Janus Capital Group Inc. Q2 2009 Earnings Call Transcript

Janus Capital Group Inc. (JNS)

Q2 2009 Earnings Call

July 14, 2009 5.30 pm ET

Executives

Steve Scheid - Chairman of the Board

Tim Armour - Interim Chief Executive Officer

Greg Frost - Chief Financial Officer

Analysts

Ken Worthington - JP Morgan

Marc Irizarry - Goldman Sachs

Robert Lee - KBW

Mike Carrier - Deutsche Bank

Roger Freeman - Barclays Capital

Michael Kim - Sandler O’Neill

Bill Katz - Buckingham Research

Presentation

Operator

Good afternoon, my name is Christen and I will be your conference facilitator today. I would like to welcome everyone to the Janus Capital Group second quarter 2009 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker’s 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 the 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 report filed with the SEC, which are available on their 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 responsibility 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 Steve Scheid, Chairman of Janus Capital Group and Board of Directors. Mr. Scheid, you may begin your conference.

Steve Scheid

Thank you. Let me start with some of the highlights of the news we released today. I will start with the second quarter performance and let me start with investment performance. Investment performance was very strong over the one, three and five year periods 65%, 84% and 85% of our products are out performing our peers.

Importantly two out of three funds have four and five star Morningstar ratings. That performance turned into net inflows of $2.3 billion which is approximately a 9% organic growth and we believe better than the market and better than our competitors. Further, the expense initiatives that we have been working on over the last couple of quarters are showing up and have significantly improved our operating leverage; margins for the quarter were approximately 23.5%.

These all combined numbers resulted in our earnings per share of $0.10 for the quarter. Let me go ahead and touch on the management change. Gary and the Board mutually agreed that it was time to change leadership. The parting with Gary has been very professional and very amicable. Our Gary accomplished a great deal in the time that he and I worked together from 2004 forward.

He did an amazing job in getting a lot of things accomplished and we wish him very well in his next endeavor. Tim Armour is our new interim CEO. He’s here with us today and he will be available. I will introduce him in a second and he will have a few words to say. We believe that Tim has got the right expertise and right management style for the next chapter of Janus and I believe he will do a great job in his interim role.

Tim and I have known each other for almost 15 years and have a good working relationship. Importantly, Tim has got 20 years in the mutual fund industry, ten with a senior position at Morningstar and was also the President of Stein Roe.

I should comment on the impact of the management change I do believe overall it will be a minimal change. I don’t believe that there will be impact on the investment teams at Janus, Perkins or INTECH Jonathan Coleman, our Chief Investment Officer of Janus is going to be on the call today.

He is not presenting but will be available for questions. Clearly anytime you do an organizational change in the institutional business, there’s going to be some look by the consultants at the organizational change, but it is important to remember that the bulk of our institutional assets and cash flow are at INTECH and Bob Garvey in Jim Linfield and Bob Bernholtz have all been around for at least a decade and they’re still in place and they really are the face to the client.

Finally, I guess I would say that with in the Janus mutual fund shareholders, they’re fundamentally retail shareholders so a change of the Chief Executive Officer the public company I don’t believe will have an impact. So, let me just say in summary that I have never been more bullish on Janus since I have been involved in the company since 2002.

The strategy is in place its clearly working, our performance is outstanding, the product set is very well positioned of the investments in our distribution both in the intermediary channel and the global distribution channel is also paying off, and I think most importantly of the quality and the depth of our investment professionals have never been better and through the result of Jonathan, Gibson Smith and Jim Goss leadership over the last three years, that they have been managing Janus product they have improved the investment process and I do the believe the culture has never been stronger and the teams have never worked better together.

So with that, I will turn it over to Tim and he’s got a few comments and then Greg will go through the detailed presentation.

Tim Armour

Thanks. Good afternoon, my name is Tim Armour, as Steve mentioned, I have been a Janus Director since March of 2008. I retired after ten years at Morningstar and more than 20 years in the financial services business prior to that I had spent six years as President at Stein Roe and five years at Citibank and I embarked year and half ago or so, on what I call Life 2.0.

I would spend more time with my family I’ve been on three outside boards and I have been deeply involved with what’s going on at Janus both as part of the planning and strategy committee and also the compensation committee. So I am looking forward to plan playing a much more active role at Janus as I move to what I now call Life 3.0.

The agenda that I see there is to one continue to pursue to the strategies laid out by Gary and Steve and the Board and at the center of that is this to continue the consistently superior performance of our investment capability and I think under the stewardship of Jonathan Coleman who you will hear from later, Gibson Smith and our Research Director, Jim Goss, the results have been outstanding my desire is to find ways to support that group and make sure they have everything they need to continue the terrific performance, 32.5% of the average funds get a 4 or 5 star rating.

We have got at Janus, 64% achieving that level and it is really an outstanding world beating performance. I also would say I look forward to continuing the retail intermediary and institutional channel build outs. We have progress in the international arena.

When I was at Stein Roe, we were aggressive in building out, so it was almost a quarter of the revenue stream of the company and I see that as a growth opportunity continuing for Janus and I want to insure in the resource constrained environment that we find ourselves in it won’t last forever, but we are in one now, that we continue to execute well and very efficiently. So I think the headline I give you is I think Janus is positioned very well to capitalize in the future environment.

The new normal, as Bill Gross would call it, is an expectation the year where living is probably higher savings rate from investors, lower overall returns from investments and probably lower growth for businesses and sort of adapting to that new world.

I think investors looking to rebuild their investment portfolios are going to look to Janus with this really a well above par performance and reasonable expense ratios and we’re going to be a winner in the coming environment alongside of low cost EPS and index funds and I think as an active manager, you are going to see continuation of the kind of really outside performance.

So I look forward to playing a more expanded role in Janus and thank you Steve for the introduction. Let me I will be available for subsequent questions but I will turn it over now to our CFO, Greg Frost.

Greg Frost

Thanks, Tim good afternoon. I am going to walk through the earnings deck, and as Tim mentioned, we’ll have Q-and-A at the end. Turning to page two, it really was a strong quarter in a lot of respects, we start with earnings.

Second quarter totaled $0.10 per share in earnings a very clean quarter compared to but obviously was a little bit noisy quarter in the first quarter of this year. We took $5.27 of losses related to goodwill and intangible impairments, litigation charges and the non-cash operating charge unconsolidated seed capital.

So, if you adjust out those items you end up approximately $0.05 and so it is fair to say that earnings have doubled from $0.05 to $0.10 quarter-to-quarter. Flows are very strong across the complex with $2.3 billion of positive net. Concentrated primarily at Janus and Perkins, INTECH continues to work through a very low surge activity institutional environment, but frankly with all of that, still is only slightly negative and we are seeing improvements from prior quarters.

Performance is very strong on a long term basis and certainly improving in the near term basis. I will talk about that in a few slides. As discussed the little bit on the last call we successfully completed the merger of our two retail trusts, JIF/JAD, over the Fourth of July weekend again this demonstrates our commitment to the advisor channel and a simplification of our product platform.

We also announced today that we intend to concurrently offer 150 million of common shares and 150 million of convertible senior notes through 2014 and that is we will offer to repurchase approximately 400 million of the principal amount of outstanding debt in the separate tender.

I will refer you to the separate press releases that have gone out at the same time, as we are unable to talk to it or answer my questions on it after we get done with the prepared remarks. Page three from a flow perspective. Flows were strong in Q2 as we saw improvements in virtually all aspects of our business across all three of our franchises.

We saw higher gross sales and lower redemptions in a quarter that saw global conditions improve, although still remaining a little bit uncertain. We believe that this is largely due to the strong investment performance, but we clearly benefited from a noticeable shift, from the investor perspective back into equities from money market funds.

On the Janus side, net term positive again after three quarters of negative outflows to 1.7 billion positive, over half of our Janus funds saw positive net flows during the quarter; our largest contributors being our international and concentrated growth funds and our fixed income products.

INTECH, although improved from the previous two quarters, as I mentioned before still slightly negative from some international redemptions that occurred during the quarter, and again it is operated in an overall environment and institutional space that is relatively frozen. We are seeing our RFP activity improve somewhat, but they’re still obviously well off historical levels we have experienced and on the lower right hand corner of the page.

Perkins continue to strong run from exceptional investment performance in the small and mid cap value space, with an annualized organic growth rate of 37% in the second quarter and large cap value product that is as people know we launched in the fourth quarter of 2008 that is out performing the benchmark by roughly 700 basis points conception to date. We believe Perkins is well positioned to continue to gain share as we move forward.

Page four at the channel level, I think the trends here seem fairly understood. The [Inaudible] based market is moving clients back into equities in the second quarter from cash and while the institutional and international channels remain a bit challenged, remain a bit frozen. On the retail side, moving left to right we obviously saw noticeable jump here in growth sales, roughly 40% higher quarter-to-quarter.

While redemptions were somewhat tempered, clearly our strong fund performance and past investments made in this channel are certainly paying dividends and all businesses that make up this channel brokered dealer, the retirement channel, financial institutions, supermarket and our direct retail business all had positive flows in the second quarter of 2009.

The institutional, as most people know is largely INTECH driven, slightly positive flows, and again while volumes and search activity in this industry remain depressed, we have started to see a moderate up tick in activity and as consultants and plan sponsors assess the risk models and begin to think once again about asset allocations, we believe our subsidiaries are well positioned to capture share here as well.

On the international front, international is driven primarily by certain INTECH redemptions, but again, I think we see here a channel with lower than usual sales volumes and activity. We do expect had this to pick up as well as we continue to move throughout the year and allow it is still early in the third quarter, we’ve had some nice wins internationally as we started off July.

Page five, as everybody is aware, I think the market rebounded sharply in Q2 and investors seem to take their Q and start moving money back into equities. Importantly for our firm on this slides is the lower right hand graph our organic growth rate for April and May totaled roughly 10.5% compared to just shy of 8% for the industry.

Now here the June data is not yet available. So, we are using April to May here. This to me is further evidence that we continue to gain market share with our strong investment performance and our established distribution levels.

Page six, from the performance and timeframe Steve hit on these, but they really are quite spectacular. As I mentioned before, firm wide performance continues to be strong, again to the Janus across Janus, INTECH and Perkins, particularly over the longer time periods. 65% to 84% and 85% of our products or funds are beating peers over a one, three and five year basis.

As Tim mentioned, Morningstar continues to recognize the work being done in our franchise with near, two-thirds of our products have a four or five star rating in June. On the Janus equity side, performance continues to be very strong on a long term basis while the short term numbers have rebounded meaningfully, 61 products are beating peers as of June 30 on a one year basis.

This compares to just 38% just three months ago. Although we don’t generally focus on short term period, it is prudent to highlight that 94% of our equity products are beating our peers on a year-to-date basis.

INTECH although a little weaker on the one year front, in our mind remains well positioned given the strong long term numbers and the more comprehensive batting averages, which institutions and consultants intend to pay more attention to which I will cover more in a couple of pages.

As I mentioned before, Perkins continues to put up great numbers across all time periods in their small and mid cap products as I mentioned before, large cap values off to a very strong start.

Page seven is our standard firm-wide chart which graphs the percent of funds in the top two lipper quartiles. I think we have made this point, three and five year numbers very consistently strong for a number of periods.

The one year numbers on Janus equity side jumped noticeably on a one year basis. Clearly, 2008 was challenging, however in 2009, our year-to-date basis Janus’s larger and more well known products such as the worldwide fund, Janus 20, Janus Contrarian, growth and income, these products of all rebounded in the top quartiles of our lipper peers compared to where they were in 2008.

Overseas fund is another fund that is well into the top decile year-to-date, on the year-to-date basis compared with fourth quartile in 2008. Overseas has returned a 38% return year-to-date on an absolute basis, compared to the 21% for the MSCI index. Also [refrenching] here is our fixed income franchise, it’s working well. We have got first quartile performance across all time periods and all products and they’re obviously a very strong contributor to the net flows that we saw in the second quarter of 2009.

Turning to page eight and looking a little more at INTECH, we’ve used this concept before and although the one year numbers, the one year percent of strategies beating their benchmarks were lower than expectations. From a batting average perspective, that is the percent of time a strategy out performs its respective benchmark. The numbers remain compelling on both the short and long term basis.

On average, the firm-wide numbers are 73%, 84%, and 93% of strategies beating peers on a batting average basis on the one, three and five year time period respectively. Two, clear growth opportunities for INTECH that we have mentioned in the past are the Global Core and International equity products, both outperforming the respective indices since inception. We believe that these products, along with the large cap value strategy which has a very strong 15 year track record and existing strategies position INTECH well to gain market share in the institutional arena both domestically and outside the United States.

Turning quickly to the financials, as I mentioned before, the second quarter was a very clean $0.10 per share quarter compared with a $0.05 number if you back out that the $5.27 of what I would call non-recurring charges. Revenue accelerated the head of the rise in assets from higher performance fees and the mix shift back to equities that we experienced in Q2.

Margins expanded nicely in the quarter to roughly 23.5% from approximately 20% without the goodwill and litigation charges, clearly showing the strong positive operating leverage in this business, as we have managed expenses tightly through this difficult market environment.

Expenses did increase in Q2, primarily from higher variable expenses as well as $3 million of expenses related to the JIF/JAD merger which is as we mentioned before was completed on the Fourth of July weekend. This is very much inline with the $10 million of costs we have discussed previously.

We would expect to see another $5 million to $6 million over the second half of the year, most likely concentrated in Q3. Also worth noting in Q3, and as mentioned in our press release, we do expect to take a charge, or we will take a charge of approximately $12.1 million relating to Gary’s departure. This will be recorded in the third quarter. $6.8 million in cash and $5.3 million on the non-cash charge related to acceleration of his unvested equity to severance rights agreement.

As a finally, turn to page 12, let me finish with the following point and then we can go into Q-and-A. I believe that we’re winning in the marketplace with our strong performance in our above industry flows; we will be continuing to expand our investment capabilities to global, international value, fixed income and alternatives asset classes where we believe we can have value and distinguish ourselves from the competition.

Our distribution channel build out is well underway, and the investments made over the past few years are certainly paying dividend. Finally our disciplined expense management in this challenging marketplace has certainly resulted in current margins very much inline with our peers and we’re also very happy to see the positive operating leverage experienced in Q2.

Speaking for the management team, we look forward to working with Tim and at this point, we will open it up for questions and as a reminder, we cannot take questions on the common equity or convertible offering raise. So please refer to those documents filed for questions. Thank you.

Questions-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Ken Worthington - JP Morgan.

Ken Worthington - JP Morgan

First, with the change in management, like what do you see as the appropriate priorities for Janus over the next five years and then maybe with that in mind what skills or characteristics are you really seeking in the new CEO?

Steve Scheid

Let me take the first crack at that and then I’ll look for Tim’s perspective on it. I think this business is over the next five years is not unlike what it has been. First of all, you have to deliver great performance. You got have a robust product set, you need to have good distribution and you need to have a flexible business model and a flexible balance sheet. I think if you have those things in place, you are going to continue to succeed when in the marketplace.

I think we do well across virtually all of those categories. I would like to see a balance sheet a little different and I think our distribution is certainly strengthening and we will continue to invest in that but we certainly have the performance or business model is much more flexible and our product set is very, very robust. So, as it relates to the new leader I would say, we’re looking at somebody clearly with some investment acumen and experience in the industry, I would like to see somebody with global perspective.

I would like to see somebody with season public company experience and then I think last and certainly not least is a strong leader with vision and the ability to manage intellectual capital because at the end of the day that’s what this business is. So, I will turn it over to Tim who will be doing the day-to-day and get his perspective.

Tim Armour

I agree intensely with what Steve just said, it is not enough to have good performance. This is an industry and a category we have to get an A in sort of every aspect, whether it’s distribution or marketing the product line if you have along with performance and I think for us to execute well against all of that is really going to be a challenge.

We are in a constrained environment, but I do think Janus, before I got here and before Steve got here has had this ethos of investment excellence and it is powered by this truly world class investment research capability on the equity side, and I think that’s going to serve us well.

Again, I think one of the things Steve and I need to do together create the environment and sort of the conditions in the business where we attract the best talent, people want to work there, they want to do good work and that’s a hand on task and I look forward to that.

Ken Worthington - JP Morgan

And then in the deck on pages three and four you have long term sales at Janus, INTECH and Perkins, next page you got it by distribution channel and it seems that everything is moving in the right direction. Maybe the only hole would be on the international side. I know it is small, but I think that’s probably a priority as well and just something need to change their I think maybe Greg said in the opening remarks it is just the market is frozen. Is it just the market, or is it that something else needs to change there? If so what needs to change?

Greg Frost

I wouldn’t say that anything needs to change. I would say that the market that’s a little bit slower these days. We are still very focused and we have got sales people on the ground throughout Europe and Asia.

We are focused on the separate subsidized world it they tend to be lumpy over there I think that’s what you are seeing, as I mentioned in the comments, we have seen some larger mandates come in the first part of July we are encouraged to see. In 14 of the last 18 quarters we have seen positive flows there. So nothing that necessarily concerns us. We are watching it but I don’t think there’s anything of concern.

Steve Scheid

From the Board’s perspective, Ken that’s an area that we are very much in favor of expanding and I think a lot of the work we have done the last two or three years in getting the products positioned for international growth will be key because we have a number of products coming on, particularly in the INTECH area that have got three year track records that are doing quite well. So, yes, if we still see this kind of performance over a while, we will certainly be disappointed because this is an area we think will provide growth for us.

Operator

Your next question comes from Marc Irizarry - Goldman Sachs.

Marc Irizarry - Goldman Sachs

Just a question on the operating margin, obviously you had very strong sequential improvement. When you think about the comp, the progression of the comp ratio throughout the year, and the fact that you continue to see some nice improvement in your revenue and AUM, how should we think about the comp philosophy going forward and maybe the progression of the comp ratio?

Greg Frost

I would say you can think about it very consistently where it’s been the last couple of years, as we have put in a variable cost, a variable compensation model. We have seen it in the last couple of months, the last two or three quarters, where revenues have been sharply down and compensation has largely followed. I think as you know the investment management team has been centered on revenue as well as individual performance and we are seeing the performance side.

So, you might expect a slight tick up there as a percent of revenue. So, we feel good that we are getting increases revenue from performance fees, but I don’t know that I would highlight any changes that I would expect to see I think we will be very measured and how we allocate other forms of compensation of the second half of the year making sure that we keep the right people in the right seats, but I don’t know that I would highlight any changes.

Marc Irizarry - Goldman Sachs

Great and then just, in terms of the industry picture, if you look at the flow trends on the industry-wide basis, the credit and fixed income funds are out stripping equity funds at the pace of 2 to 1, clearly you guys are gaining market share, but if you could just maybe speak to, I don’t know if this is a question perhaps Tim, you have some perspective you want to shed here or Steve but the robust product set, obviously credit fixed income oriented products are taking share. Does the business need to evolve and is part of the vision in the future to really start thinking about the asset classes you are operating in as well?

Steve Scheid

I would say that Janus fixed income is one of the best kept secrets in the industry. Gibson Smith’s leadership was recognized as the lipper large cap fixed income manager of the year and I do thing that we got the products that, we probably need to do a better job of making sure it is known.

With that said, I think we also have the research capability inside the fixed income shop that is a value add and its consistent with the type of research we do on the equity side. So, I think it is probably more a focus than product set itself, there is clearly room that products, but...

Tim Armour

I also think we are going through a phenomenon where there’s a still lot of fear in the marketplace. You have got $3 trillion to $4 trillion parked in money market. It won’t stay they’re forever.

At some point, as things got better, we saw a little bit of the upside in the second quarter, but I think there’s almost no one better positioned than Janus to capture better than their fair share of the money as it leaves the safe, but low return harbor of money market funds and goes back into equity, I think we’ll be a winner when that happens.

Marc Irizarry - Goldman Sachs

Also, there has been a lot of discussion around movement towards passive from active. Is that something trend wise that you guys think will benefit you in terms of your flows over the coming quarters or is that something that you should be more concerned about in terms of just to trend away from active?

Tim Armour

I think it is clearly a reality that whether it is a passive index fund or whether it is an ETS that is index-based, the price value is there for investors and you get, a very low expense ratio and you get exposure to the market.

In the same breath I would say an investor is going to look at Janus as a good price value in a similar way, not because it’s the lowest cost of all of the actively managed funds but because the expense ratios are reasonable, what I call moderate and the returns are well above par on a consistent basis, and so I think you are going to get a bifurcation of the marketplace.

The low cost index-based products that you can transact instantly with, especially EPS, are going to do well and I think if you can deliver Alpha on a sustained basis in the form of an active mutual fund, I think overtime, you are going to do well and I think if you are stuck in the middle, where you have relatively high expense ratios, you are an active manager and have so performance, I think you will see a lot of attrition in the marketplace and we are investing in sort of the best investment talent to make sure we don’t fall into that middle.

Marc Irizarry - Goldman Sachs

Then just a question on the balance sheet maybe this is for you, Greg. Obviously the capital structure that you guys operate under when S&P 600 probably wasn’t the best one out there. Can you just speak to what, I mean you still do have a decent amount of leverage on a pro forma basis, but can you speak to sort of ultimately what the appropriate capital structure is for Janus?

Greg Frost

I think I am getting a look from the attorneys here. I’m not sure we should go too far there but I think all I would say as we certainly recognize the market has changed from a couple of years ago and I think we are going to head in the right direction.

Operator

Your next question comes from the line of Robert Lee - KBW.

Robert Lee - KBW

I would like to go back, if we could maybe to the CEO change a little bit. Can you, it seems no kind of sudden, at least that’s my take on it and maybe I am reading too much between the lines but between the press release maybe some comments earlier, it seem like there was a feeling maybe among the Board that there was a need for some type of change in leader, not just leadership but maybe the approach to the company or where you were going.

Could you maybe give us a little more color on what you think kind of in the next generation of Janus is kind of needed that maybe hadn’t been there before and you are looking for in a new leader?

Steve Scheid

Let me just reiterate that Gary and the Board came to a mutual agreement. The decision was based on the fact, that Gary had accomplished much of what he had setout to do when he joined me in 2004. Let me just reiterate what those are as well. His goal was to get the brand reestablished, we’ve certainly done that. Strengthen investment performance and the risk management processes. I think that’s quite evident.

We’ve expanded the distribution and he has been instrumental in a lot of the product innovation and last he has done a good job of stabilizing flows. So, if you look at from that perspective and then you add in the notion that we’re certainly in a different operating environment.

The company is doing quite strongly, you add all of that together, it was just the right time and Gary and the Board were both very comfortable making the change. He’s very amicable. Gary did a nice interview with the Board yesterday. He’s going out and I think can claim victory because I think the company as far stronger than it was when he joined in April of 2004.

Let me close, I think we’re also very fortunate that we’ve got a very, very strong investment team. We’ve got three strong brands and I think we’re blessed with having a number of long tenure Janus executives here that will support us through this change, which I believe will be certainly never easy to make a change like this, but I think the impact, the shareholders and stockholders will be minimal.

Operator

Your next question comes from Mike Carrier - Deutsche Bank.

Mike Carrier - Deutsche Bank

I think when I look and this is more as a strategic question. Your performance is pretty good across the products. Some of the industry would kill for it, but I think when you look at when you’re going through kind of strategic changes at firms and you look at some of the changes that are going on in the industry like the institutional flows, what we start to pickup and retail we’ve seen a pullback. You’ve definitely seen this shift in the fixed income versus equities and passives versus active?

Then on the M&A side, you’ve seen more of an increase in size of asset managers and more of them being on the consolidated distributors. So, it’s harder and harder to get distribution. So, I guess when you are looking out two to five years for Janus, is this the time, where you should try to be positioning for some of those trends or do you feel like in the near term just given the performance you’re still going to do relatively well versus the equity managers?

Steve Scheid

I feel very good about where we are. For the exact reason that you mentioned, but also because of what we talked about before about who wins in the marketplace. We do not have all 12 asset classes, but frankly, I don’t know anybody that’s out there, that’s got all 12 of the asset classes that are doing well.

So, clearly in the industry is still fragmented. We’ll continue to invest the business. We’ll continue to get cash flow to invest in the business. It was not that long ago that we didn’t have. I think we had four wholesalers in the intermediary channel and when we announced that we’re making the shift that was certainly there’s a lot of eye brows raised.

I think, we’ve done a very good job, but we’re not done investing and distribution here internally, nationally or internationally. I am very, very confident about our ability to operate independently.

Let me, also just jumped and then say clearly, we’ve a board that understand its responsibility and it’s a very, very deep board and like any public company perhaps first line you’re question would be, the Board will always consider any kind of strategic option that might be available and if it’s clear, that scale is the only way to win. We‘ll certainly look at whatever we need to enhance shareholder value.

Mike Carrier - Deutsche Bank

Greg on the fee rate, it seems like it jumped pretty much this quarter. I see the shift from equities, but you’re mostly an equity shop at this point. So, anything with international down it seems like that would offset because fees there will be a little higher, but anything else that was moving the fee rate around?

Greg Frost

The only thing I would, I think you hit on mix shift. I think the only I would comment on as we had a pretty significant increase in performance fees, on the Janus mutual funds that have performance fees attached to them and there is a slide in the appendix that we always give which details of that, but if you look at kind of those trends quarter-to-quarter, I think you’ll see a very strong increase in performance fees, I think which is probably taking care of your rate question.

Operator

Your next question comes from Roger Freeman - Barclays Capital.

Roger Freeman - Barclays Capital

I just wanted to comeback again to the [MBS] for change and I guess correct me if I’m wrong, but it seems like this was PM driven, because I have to say, I mean 12 years of recovering companies and I’ve never gotten emails before like I have from Janus, from employees that have been so dissatisfied with management. So I guess my question is, do you think this is going to be a significant boost for both morale and retention going forward?

Steve Scheid

I want to just stay with the fact that, I think Gary has done a great job here. He came into the company in a very, very difficult time. The Board asked them to do a lot of difficult things. The company is much stronger today than it was when Gary got in here and we’re very, very happy with what Gary has done. With that said, it’s a different business and the operating environment and we’re ready to write the next chapter.

Roger Freeman - Barclays Capital

I guess, just with respect to flows, so this past quarter obviously has been an improvement because of the equity market performance, but if you kind of look at some of the industry numbers the past couple of weeks, flows have turned negative again for the first time in this early March just curious, if you are seeing any of the same trends in your funds?

Greg Frost

No, I think all I’ll say is, as I mentioned before, we’re certainly encouraged by some of the larger mandate wins we seen in the first half of year. I think we look at the flows into the funds although perhaps slow, slowing down from maybe where they were, they’re still largely positive.

Operator

Your next question comes from Michael Kim - Sandler O’Neill.

Michael Kim - Sandler O’Neill

First off, not to beat a dead horse here, but I’m just to trying to understand the rationale for making a change now at that time, when the firm is seemingly gaining momentum as you mentioned earlier?

Steve Scheid

I think, any time that you make a change, it’s tough to make. I think it’s best to do it when the company is doing extremely well and I think that’s the conclusion that the Board and Gary came to.

Michael Kim - Sandler O’Neill

Okay, fair enough and then, just in terms of flows I’d be curious to get your take on. On where you think we can stand in the cycle, assuming the broader markets? Do you continue to trend higher? Do you guys foresee another step up in flows coming back into equity funds kind of as risk appetites start to rebuild?

Steve Scheid

I think, we’re winning in the market place and I think we’re taking share from competitors as long as performance and then and flows pick up in the equity markets. I think we’ll take a disproportionate share, but that’s clearly maybe a lot of confidence on my part, but I have that much confidence in our team.

Greg Frost

Yes. I think the only thing, I would add to that is clearly as you can see from the channel level, you did see people start moving back into equity on the Janus side. Clearly mark-to-marked improvement there from a gross and net perspective, on the retail side and I think we all believe, that we have a great product set positioned institutionally and internationally, as those markets begin to fall. I think we have a lot of opportunity to capture share at this point.

Operator

Your next question comes from Bill Katz - Buckingham Research.

Bill Katz - Buckingham Research

I just want to come back again to just the timing of the announcement or the change and I guess, I like to ask another question as it relates that if you ticked off the keys to success were before. You mentioned four or five different variables. If you were so look at the strength of Tim or maybe, the replacement versus Gary, what incremental area wouldn’t be the area of most focus, is it the balance sheet flexibility, is it the breadth of product, is it expense control? That’s my first question.

Steve Scheid

Bill, this is Steve. I had frankly, trouble hearing the question. You were really pretty scratchy. I think that what we’re looking for in the next individual is somebody that’s got a lot of investment expertise and global perspective. I like to find somebody that knows where the buck is going and is a good strong product innovator.

Tim brings a very, very experience public company profile. He is got a leadership style that he rolls up his sleeves. He was very, very instrumental in bringing Morningstar’s international business online equal to about 25% of its revenue so, he has got the product expertise and the global perspective and we believe there’s a lot of talent in the marketplace.

Bill Katz - Buckingham Research

Second question, so the news since you referred to, I think it was commented about the outlook that your margin was 22.5% this quarter and then step up sequentially. What do you think is a sustainable margin, if you assume a mid-single-digit type market when you stop from the environment?

Greg Frost

Bill, I think, we’ve often stated that our long term goal is to operate margins in the 30% range. We clearly were there in ‘07 and late before the market turned substantially downward. We’re clearly pleased with the operating leverage that we saw in the second quarter and look, I think with our cost structure being largely variable. As you know, with the cost reductions, the management that we’ve taken place and we’ve worked on, I suspect margins can continue to improve.

I can’t tell you when we’ll get back to the 30% range, because I think a lot of that will depend on what the market does, but we’re certainly feel like we’re on the right track.

Operator

That is all the time, we have for questions today. It is over to you, Steve Scheid, for any closing remarks.

Steve Scheid

Thank you all very much for attending today. Clearly, we’re quite bullish on the company and feel like it is very, very well positioned. I appreciate everybody’s time and thank you again for the change in the early announcement. I know that we’ve imposed on people’s evenings, but appreciate everybody’s keen interest here today. Thank you again.

Operator

Ladies and gentlemen, this concludes the Janus Capital Group, second quarter 2009 earnings conference call. You may now disconnect.

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

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

If you have any additional questions about our online transcripts, please contact us at: [e-mail]. Thank you!