $0.07 of mark-to-market losses on our seed capital portfolio. Please recall that the third quarter included $0.04 of mark-to-market losses, and a $0.08 impairment charge on our SIV. It is worth mentioning here, and Gary mentioned it briefly, that we have put a hedging strategy in place on our seed capital portfolio, which should reduce these significant swings in earnings that we've seen in the last several quarters.

Revenue declined 36% from the third quarter to the fourth quarter, and operating expenses declined 28%, primarily as a result of lower variable compensation and distribution costs. Included in the quarter were severance charges of just under $8 million that are recorded in compensation. These are largely offset by some insurance recoveries we received in the quarter of approximately $7 million, which are reflected in G&A expenses.

Although we did initiate the cost reduction measures in late October that we talked about, the full effect of these reductions won't be seen until 2009, and I'll talk more about that in a couple of slides. As Gary mentioned, we did complete the Perkins acquisition of the additional 50% on December 31. Upon consolidation in 2009, Janus will record 100% of the revenues and expenses of the firm, compared to 50% of the revenues that we account for today. The 20% share of Perkins that we do not own will be backed out through minority interests, similar to how we account for INTECH's minority.

Also, as we mentioned back in July when we announced the deal, the platform will require some level of additional resources, including the hire of Peter Thompson as CEO, as Gary mentioned, and the partnership structure and distributions that have been in place for some time will be replaced by more traditional compensation programs.

Turning to page 12, Janus recorded full year earnings per share of $0.86 and margins of just over 32%, slightly down, kind of in line, to slightly down from that scene in 2007. However, as the blue bar shows, the sharp decline in assets and revenues in the fourth quarter led to operating results that are approximately half of what we were in the fourth quarter of 2007, and we'll clearly put pressure on the firm as we go forward to 2009.

We do take a long-term view of this business, and we will continue to strive towards the balance of reducing costs as revenues decline, with having the resources and the infrastructure to execute on our long-term plan and be ready to grow again when the markets return. That said, we are mindful of current market conditions and may take further cost actions if the environment significantly worsens.

Turning to the last page of my section, as I look ahead to 2009, I'll just make a few observations, as everybody kind of thinks about their modeling. We remain committed to our cost reductions that we mentioned last quarter. As I said last time, these weren't easy decisions but clearly necessary, given our lower asset base.

Variable expenses, namely incentive compensation programs and distribution expenses, will continue to vary with assets and revenue. On the fixed and discretionary side, we have implemented $40 million to $45 million of full year cost reductions off of 2008 levels. Roughly $15 million of the $40 million-$45 million will come from the staffing reductions done in late October; $5 million will come from scaling back on some other compensation programs, and the balance will come from lower spending and technology, back-office functions and marketing.

Secondly, as I mentioned before, Perkins will now be consolidated beginning January 1, and our seed capital portfolio is now largely hedged. Lastly, we expect our effective tax rate to decrease by approximately 125 basis points going forward, as a result of the Colorado legislative change that we discussed back in July.

To wrap up, I believe Janus has worked very hard over the past several months. Adjusting our expense base reflects the current market conditions and we'll continue watching it closely as we move forward. It is our goal to preserve our liquidity and financial flexibility while managing the business through these extraordinary times.

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

Gary Black

Thanks, Greg. So in sum, difficult quarter obviously for us and for the industry, but I think Janus is well positioned to capitalize on the turmoil we see in the markets today. We have strong performance across the board. Our flows are stable and held up relatively well, particularly as we were ending the year. We have a global distribution footprint that's been fully built out and is functioning very, very well and we have a broad product platform that we're very pleased with.

As I think about the strategic priorities on Slide 14, our goals are to continue to deliver the strong long-term performance that we have in the past, continue to expand our global distribution and product offerings, continue to move to being more advisory and intermediary-based, instead of direct-based.

We will continue to broaden out our alternative product capabilities, and try to capitalize on some of the turmoil we're seeing in the hedge fund space. We will build out our value franchise around Perkins' very strong performance, very strong investment team, and we think we can leverage that to other products. We'll leverage the INTECH product platform and very strong performance to meet the market demand for large cap value, global and international and some alternative strategies. We'll continue to build trust in the Janus brand, which remains the fourth most recognized brand in the industry, and we'll continue to try to get more acceptance for the Janus-managed strategies on the institutional side, where we did get a lot of traction in 2008.

So with that, let me open it up for questions. Operator? Just see if there's any questions. I don't know if the operator is standing by. Just bear with us for a minute. We're trying to find out where our operator is at this point. Just give us a minute.

Question-and-Answer Session

Operator

From the line of Michael Kim.

Michael Kim - Sandler O’Neil

Hi, guys, good morning. Just to start out with, I guess I understand the rationale behind hedging your investments. But first, how much of the portfolio is actually hedged; and then more broadly, should we assume your near term outlook for the capital markets isn't all that constructive, since I would expect this limits the upside when the markets do eventually start to rally?

Gary Black

Could you repeat the question? We missed the first part of it.

Michael Kim - Sandler O’Neil

Yeah. Just in terms of kind of hedging your investment portfolio, first part of the question was how much of the portfolio was actually hedged. The second part was how should we think about your near term outlook for the broader markets, just given the fact that I would assume the hedging kind of limits your upside when the markets do eventually rally.

Greg Frost

This is Greg. I certainly wouldn't classify the hedge as a market call. I think it was just something that we did. It causes lots of volatility in earnings. I think it's just something that we wanted to get done. Many of our peers do the same thing. It's certainly not making a market call up or down either way.

Michael Kim - Sandler O’Neil

Okay, and then any color on how much of the investment portfolio is hedged?

Greg Frost

The large part, the bulk of the equity piece of the portfolio is hedged.

Michael Kim - Sandler O’Neil

Okay, great. And then secondly, just focusing on compensation, even if we include the severance charges this quarter, comp was down pretty meaningfully on a sequential basis, and I'm just wondering if part of the decline reflected any kind of year-end bonus accrual true ups and, if so, can you quantify any of that potential amount?

Greg Frost

I think if you look at comp quarter-to-quarter and, as you point out, if you back out the $8 million of severance, comp was down 44% on asset decline or revenue decline of 36%. That differential to me really is the true up of some year-end accruals and some other compensation adjustments we made through the fourth quarter, so that's the way I would think about it.

Michael Kim - Sandler O’Neil

Okay. And then if just finally, in terms of the decision to exit the money market fund business, I'm just wondering what your options are in terms of looking at disposing those assets, and how does the decision box with what seems to be an overall initiative to be a more diversified asset manager?

Gary Black

I think let me start with the strategic question first. In this market environment, you'll see this from most firms. We'll focus on our core competencies. We're very good at long-term investing, both on the equity side and fixed income side. We have scale in most of our businesses. On the money market business, on the institutional side, we have about $6 billion of assets. As you know, this is a very much a scale business and with interest rates expected to remain low for potentially several years as we work out of the credit crisis in the economy, we just felt that it wasn't a good place to be putting our resources right now.

From a P&L standpoint, it's insignificant, about $0.02/share and declining as most of our competitors are finding out with waivers, and we just felt it would be better for us to focus on what we do really well going forward. We will exit the institutional business over the normal course between now and April 30th.

Michael Kim - Sandler O’Neil

Okay, that's helpful. Thanks.

Gary Black

Sure.

Operator

Your next question is from William Katz from Buckingham Research.

William Katz - Buckingham Research

Hi, good morning. Just a couple questions if I may. Just wondering, Greg, if you could just go into a little more detail; the revenue yield decline sequentially seemed pretty stout even with the AUM decline. Just wondering, is there anything going on there between mix and pricing? And then, while I have you, could you walk through the free cash flow dynamics in the quarter, and why it went negative and then kind of seasonality or one off investments in the quarter?

Greg Frost

Sure. On the revenue yield side, I don't think anything significant happened, other than that we did record lower performance fees in the quarter, so that's probably going to be your big driver there on yield. On cash flows, on a net basis, we were negative, but remember that we did pay for Perkins right at the end of the year. Our cash provided by operating activities, as indicated in the press release, was still positive $70 million. So, we normally see some outflows or negative cash in the first quarter due to the seasonality of paying compensation, but the fourth quarter operating cash was positive; overall cash was negative due to the purchase of Perkins.

William Katz - Buckingham Research

Okay, that's great. And then, Gary, just quick question for you. I'm wondering, just conceptually, last year you had the benefit of exceptionally strong relative performance, and apart from the second half of the year where things tailed off in the market but generally a little bit more constructive back drop, starting the year. As we look out into this year, it seems like a little bit more of hostile environment and your performances lagged a little bit. I’m just trying to square the economic reality against your decision maybe to pull back on marketing, and the impact that might have on flows. So maybe help me understand the outlook for the marketing side?

Gary Black

We'll continue to invest more of our marketing dollar behind the sales side of things. So, we continue to invest in sales people. We haven't really pulled back much either on the institutional side or the advisory side. We'll continue to focus on the advisory side, the overall intermediary business and the international business, where again, when you look at the flow numbers, the broker-dealer business where we put a lot of the resource, we had $2.5 billion of flows in ’08; the international business, we had $1.7 million; plus clearly the distribution of assets are paying off.

When you become more of an advisory-driven business, the actual brand advertisement becomes less impactful because it's more day-to-day combat out in the field, with wholesalers talking to FAs. And that's where the growth in the business is. That's where we're putting our resources and it does seem to be paying off.

On a performance side, we have not seen a lot of redemptions due to the short-term underperformance that we saw earlier in the year, and again, that has bounced back. I think most of our clients get it. They understand that in a severe down-market, this ranks up there with the best. We're just going to hold our own in a bare market. Very different from what you saw in 2000-2001, when we severely under performed. But on the flip side, in the normal market, which is seven out of 10 years, the market is up. They expect us to outperform nicely, and we think that that's the value proposition that clients who hire us expect, and that's what we've been delivering. So, we're not really seeing much redemption because of our short-term underperformance, which, again, has been modest. More of the redemptions were due to the fact that retail investors pulled money out of equities and put it into cash.

Operator

(Operator instructions.) Your next question is from Craig Seigenthaler from Credit Suisse.

Craig Seigenthaler - Credit Suisse

Thanks and good morning. First question really is a follow-up on compensation expenses, Greg. You outlined reduction to fixed expenses being in the $40 million to $45 million range, and I'm just wondering what part is targeted for the comp line, and then what part is targeted for either marketing or [D&A]?

Greg Frost

On page 13 of the slide, I think that's laid out. We've got $15 million from the reduction in force we did back in October and another $5 million from additional compensation, so I would classify that to be $20 million going forward of compensation reductions, and then the balance of administrative and marketing.

Craig Seigenthaler - Credit Suisse

So has the $5 million, is that already in the fourth quarter number or is that going to count on the additional compensation reductions? That's additional, right, that next quarter?

Greg Frost

That's additional, correct.

Craig Seigenthaler - Credit Suisse

And the 20-25 is that in the fourth quarter number, is that additional, too?

Greg Frost

Some. I would classify the majority of that as going to be seen in ‘09. We clearly clamped down on spending and travel and things like that in November and December, but the reality is you'd already spent a lot of money throughout the year. So, obviously, as I mentioned, the 40-45 we expect to see fully in ‘09, based on ‘08 numbers.

Craig Seigenthaler - Credit Suisse

And my second question is for Gary. Just on the institutional money-market business. What part of the money-market assets that you have now are institutional. I'm wondering, will this asset, are you able to sell it or is it going to be more run-off when investors redeem, or is it going to be closed where the money is going to be handed back to investors? I'm wondering, was it the low asset yields out there that drove this decision, or was it more of the risk from the charges.

Gary Black

Just to answer, the institutional business was about $6 billion in assets, $5.8 billion, to be exact, as of December 31. Our retail business, which is possible is $2.1 billion in assets. On the institutional business, if we had scale, it could be a very profitable business, as a lot of the top 10 or 15 players in that business, all have $150 billion plus of assets and we had $6 billion. And so, we took a pretty hard look at it. Our long term performance was good. We just didn't see the upside opportunity for the firm, and you couple that with the balance sheet risk in that business. So I think it was a decision based on what are the core competencies of the firm, trying to be prudent from a capital position, making sure we don't have any issues. In terms of the assets, look, we fully expect that institutional clients will, over time, take their money out and will exit this business between now and April 30th.

Operator

Your next question is from Ken Worthington from JPMorgan.

Ken Worthington - JPMorgan

Hi. Good morning. You announced a lot of cost cuts, that's great. What happens if the market is down, call it like another 20%? You have a lot of debt to service. Hard to sell funds in a further deteriorating market, so just for Gary, what's the contingency plan here?

Gary Black

We don't need a bull market to do well. We believe that in a normal market, or even a down market, it's the depth of our research; we'll continue to drive the long term performance of our clients. We think we can take share from competitors who are not delivering strong performance. We have great long-term performance and we have a great investment process on the Janus side, very strong performance on the INTECH and Perkins side.

So we don't really need positive flows, even in the industry, to grow. We can take market share and we've done that over the last couple of years. That said, if the market goes down to your question, 15% to 20%, we work for our shareholders, as Greg said, we have to continue to reduce costs as revenues fall, and the good news about this business is it's still largely a variable cost business.

The whole industry will have to go through this process of reducing compensation for the folks that stay in the business and we'll do the same thing. We're committed to doing that, so I think the first line of defense is, if the market is down another 20%, we'll have to cut costs further, as Greg said, and others will do the same thing, and compensation in this business will continue to come down as it did in 2008.

I think we'll be in a great position though, because our long-term performance is strong. Our research is great. Our products are very well positioned. The growth product is very well positioned in the marketplace. Perkins is going to take a lot of share, we believe, from some of ours. INTECH is very, very well positioned against the quantitative and mathematical managers it competes with. So I think as we come out of this. I think we're very well positioned to take share, whether the market is flat, up or slightly down.

Ken Worthington - JPMorgan

Okay. Just to say it back to you, if the market continues to fall, you have the wherewithal, even if it falls a lot, you have the wherewithal to take out enough cost to survive?

Gary Black

Yeah. We now have, I'd say, flexible compensation systems across the board, so it's much more linked to revenues today. Particularly on the investment side, it's very driven by long-term performance, but it's much more flexible today than it's ever been. So as revenues come down, compensation comes down automatically; but then on top of that, we have base salaries and bonuses, as everybody and the bonuses are still multiples of the base salaries. So yeah, there's a lot of flexibility in the compensation model.

Operator

Your next question is from Robert Lee from KBW.

Robert Lee - KBW

Thanks, good morning. A couple of questions, maybe to start with INTECH. I'm just curious, given the pending reallocation of a lot of institutional investors that are going to be going through, have you started to see any kind of increase in RFP activity at INTECH or anywhere else? And then maybe related to that, I know there's a transition of senior management taking place at INTECH, from the founders to – I guess I'll call it the next generation. Is that creating any kind of issue with consultants?

Gary Black

We have seen it bounce back in activity. I think the fourth quarter for us and everybody else was debt. RFP activity was frozen as pension plans, which are going back into under funded status, given the double whammy of interest rates going down, which means liabilities are worth more and returns were negative across the board. I think a lot of them were frozen.

Historically, when you've had 20% to 30% plunges in equities, you get back to 2000-2001, 1992, you always see pension plans rebalance back into equities. Given you have a double effect here, and there was a lot of movement into alternatives over the last couple years, that obviously didn't work out because alternatives, a lot of long-short funds that were supposed to be delivering positive returns last year were down 15% to 20%.

So we think those two factors, people rebalancing back into equities and the bloom is off the rose on alternatives. That will cause people to put more money back into equities. Now where I think we've done a pretty good job at INTECH over the last couple years is diversifying our product line. It's not just enhanced index and large cap growth anymore. We have a great track record on global. In fact, a lot of the activity we're seeing is on the global side.

A great track record on [each] of product, our international product and we have a market neutral product that now has two plus years of good performance, and its positive performance. Then we throw in the value product, where again, in 2000, we saw a lot of people embrace risk-managed growth strategies, 2000-2001 we think the same thing will happen here on the value side. So, lots of excitement for INTECH, and we do think the activity will continue to pick up. We've seen that in the first quarter so far, in terms of RFP activity coming back.

Robert Lee - KBW

And are you seeing, I assume you aren't seeing impact from the fact that the founders are in the process, I guess, of withdrawing from the business?

Gary Black

Not at all. It's a very long-term succession plan. I think institutional investors appreciate the transparency into the plan that we've given them. As you know, unlike some other firms, the folks that are taking over have been at the firm for many years. Jen Young, probably one of our institutional clients knows Jen. She's the CEO, and Adrian Banner, who is the co-CIO. People know Adrian very well. So, we won't have any institutional investors who don't know both Jen and Adrian. It's been well telegraphed and they know those folks, so we don't think that's going to be an issue at all.

Operator

Your next question is from Marc Irizarry from Goldman Sachs.

Marc Irizarry - Goldman Sachs

Yeah. Gary, I have a bigger picture question. Obviously, risk tolerance at the retail level appears like at least the willingness to take risk is low. Do you think there is a permanent change, temporary change? And if so, given the volatility, how do you expect your product line-up for Janus to stack-up if the change is more permanent?

Gary Black

Let's start with the market. You know, historically, when you have a 20% to 30% [cash] funds, whatever you want to call it, people do flee equities; and we saw that in the fourth quarter. If you look back at 2001-2002, it took 12-18 months for folks to come back into the market. As to your point, it came at a lag. That said, we've been very pleasantly surprised by its ability in our flows. If you look at our flows from fourth quarter, October was a bad month for us and the industry. November-December, we were flat.

And we think that the long-term performance, the well-positioned product, the broad product platform and the investments on the intermediary side away from direct, plus our investments international will allow us to weather this storm in the retail space as people come back. Again, while we did see industry flows negative in November-December, we did better because I think our long-term performance was strong and I think our clients know what we do for them. They understand the investment process for Janus and how it normally works. And the good news is, as we discussed, and I don't want to put too much stock in short-term performance, if you look back to where the market bottomed November 20, to – I think the date we have is through January 20, 87% of our products, our Janus-managed equity products were beating peers. So, I think we're well positioned and the distribution footprint we have is strong and will help us going forward.

Marc Irizarry - Goldman Sachs

Okay. Then, just in terms of the debt covenants, I know some of the rating agencies are focused on market share. Can you just a) talk about what metrics are out there, what the covenants now look like, Gary? Maybe Greg, you can tackle this one in terms of updating us on what some of those debt covenants are and when and where do you stand?

Greg Frost

On our senior notes, we have no covenants other than provisions, should we get it downgraded by the agencies. Moody's recently came out and reaffirmed our rating, but they did put us on negative watch. But to me, if you read in their report, they seem to be giving us 2009 to work through some things, as long as the fundamentals of the business are okay. They are going to give us the latitude to operate, maybe outside of their normal ranges of credit metrics and, as Gary said, I think our fundamentals are still very strong. On the credit facility side, we do have covenants there and we intend to work with our bank group to amend our existing facility.

Gary Black

It is also important to just remember, this is a cash generating business. Even at these reduced asset levels, we have $22 million of maturities coming due, that's it, of our debt, of debts coming due this year. We don't have another major maturity until 2011, and this business continues to generate ample cash to service both the interest expense and the debt going forward. So, I think we're, from a financial flexibility standpoint, I think, as Greg said, Moody's reaffirmed our rating. I think we're in pretty good shape.

Operator

Your next question is from Mike Carrier from UBS.

Michael Carrier - UBS

Thanks, guys. Just one follow-up on the money-market side of the business in terms of exiting. You mentioned the $0.02, but is there any impact just given the remaining SIV exposure and some of these funds?

Gary Black

Well, we don't have any SIVs left in any of our money-market funds. Obviously, we still have a SIV on the balance sheet, which is producing some cash flow. We got some cash flow in from that SIV. We left the carrying value at where it is. We go through the impairment test at the end of each quarter, and I think we and our auditors are comfortable at where we are, so there's no further write-down on that. I think we're comfortable with the position on SIV. On the balance sheet, we have none left in the money-market funds.

Michael Carrier - UBS

Okay. And then just one other on the distribution side of the business. You've invested a lot over the past couple of years and there's definitely been some progress made. Just given what's going on, I guess in the broker-dealer industry, with the consolidation, you had Banc of America and Merrill, and then Morgan Stanley and Smith Barney, it seems like it was very difficult to get on these distribution platforms, you know and three years ago and now, with fewer platforms, the competition to get on there and we have a presence that is going to be more and more difficult. So, just curious, your guys' perception on what changes are going to be taking place on the distribution platforms and how you're positioned, despite all the changes in the industry?

Gary Black

I think it's a good question. Over the last few years, we've focused on the larger firms, so we have – I don't want to go through the individual players, but we have good relationships with a lot of the top distribution firms. When one large firm gets swallowed up by another large firm, the goal is to have had good relationships with both, to have products on the platforms of both, and I'd say when we look at the mergers that have been announced and which we are sure will continue.

We have good relationships and we are on those platforms already, so when they merge, if you got a good relationship with A, A merges with B, with the combined entity you'll be fine. I think the other thing that we really focused on the last few years was just focus on the top producers, and the top producers, again, when you merge from one from the other, they stay because they are doing well.

So I think we have the right team in place. We have tenured sales personnel. We have stability in our relationships. We have great long-term performance. We have a Janus labs program which has helped the sales team provide more insights and tools to help the advisors, and they are very loyal to those that provide them with services. So I think we're going to be fine going forward, even if the industry continues to consolidate, which we expect it will.

Operator

Your next question is from Cynthia Mayer from Banc of America.

Cynthia Mayer - Banc of America

Hi, good morning.

Gary Black

Good morning.

Cynthia Mayer - Banc of America

Just to circle back to the expense question, but with another angle. I'm just wondering, if markets were to bounce back, how much of the fixed expenses that you've cut would you add back? I assume marketing and some of the incentive comp, but just trying to get a sense of what kind of leverage there is, if markets actually go up instead of down.

Greg Frost

Nice to hear a question like that, with the markets going up versus down. I think the variable expenses will clearly go up, would rise with the increase in revenue. I think the fixed and discretionary, the cuts that we've laid out, I think they would be, I think would be very measured in our approach. I think there are certain things that maybe you might decide to spend money on, but I think, by and large, we would still look to get a majority of those costs out of the system.

Cynthia Mayer - Banc of America

Okay. And if you were to just take a snapshot now, do you have a sense of what of part of your expenses is fixed and what is variable?

Greg Frost

No. We've never broken that out. I think you can look at the P&L, a large part of employee comp and benefits is variable and all of distribution is variable. I think everything else you could classify as fixed and discretionary.

Operator

Your next question is from Roger Freeman from Barclays Capital.

Roger Freeman - Barclays Capital

Hi, good morning. Just wanted to come back to comp one more time with a little more specificity. Given the flexibility and the comp structure today versus last cycle, and barring the layoffs that have happened so far, and any rebound in the market – if I heard you correctly, it sounds like you think that you actually could put up a counter revenue ratio in '09 that's flat with '08, is that fair to say so around 31%?

Greg Frost

Well, remember, within compensation is still base salaries.

Roger Freeman - Barclays Capital

Yeah, yeah.

Greg Frost

And benefits which are fixed, so I might expect to see comp-to-revenue increase a little bit, but, as Gary's mentioned, a good chunk of our compensation, whether it's for the investment portfolio or Portfolio Managers or for the company, is variable, with revenue in our results. So I might expect to see a slight pick-up in that ratio, just given the fixed costs embedded in comp, but there is a very large variable component as well.

Roger Freeman - Barclays Capital

Got it. That makes sense and then secondly, I guess just maybe a little big picture, since I'm a little newer to the story. Can you just comment on how risk management has been working? I know you focus a lot on one, three and five year results, kind of look over the last year, the Janus equity funds, a number of them have seen declining Lipper rankings. One of the things I noticed, anecdotally, is there does seem to be some concentration of stocks across the portfolio and key names like Apple, Google, et cetera, and I know part of risk management was to reduce that. So how has that been working out?

Gary Black

I think our risk management is among the best in the industry. We hired a fellow by the name of Dan Sherman two years back, who has done a fabulous job helping the Portfolio Managers understand their risk better for fundamental shop so people pick stocks. But we've gotten our Portfolio Managers to know the risk in their portfolios without being over bearing.

I think we've done a really good job of making sure the overlap is not there, as it was in 2000-2001. When we look at things such as the correlation between our portfolios, the percentage of our holdings are in, say, the top 10 or 15 names, nowhere near the level of concentration we saw in the last downturn.

So I would say our risk management, people look at it today; they would say that we're at the top of the industry in terms of the way we manage risk. We can look at things like beta; while many of our portfolios have betas that are a little bit higher than one, it's not extreme, and when you look at the attribution, it's not beta-driven. It's all stock for a vast majority is stock.

I think with any time you go through a period of underperformance, as the Janus-managed equity side did, parts of last year, and again that's come back, you learn lessons. We did learn some lessons, that we have to pay more attention to the credit markets as leading indicators for equity markets, and analyze something and Warren Buffet said this for years, but you got to be weary of it. And I think in times of financial crisis, when you have high leverage, even if you have a good business model or a stable business model, sometimes the stocks don't act well. Those are the types of lessons we've learned in this market, and I would put it in the category of risk management. So I think the investment team is doing a great job, and we feel really good about the way we're positioned as we go into 2009.

Operator

Your next question is from Hojoon Lee from Morgan Stanley.

Hojoon Lee - Morgan Stanley

Thank you. A follow-up on your comments on institutional rebalancing. Just curious, what do you think it will take, how long do you think it will take for clients to rebalance back into equities?

Gary Black

You know, it's a great question. Everybody is trying to figure that out but again, you could look at history and historically people have always rebalanced back into equities. You got the other piece of this, that a lot of folks are moving into alternatives in the beginning of 2008. We've seen that just stop dead in its tracks because, not just performance, but people realize that a lot of these alternative strategies are very highly correlated with the loan only managers that they’ve placed. People also learn that it's hard to get your money back. You have a lot of hedge funds, as you know. They are locking up the money and saying, well, we aren't going to give it back right away; those pension plans don't react very well to that. At the same time, you've got interest rates near historic lows; that really go down that much longer. So, from a fixed income standpoint, hard to see positive returns when you got treasuries at 2, 2, 2, 3. So, I think in the end, we will get a rebalancing back this year for all those reasons, and I think we're well positioned to take advantage of that. Let's take one more question. We're getting close to the top of the hour.

Operator

Your next question is from Roger Smith from FPK.

Roger Smith - FPK

Thanks a lot. I'm going to just stick with this rebalancing, and I just want to understand where you guys really are in that process right now. I mean are you out talking with the consultants mostly about what's going on in that process, or are you out talking with clients, getting them more comfortable with the strategies on the equity side, or how does that really work and where are you positioned right now?

Gary Black

It's both. One of the big initiatives over the last few years was to rebuild our institutional team under Dan Troll's leadership. I think he has done a fabulous job, both recruiting people and building a good institutional sales process that can sell all of our products. I think the INTECH folks have been all over their clients, just talking about the performance issues. In fact in 2007, performance has come back dramatically in 2008. We're well positioned on the INTECH side to take advantage of the turmoil in the market and, again, the performance is extremely good now.

On the Janus side, we haven't gotten a lot of traction in the past. I think we positioned our product line differently now and it's got much more of an institutional flavor, so I think we will get some traction. We've seen some interest in the Janus products, particularly our concentrated growth strategy. Our international equity strategy has got good numbers. So, we're getting both prospects and clients to look at our strategies, but the whole rebalancing, it's an industry phenomenon that, again, you've got to look at history and say, has it happened? It always has. If you look over long periods of time, you see the allocation of equities versus fixed versus alternatives. Alternatives has grown a lot in the last couple years, but we expect that to come back down as people realize that it's not what they thought. I think that equity-fixed relationship will come back into line with equities down 40%, close to 40% in 2008; and fixed income again, when you've got interest rates as low as they are, it's hard to make a case that's really strong for keeping our fixed income allocations where they are. So yes, we're talking to institutional clients across the board and I'm sure most of our competitors are doing the same thing.

Roger Smith - FPK

And then just on the money-market funds. It was my understanding that that was really a critical product to have at Janus in order to really penetrate on the institutional side. Why is that different today though?

Gary Black

I would say that's not correct. I think we always felt we were going to have a retail option for our investors, so that when you have their markets such as this and people get nervous, there was an outlet, was cash, and that business we're keeping and it's a profitable business.

On the institutional side, I think we always felt we have an existing team who could manage money-market assets; it would be nice to get some scale. And again, in a normal environment, if things were, if we didn't have a credit crisis, we think we could have made good profitability on that institutional side. But in this type of market where you've got waivers and the big keep getting bigger, we just didn't feel it was a core competency going forward. So, it's not significant from a P&L standpoint for us, but it helps us focus on what we do well, which is long-term investing.

Okay, Thank you, everyone, for listening in today. We'll see you next quarter.

Operator

Ladies and gentlemen, this concludes today’s conference. You may now disconnect. Thank you.

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Source: Janus Capital Group Inc. Q4 2008 Earnings Call Transcript
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