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Executives

Gary Black - Chief Executive Officer

Gregory A. Frost - Executive Vice President and Chief Financial Officer

Analysts

Roger Freeman - Barclays Capital

Kenneth Worthington - JPMorgan

Michael Kim - Sandler O'Neill & Partners L.P.

Marc Irizarry - Goldman Sachs

Bill Katz - Buckingham Research Group

Craig Siegenthaler - Credit Suisse

Hojoon Lee - Morgan Stanley

Cynthia Mayer - Bank of America-Merrill Lynch

Janus Capital Group, Inc. (JNS) Q1 2009 Earnings Call April 23, 2009 10:00 AM ET

Operator

Good morning. My name is Rachel, and I will be your conference facilitator today. I would like to welcome everyone to the Janus Capital Group's First Quarter 2009 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 question. (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 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 their statement. These factors include, but are not limited to, the factors described in Janus's 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 day that 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

Thank you. Good morning, everyone. And welcome to our first quarter earnings call. With me today is Greg Frost, our Chief Financial Officer.

Overall, Janus is performing reasonably well in a tough operating environment. Earnings excluding the noise are pretty much on track. Net flows, while negative, were much better than the industry flows, on an again a growth rate basis.

Investment performance has rebounded sharply on the Janus side, and is now solid across the board again. And we have been reducing expenses, fairly sharply, while still preserving our ability to gain market share as we come out as this recession.

So turning to slide two. Let's get through the details. So, first quarter earnings from continuing operations were $0.02 a share. If you exclude a non-operating impairment charge on unconsolidated capital which is $0.03 a share, and have a normalized number that was more like $0.05 a share. And as Greg will talk about, we took a pretty substantial goodwill write-down during the quarter. It's non cash obviously.

Long-term flows for Janus, the first quarter the first quarter, again, a reasonably good 900 million outflow, not like outflows, but again relative to industry pretty good. And definitely, it has stabilized from where we were in the fourth quarter when we had 3 billion of outflows.

If you look at the details of flows, about 700 million outflow for Janus, and 500 million outflow for INTECH, and continued strong positive flows at a Perkins 300 million. This number actually includes a roughly $300 million rebalancing by an INTECH client that is actually coming back next week. So, you can look at it at is 900 million, you can look at it is 600 million outflow; but 300 of its coming back in.

Assets under management at the end of the quarter were about 111 billion. It was down 10% versus year-end. About four percentage points of this decline though is due to our decision to exit the institutional money market business. So, ex-money markets, our AUM is down about 6%.

Looking at performance across the entire franchise, you can see the 51%, 73%, 87% of our mutual funds were beating with peers over one, three and five years respectively. And again, on a year-to-date basis, they are one year numbers are just Okay. But, on a year-to-date basis, 80% of our funds are beating peers as of April 16th.

Last little point. We did finalize an agreement with INTECH founders to purchase an additional 3% as we do normally each year at this time. We're going to pay $25 million to that 3% that will bring our ownership in INTECH to 92%.

Turning to slide three. Net flows are clearly stabilizing for us. The 900 million outflow versus 3 billion in the fourth quarter. That is roughly about a 3% on an annualized basis 3%, 3% annualized organic decline, the industry is as far as we can tell is down by 5% annualized in the first quarter.

Looking at the details, the big story here is that redemptions are down sharply in the industry. Gross sales are down, but redemptions are not even more. So, gross sales are down by 28% quarter-over-quarter, looking at the top left hand chart, really due to weaker volumes across all channels and that continued uncertainty around the equity markets. Redemptions were down 40% quarter-to-quarter.

Looking at the top right, on the Janus-managed side, our net flows improved from a minus 2.3 billion in the fourth quarter to a minus 700 million. Fixed income products where big share gains in the quarter, a very strong investment performance across the board our fixed income cost.

Down below on the left INTECH, net flows improved from a negative 1 billion in the fourth quarter to about 500, I'm sorry 900... 500 million in first quarter outflow.

Product fee activity has been impact somewhat. We have seen that, but it is also very a quality standing stop in the fourth quarter. So, while we have seen a pickup in our fee activity as others in the industry, it is also low base as plans are still trying to figure out to us through allocations.

Perkins on the far right at the bottom, net flows were 300 million same as fourth quarter, exceptional investment performance against many of our deep value competitors who have a very poor performance, we're growing in those businesses 10 to 15% organically.

Turning to slide four. In first quarter, it's really in first quarter again if you look at the distribution channels is again much lower redemption, again sales volume is much low as well. And our retail intermediary business, our broker dealer channel, and our retirement channels both went back into positive territory during the quarter. They were in slight negative territories in the fourth quarter, but they are now back into positive territory.

On the institutional side, the improvement in net, again redemptions that are much lower pace. On the international business, again positive flows, we've been positive in 14 of the last 17 quarters. Across the firm, April again continued stabilization. We don't make forecast, but flows in April have been positive.

Looking at slide five. The industry chart, S&P as you all know is down about 11% during the quarter. This was linked in the bottom 15% of all quarters going back to 1930. If you go to the bottom left, you could see that growth stocks did much better than valued stocks in the first quarter, down 4% the growth and 17% value. And I think that's one of the reasons, all closures are holding us relative to the industry.

Over the top right, one of the big trends in the industry to watch going forward, this is a market share value assets, perhaps you could see that money market just improve lines those of you have color printers are behind some 30% of the industry in first quarter of last year, now 41% of the industry is now the largest asset class despite yields been close to zero. That will reverse as the markets stabilize or these things going to that reverse thing.

Equities have dropped from being 55%, the industry down to 40%. Fixed income is gaining steadily, was 15% the year ago, today's it's 19%. The bottom right is that is our attempt to show organic growth versus industry. You could see that the periods when we've underperformed the industry but first quarter fully outperformed the industry, are organic growth on an annualized basis which is up 3% negative, versus the industry at minus 5.1.

Turning to slide six. Performance remains very strong, on a three year, five year basis. Again, just we see what I showed on the first page, a 73%, 82% beating peers, 51% beating peers on a one year basis.

On the Morningstar basis, 55% of our funds are already four and five start that's versus an industry average 32.5. On the Janus-managed side which is exact at both point, 38% beating peers on a one year, 71, 85 over three and five years respectively. But again, I think you have to look at it in the context that we had a very what we call a rationale market, but a market that was very fearful. And as we go back to say when the market bottomed in 2008, which is in November, and we look at our performance since then on the Janus-managed side 95% of all products are beating the peers, which is as of less priority.

If you look at it, just year-to-date, 80% of our products are beating peers. So, we have about another two quarters of tough performance from last year to roll-off. But, we're pretty confident that our investment practice is working.

Similar point under number two, I think it's worth calling out, Lipper announces every year that's won awards. We won five Lipper awards this year, and including we are proud of this best, large fixed income shop. A lot of our peers were much, much larger. And that's in excess of it.

INTECH's performance as you know has bounced back very sharply from when it was underperforming. It's seems like you undergo, but probably two months ago, much stronger, 83%, 56%, 86% beating on one, three and five year basis. And as we've talked about Perkins continues to be just seller nearing top debt prior for us one, three and five. We did launch a large cap value product at the end of last year. That has also had very strong performance. Obviously, short-term, but it's about 700 basis points over value benchmark since we launched it.

Turning now to slide seven, you can see this all graphically. Again, the three and five year numbers are very strong. As fundamentals have again begun to matter, and the healing process has begun in the marketplace, our stock picking has a good sharp lift. So again, I will give you the year-to-date numbers, which are much better than the one year numbers.

Looking at slide eight. We show batting averages, which is the way clients think about the slightly client experience. You can see with INTECH, and I simply look at this beating five year periods. It is that typically way the client thinks about it. And 85% of the time there was a rebate, will get lower increase, going back lower increase if it goes along five year periods, every month going back from March 31, 2009. 85, 93% of the time INTECH strategy is outperforming the benchmark, which is going to be very, very high batting average.

Two growth initiatives. First, as we've talked about in the past, and I think again, in a tough operating environment, you want to think about the growth going forward. We're very excited about our global and international products. With INTECH, they both gotten office lead, starts global capital around for four year, its inception was January of '05. It's outperforming its benchmark by 330 basis points since over the last three years 250 basis points since its inception.

And our international equity product also outperforming its benchmark. This, a lot of it play outside the U.S. If any gets share with pension plans and the UK, Australia, Japan, you got to have a global product, and INTECH has been able to put together global products. It's really outperforming its peers.

Slide nine. I do want to spend just a minute talking about an announcement that we had during the quarter, which was to merge or what we call our JAD or Adviser Series mutual fund trust into our JIF, which more of our traditional retail funds. And that merger will occur at the beginning of third quarter 2009. The reason for doing this is really to demonstrate our commitment to the advisory channel, to just simplify our product platform. And as of the third quarter, we will role off our direct channel which means that other then existing clients, we won't accept any money into that. And it really allows us to focus on the advisory channel, which is where 85% of the flows are today.

So, it's a sign of commitment to this channel. It's where our growth business for our growth has been. We're positive in this channel to much more stable asset base. It gives us broader access for our product strategy to repeatedly just in that JIF channel. And it does simplify things. So, advisers can keep track of one name, one strategy, rather than two names, one for JIF, and one for JAD.

The cost, and importantly that last bullet point is estimated to be $10 million. That's not an incremental plus. When we talked about 40 to $45 million in net flow space, average fixed and discretionary areas that includes the $10 million spend back. So, that's not a new cost which we're well talking about.

Now, let me turn it over to Greg who will take us through the financials.

Gregory A. Frost

Thanks Garry. Good morning. Turning to page 11. Janus recorded first quarter earnings of $0.02, compared to $0.05 in the fourth quarter, and 20% a year ago. Included in this in the current quarter is the $0.03 non-cash other than temporary impairment charge on our seed capital portfolio that we do not consolidate.

While the fourth quarter, as a reminder included $0.07 mark-to-market loss on that seed capital that we in fact do consolidate. Just as a quick aside, the majority of our seed capital portfolio is comprised of those products that we consolidate. And as you well know those... if you can consolidate those products the gains and losses are mark-to-market through the P&L. We did for the hedging strategy on this portfolio in late '08, which is largely affected since its inception, there was a minimal mark-to-market impact of the portfolio in the first quarter. We do though have a small portion of seed capital investments that we do not consolidate.

These are mark-to-market, gains and losses are mark-to-mark through equity, and then our evaluate quarterly for impairments. So, this impairment charge that we took generally arises when the decline in the fair value, the investment to low cost for an extended period of time.

In addition, the result today, as Gary mentioned do not include anticipated non-cash charge for the impairment of our goodwill and intangible assets. As a result of the continued uncertainty in the markets during the quarter, lower assets in our management and our results in lower forecasted financial results, we reassess our goodwill intangibles during the first quarter and determined that an impairment charge would be necessary.

As a reminder, the majority of our goodwill and intangible assets on the books today were generated from a series of transactions in 2001, to buyout the minority interest in Janus from its founder.

While those impairment charges have not been yet finalized, we currently estimate recording the non-cash impairment charge between 900 million and 1 billion. Although the final number could vary slightly as we finalize the work. We will record the final charge in our financial statements from the file Form 10-Q in early May.

Moving to the operational side, both average assets in our management and revenues were lower in the first quarter, obviously given the market conditions. Revenue yield, however, was positive impacted by a couple of items as you can see with the assets being down 9% in revenue... we've done only 4%.

Remember we're now consolidating Perkins, beginning in January 1 of 2009, while we have always counted the assets in our AUM because they are in our trust. We now record a 100% of the revenue. So, we're starting to impact of the consolidation. And we clearly also are seeing a little bit of shift in our asset mix given our exit and our institutional money fund business.

On the expense side, operating expenses declined 29% from the first quarter 2008. As Gary mentioned, from lower variable expenses in our cost initiatives, but they did increase slightly from the fourth quarter. And I'll spend just a couple minutes on this. It's primarily related to the true-up of our incentive comp accruals in Q4 given the market conditions that we were experiencing. Said another way, we recorded credit in Q4 to reflect what we ultimately paid out for incentive compensation bonuses. So, any accrual in Q1causes an increase, but I think this is what we're seeing.

In addition, let's see a slight increase in LTI expense is primarily resulted from a $3 million credits that we recorded during Q4, related to an adjustment we made in our corporate trade assumption. And, obviously these increases were offset somewhat by the full quarter's impact of the cost saving initiative, which we can talk about on the next page.

From the cash flow perspective, just a quick point here. We did have operating cash outflows of around $18 million. For the quarter we shall see in our cash flow statement. This is very typical for us in the first quarter given our annual bonus and mutual fund LTI payments during the quarter. We do expect to see positive operating cash for the reminder of the year.

Turning to page 12. That will be in accordance in a couple minutes about our expense base. As I mentioned earlier, comparing the first quarter of '09 for the same quarter in '08, expenses declined 29% while revenue was down 40, which obviously is leading to the margin compression. We and most of our peers are seeing. Our variable expense base, which principally is comprised of incentive compensation and distribution has follow the rate actually above revenue, reflecting more assets in our management. It reflects lower one year relative investment performance numbers. And it reflects lower company-wide bonus accruals.

We are on-track to realize the 40 to 45 million of savings that we've announced previously. You'll see the discretionary cost numbers are down 25%, which is inline with what we expect. And our fixed-cost, although not down as much, but you will still see an impact of the fixed-cost from the fact in reduction we did last year. But clearly it's difficult to cut fixed and discretionary expenses as fast as our revenues has come down, which is led to the margin compression.

Gary mentioned that the 10 million of spending that will occur for the trust merger right in the middle of this year. As Gary mentioned, this is already in the numbers, we've given out. So, said in another way, the gross savings we expect to realize, will actually be 50 to 55 million offset by the 10 we're spending back on this very key initiative for the firm.

And lastly, while the cost reductions we've acted on to-date, certain were appropriate given the market conditions. We do believe we have the resources today to still allow us to execute on our plans. We do take a longer-term view of this business, and we'll continue to balance the need to further cost reductions in fixed and discretionary expenses, with maintaining the flexibility to grow when the market conditions improve. And as I mentioned last quarter, we stand ready to take further action on expenses if we need to.

With that, I'll turn it back to Gary.

Gary Black

Thanks Greg. So in summary, we think it was relatively good quarter, continued tough operating environment. And we have strong investment performance plus all of our franchisees.

Investments we've made in distribution, particularly in the advisory segment and the international segment, clearly paying dividend as we gain market share from our weakening competitors. And we are executing on our strategic plan in the advisory space becoming global firm, leveraging our INTECH franchise, building on our value platform, building at a fixed income franchise opportunistically.

And as Greg talked about, we think we have done a pretty good job of striking that down in reducing expenses sharply to reflect we have a low revenue base, a low asset base. But we do want to make sure we position the firm to be in share as the market continues to stabilize.

With that, let's open up to question.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Roger Freeman with Barclays Capital.

Roger Freeman - Barclays Capital

Hi. Good morning. I wanted to discuss... come back on the comp discussion. I didn't quite understand your accrual issue from the first quarter, leaking into the first quarter. If you could just sort of quantify that? And then also is part of the pickup, due to Perkins being consolidated, what I'm really trying to get at is how much sequential increase there was in base compensation?

Gregory Frost

The increase in base compensation was nominal. Perkins is a very lean shop. The numbers you'll see were really more on the revenue side than the expense. From a compensation perspective, from Q1-to-Q1 you saw the big decease, which was all asset from short-term performance.

From the forth quarter to the first quarter, what I was trying to make a point that you increase their and that's only because we took some significant decreases in Q4, as we trued-up our bonuses of what we actually paid. So, we were accruing at one rate for three quarters, significantly drop that in the fourth quarter. And now we are accruing at a different rate in '09, but just little mechanics working for you to see it a slight increase in Q1 to Q4.

Roger Freeman - Barclays Capital

And just part of that first question, is that a level then? I mean is there anything unusually high in there as a result of that sort of, we true-up whatever we want to call that, or is that level which something we should think about carrying through the year?

Gregory Frost

I would think you can look at the level where efforts that they are its pretty consistent throughout the year, obviously including the JIF, JAD cost as Gary mentioned.

Roger Freeman - Barclays Capital

Okay. And then my second and final question is, just around the performance so, obviously noted that your performance for the quarter improved. If you look at I guess just like the... with the last one month on a one month basis the Lipper rankings for most of your key funds deteriorated again a little. And I'm just wondering, can you talk about a count toward the quarter and then at the beginning of the quarter, financials were underperforming more and where you have probably less waiting?

And then in the third quarter and third month of the quarter that sort of reversed itself. How tired are you to think like sort of tech portion of the market and maybe just couple other industry factors.

Gary Black

We don't... let's say, we don't really look at month-to-month performance, and we don't even usually look year-to-date performance. But given that we went through this rough period last year, when the market was... and again we think was rationale, and it was very focused on as call the period of euro. Fundamentals really didn't added that much during that period. And as the market started to stabilize and if you look back to November, it's kind of the bottom of or you can look at February. But you get back to November when the market seems to become more rationale and focus on fundamentals again.

Our performance has been very, very strong across the board. You know in any given month you see under performance, your out performance that we don't really comment on what are best choice today because that could change, tomorrow it may have already change from where we were in March.

But our performance is very strong and look at the Lipper ranking and if you look at Morningstar ranking, but anyway you slice it since last November, our performance have been very strong.

Roger Freeman - Barclays Capital

All right. Thanks.

Operator

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

Kenneth Worthington - JPMorgan

Hi. Good morning. First, I'll start on the balance sheet. You guys have or will have excess cash flow. You've got debt maturing in the distant future. But, what do you do with the cash here? Do you kind of build it up on the balance sheet, and kind of wait for that debts to mature? Do you actually go out and maybe start actively buying it at a discount in the open market? Do you kind of keep it on reserve for INTECH, and maybe Perkins and other similar type building of interest there or other companies. What has this got on the cash flow?

Gregory A. Frost

Hey Ken, I don't think it's right for us to speculate on what we may or may not do in the future. But, I will tell you where we are today. Coming out of quarter where we ran negative cash. We know we have upcoming cash needs with the INTECH purchase that Gary mentioned, as well as the debt maturity in the summer. We felt the prudent thing to do for right now is to maintain the liquidity we do have. And again, I don't think it's right for us to speculate on what we may or may not do down the road.

Kenneth Worthington - JPMorgan

Okay. That's fair. And then on G&A. G&A was down quite a bit. And excluding the spend, the 10 million spend on the next two quarters, what's the outlook for that particular line item? Is that a good run rate? Is there anything unusual in there? How do we think about that?

Gregory A. Frost

I don't think that's a pretty good run rate Ken. Like I mentioned before, I think the expense base in Q1 was pretty good. You're going to see some spending trickle through G&A and probably through the marketing line as a result of JIF, JAD for the probably split between those two lines.

Kenneth Worthington - JPMorgan

Okay, great. Thank you.

Operator

Your next question comes from line of Michael Kim with Sandler O'Neill.

Michael Kim - Sandler O'Neill & Partners L.P.

Hey guys, good morning. Just to start-off with, I'd be curious to kind of your thoughts on the rotation that we've seen more recently, away from equities in favor of fixed income. Do you think this is more of kind of a short-term phenomenon in reaction to the markets, or is this perhaps the start of kind of the long-term shift and how investors are thinking about asset allocation strategies?

Gary Black

Yeah. Look, a lot of it depends on where the equity markets go from here. If you at debt markets decline and we go back to the 73, 74, we wanted to obviously early 90s, 2000, 2001. The severity of decline really dictates how quickly people come back into the equity side. And I have actually been surprised as equity markets have rallied off the bottom, that there is a lot of money we received and in which we flow daily with some better ICI.

How much money is coming back out of money markets, because money markets is the big asset growth gatherer in the first quarter. And that has sharply reversed in the last couple of weeks. So, this isn't another headshake as we thought at the end of the year, where the markets rallied and then reached to low February. But, this has legs, you could see the money continued to flow back into equities.

Just on the other hand, it turns out that this was another headshake, with whom you won share and you truly twice share on the issuing and people will stand in the sidelines I guess for a long time. So, I don't have a crystal ball in the marketplace. As we sit here today, we know that April has been good, it's been seem positive. I think that's true for the industry. So, so far so good I'm going to let the market continue stabilizing.

Michael Kim - Sandler O'Neill & Partners L.P.

Okay. And then, you talked a little bit about the pickup in RSP activity, kind of in general. But, just to take that a step further, are you seeing a sign or any sign of a step up in interest for kind of your legacy Janus strategies, or is it more focused in INTECH at this point.

Gary Black

Let's be clear. If you start with a 100 and it drop to 50, and then you go back to 75, you are still down from where you were a year ago. And that's kind of the way the math works. With the RSP activity, it dropped dramatically as the markets plunged last year, and both equities and hedge funds, and alternative logout crushed at the same time. A lot of value manages and fixed income managers severely, severely underperformed. So, you had a lot of pension funds trying to figure out their asset allocations and hope to try to figure out what to do with the underperformers.

The RSP activity really dropped, I will say, nothing because there is always to some activity, but dropped dramatically. So, we then dropped to bottom. Anyways, we're still way below really where a year ago.

I'd say it's fair to say that INTECH is being the most of our fee interest. On the Janus side, we... one of the strategic initiatives for us is to grow that our institutional business to Janus products. And we are seeing some interest, but it's not levels of interest we would like. And we're still trying to convince that we're very committed to be a great institutional manager on the Janus side, where INTECH's really got that reputation. So, I'd say the early signs of INTECH well I hope to see on Janus as well.

Michael Kim - Sandler O'Neill & Partners L.P.

Okay, that's helpful. Thanks.

Operator

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

Marc Irizarry - Goldman Sachs

Hello, great. Thanks guys. Gary, I might have missed this, but can you talk a little bit about how Perkins has performed on a relative basis to peers since sort of mid-March?

Gary Black

Again, we don't... the performance has been exceptional. It up just dial across the board. We don't look at it and again, to the four week period. Because the last time it was just noise. But, on any measure of performance, small-cap value, mid-cap value and large cap value products are dramatically outperforming the peers. And that's where, again, you're seeing a lot of share pickup, because as you know a lot of the traditional deep value managers had severe, severe underperformance. It had the characteristics at the senior level, which is causing a lot of redemption with some of our peers. And we're picking up a lot of that market share.

Marc Irizarry - Goldman Sachs

Great. And then, just in times of products, obviously, if this fixed income phenomenon which flows is more than just fleeting. Obviously, you may have got some good performance. Are you thinking about some new opportunities to sort of manage across asset classes on a single product, or what sort of the product plan, if we are in a different world?

Gary Black

First order business is to make sure that, in the institutional world, the consultants and plan sponsors know that Janus is very strong in fixed income. We have great performance across the board, have high yield products, and is a great candidate institutional acceptance and short-term bond fund funded to get institutional confidence in our core bond portfolio, which is called tax fund in the retail space that was core priced product to clearly do well in the institutional space.

And so, first order business making sure, the sales teams making sure, consultants making sure plan sponsors know that we have those capability unlike of a lot of firms or fixed income and equity both fit together, is simply the research meeting that bring out... there is a synergistic effect of the fixed income folks and equity folks talking every day. And it's not well announced the firms that do synthesize the information, can get market intelligence that others can't, because as you point out you can look across the capital structure, and decide what's better to own an equity or a bond as an investor.

So, we think like that, or analysts think like that. So, first order is to try to get people understand we have great fixed income capabilities. I mention the type of Lipper and its effect, large fixed income shops last year. And we have a very stable team, very performance driven, more asset in this 6 billion in assets to fixed income. And that numbers can grow pretty sharply. And that's where we've seen a lot of the interest this year, because the lot of our competitors have underperformed.

Marc Irizarry - Goldman Sachs

Okay, great. And then just in terms of maybe Greg, this is for you. The balance sheet, you did hedge some of your own seed capital investments. But, it looks like losses are still flowing through. Is there a lot of basis risk in those hedges, and then I've got a follow-up?

Gregory A. Frost

Yeah. As I talked about it, the hedge is working on that piece of the seed capital portfolio that we consolidate, hedge was effective, and we didn't see any linkage. Where we took the charge, and where you do see the losses on that piece that we do not consolidate, but I guess that's mark-to-market through equity. So, the hedge amount I think would be interesting given that you've got part of it going to the balance sheet, and then hedge will go through the P&L.

So, we don't hedge the unconsolidated piece. We've always evaluated every quarter for impairment. We start here in this place where the funds, where we need cost for a significant amount of time. So, we could take charge. This is something I have noticed a lot of our peers have done, have done this, the same thing.

Gary Black

The base is on that slow go now, on the unconsolidated thing.

Gregory Frost

Right, right, yeah. On the unconsolidated pieces, there is not much left.

Marc Irizarry - Goldman Sachs

Okay. And then just, to get back to an earlier question on how you think about the capital structure. What's your philosophy on the appropriate capital structure going forward for this business given, been how volatility of the markets I mean is? How should we think about that? It maybe as a precedence to your 2011 maturities?

Gregory A. Frost

Well, I think we've talked about this before. Our job is to manage the firm as prudently we can. I think you are in an environmental where a lot the assumptions we've made in the past may have changed. As I talked about before, we're going to preserve liquidity the best we can.

We know we have some cash outlays coming up that we're going to manage through. And then we're going to be smart about it the way we think about going forward and we're going to try to provide best source to adjusted returns to our shareholders. Just like we always have. So I think its important that we take a long-term view of this business. As you notice, we got cash in the balance sheet today. We believe we can get through. Some of the shorter-term maturity, but we're going to be watching it closely.

Gary Black

Philosophically, we take this view as we generate cash and this quarter we have cash outflows every year. But we get into our period, we generate positive cash second quarter to fourth quarter. And we take the view that our job is still for our shareholders capital. So to put it it's best use. And so we're going to look at... we're targeted debt, we're buyback stock, we can make the acquisitions, but let's look at highest return for our shareholders, and without getting into what we're going to do with it. We will abide by that principal that our job is to maximize value for our shareholders. We'll figure out which offers the highest return and execute other.

Operator

(Operator Instructions). Your next question comes from the line of William Katz with Buckingham Research.

Bill Katz - Buckingham Research Group

Good morning, everyone. Two questions. I guess first one is as you think about the expense, you said you mentioned that the expenses could be flat for the rest of the year on a quarterly basis. What kind of market assumption are you making within that? I guess your question is, if you're relative performance improves as you think it might, will it be enough that is biased tot compensation, and as a result are there offset elsewhere we're think from that, that's my first question.

Gregory Frost

Well, I think the question that came was on kind of the G&A lines, which we would expect to see that remains somewhat flat because there is not a lot variability in those expenses. So, clearly it's short-term performance fixed up. You're going to see a little increase in comp, that's where our comps end works. And obviously there is going to be the revenue impact.

Variable expenses will continue to swing and flex with what happened to revenue. So, my comments early on the expenses are really on those that do not vary with revenue.

Bill Katz - Buckingham Research Group

Okay, understood. And then I guess another question is relative to your cash you have on hand today, how much cash do you need to run the business?

Gregory Frost

Sorry, I didn't comment on that. I think that's ... as Gary said that's kind of for us as we're going through and looking at system, and looking at the balance sheet, what we think we need. But, well, I think it's fair to say that when you a running a mutual fund business you need a certain level of cash. You've got operations offshore which need a certain amount of statutory capital. And you have a broker dealer, which needs a certain amount of statutory capital. So, you try to factor all that in your decision making.

Bill Katz - Buckingham Research Group

Okay. Thank you.

Operator

Your next question comes from the line of Craig Siegenthaler with Credit Suisse.

Craig Siegenthaler - Credit Suisse

Thanks and good morning. Just looking at your retail redemptions, just kind of sequentially and really the level in the third and the fourth quarter. I'm just wondering what is really driving improvement now and also what really drove the deterioration before. And we have slowed here, so I can actually look at the fund. So I'm not really looking for product detail. We really want to think about your distribution methods, supermarkets, direct and broker dealer.

Gary Black

Well, the industry is stabilized. You saw a dramatic outflows in the industry in the fourth quarter. And when you look at our retail business in the fourth quarter, we were like everybody else. We had huge outflows as the markets just not detailed.

Obviously in the first quarter, you had the markets down overall 11%, but quite frankly it was a tale in some quarters. Things were bad for literally half the quarter and things got much better.

So we've seen, and I know many of our competitors have also but there are many competitors that haven't. We've seen a sharp improvement inflows since the market bottomed out. And I think as we dropped our distribution in the right spot. So we're focused on advisers and I think people in the market realize that. And we're getting some project.

But I also think... so people don't pay enough attention to the performance. We have really strong performance product. We have really strong fixed income and value with low business come lying back in terms of the performance. You're going to get slow in this business, we always find the performance. And if I were trying to forecast whose is going to get share and whose not, I would watch that. And those who are not showing stabilization in the first quarter, because their performance is not improved.

So that's the big reason, our flows have improved is because the market has improved, stabilize. We're getting more than our fair share because of performance, those who haven't shown stabilization, it's because their performance is really bad.

Craig Siegenthaler - Credit Suisse

Thanks. Great color, Gary. But, I actually one other question. I was wondering about, I believe you had a debt covenant on an untapped bank facility that was outstanding. Has it been terminated together or is that outstanding?

Gary Black

As of March 31st, we remain in compliance with our debt covenants. As I mentioned last quarter, just given the market decline we would expect some pressure on that in the short-term. So, we're closely working with the bank group, so that we can put an amendment together, but nothing to report yet.

Craig Siegenthaler - Credit Suisse

Got it. And how is the debt-to-EBITDA ratio trending now, versus the guidance in the covenants?

Gregory A. Frost

As I said, we are inline. We have met our covenants for the first quarter. So, we're there or slightly below that as of 3/31.

Craig Siegenthaler - Credit Suisse

Okay. Thank you.

Operator

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

Hojoon Lee - Morgan Stanley

Hello. I have a question on in fact, relative performance is very strong. I was just hoping if you could give us some color in terms of the market depreciation is on first quarter, it was much larger than your correspond?

Gary Black

Product depreciation inline with INTECH?

Hojoon Lee - Morgan Stanley

Yeah, on INTECH, the fund performance to absolute kind of, it looked like you had about 8% market depreciation on your INTECH product?

Gregory A. Frost

Well, I think that's probably inline with the industry, with the industry decline. And we had to work through the math. But again, the S&P was down 11%. You have to look at most of the national markets were down little bit more than that. It could just be that it's a 100% equity. And that's why we found more than that's the plans that do we have some fixed income.

Hojoon Lee - Morgan Stanley

Okay. And I was just asking, because I think that some fund, I know your strategies could be different. But some funds I think we're having difficulty kind of when the markets recovered of the March lows?

Gary Black

Yeah, we're not respond that. So, we're, somewhat related to smart funds bonds, but we're not... that is not a fund strategy. So, it's just mathematical. It really doesn't have the same performance characteristics of smart funds, as you pointed out it smart funds in the first quarter. We didn't have that lot of funds.

Hojoon Lee - Morgan Stanley

Okay, great. Thanks for that color. And then, just as a follow-up on Perkins, do you... growth sales, annualized growth sales rates are like very strong. Could you just give us some color on why the redemption rates seemed to be higher there as well? They've been trending around kind of 45 to 50% over the last three quarters?

Gary Black

Yeah. I don't think there is any specific reason. Again, when you grow as quickly as Perkins is growing, sometimes you get these lumpy things that are coming out, and then you get some time. But, I haven't seen much.

Hojoon Lee - Morgan Stanley

Okay. Thank you.

Operator

Your next question comes from line of Cynthia Mayer with Bank of America-Merrill Lynch.

Cynthia Mayer - Bank of America-Merrill Lynch

Hi. Good morning. Maybe you mentioned this, but in terms of the discontinuing the direct share class work, kind of impact, if any of you expect on flows?

Gary Black

We hope it will be positive long-term. I don't think in the near-term it's going to hurt us. And as you know the direct channels requiring the double-digit rates for years, we haven't shown positive growth in that direct channel. We just talk to them for just five years. But it's been declining of about 10% rate. And all we're really going to do is roll it off to new investors which we haven't been... definitely new investors commence it anywhere.

Now, I guess the question is will the advisor community give us additional close as a result of demonstrating our commitment to the channel? I think it will but we can't quantify. But obviously as we made the decision spent $10 million to do this, there was a net present value decision. So internally in disclosures, we do think we're going to get additional incremental flows to more recover $10 million costs.

Cynthia Mayer - Bank of America-Merrill Lynch

Okay. On Perkins, what kind of institutional assets... what kind of opportunity do you see there?

Gary Black

I think it's very large. The opportunity is very large. We don't have a lot of institutional assets. It is a team managed process. It has a very institutional feel to it.

As you know it's small firm, but again when you have investment performance are strong as that, it avoids almost all the big blocks that the seed value managers got in with last year with financials. A lot of that stuff... is just those type of funds are in consistent with the way they do portfolios because they probably understand. They make a very basic fundamental approach investing, but it is key managed though.

There should be no reason we can get asset. But the biggest outflow quite frankly is one of large cap value. And now that we're in large cap value of the short track record that we are getting some interest and actually we want to separate account and they even know we only have a four or five months record on it. So, we are getting interest largely because a lot of competitors have done poorly.

Cynthia Mayer - Bank of America-Merrill Lynch

Okay. Thanks.

Operator

I would now like to turn the call back over to Mr. Black for any closing remarks.

Gary Black

Okay. So, thank you for joining us. We think we had a reasonably good quarter. And we'll talk to you again next quarter. Thank you.

Operator

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

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