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Executives

Richard Mac Coy Weil - Chief Executive Officer, Director and Chairman of the Executive Committee

Jennifer J. McPeek - Chief Financial Officer and Senior Vice President

Bruce Lewis Koepfgen - Executive Vice President, Chief Financial Officer, and Member of Executive Committee

Analysts

Gerald E. O'Hara - Jefferies LLC, Research Division

Matthew Kelley - Morgan Stanley, Research Division

Michael S. Kim - Sandler O'Neill + Partners, L.P., Research Division

Kenneth B. Worthington - JP Morgan Chase & Co, Research Division

Cynthia Mayer - BofA Merrill Lynch, Research Division

William R. Katz - Citigroup Inc, Research Division

Janus Capital Group (JNS) Q3 2013 Earnings Call October 24, 2013 10:00 AM ET

Operator

Good morning, my name is Audra, and I will be your conference facilitator today. I would like to welcome everyone to the Janus Capital Group Third Quarter 2013 Earnings Conference Call. [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 statements.

These factors include, but are not limited to, the factors described in Janus' reports filed with the SEC, which are available on their website, www.janus.com, and on the SEC's website, www.sec.gov. Investors are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date on which they are made. Janus does not undertake to update such statements to reflect the impact of circumstances or events that arise after the date these statements were made. Investors should, however, consult any further disclosures Janus may make in its reports filed with the SEC.

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

Richard Mac Coy Weil

Thank you, operator. Welcome, everybody, to the third quarter 2013 call for the Janus Capital Group. This quarter, like prior quarters, I'll start with some introductory remarks. I'll hand it over to our new CFO, Jennifer McPeek, to give you some more detailed information around our results. And then, we will turn to addressing some questions that have been brought to us over the quarter. Jennifer and our President, Bruce Koepfgen, will do that. And in the fourth section, last, we will, as always, take live questions from you all over the phone. Thank you very much for your participation today.

For the Janus Capital Group, the story of the third quarter and for much of this year is that equity markets have remained strong despite what sometimes seems like our elected government's best efforts to undermine the economic recovery. At Janus, we're using the support of positive markets and the effect, which substantially offsets negative flows, to give us the time and strength to continue to work on our investment team and investment results. As we've said many times, our mission is to deliver excellent investment performance and client service to our clients.

Looking at this most important element of investment performance, we can say our Janus fixed income team continues to deliver really excellent results, and we're very proud of what they're doing. Our mathematical equities team managed at INTECH is doing a fine job and they're keeping their promises to clients. However, in fundamental equities, most of our most important strategies are fighting uphill out of a hole dug with some recent performance. Our priority is to improve the fundamental investment performance, which, over time, will drive improved performance fees and improved net flows.

On our Janus platform, this quarter, we welcomed the new CIO of equities and asset allocation, Enrique Chang. He's a passionate and proven leader who will help us with his strong and wise leadership. We couldn't be more pleased have him on the team.

After a tough start for investment results in 2013, and after some significant changes, our fundamental Janus equity team is delivering stronger results. However, this needs to be sustained over a much longer period of time. We've got a lot of work to do.

In that light, we are, of course, aware of some recent stories that have been focusing on some departures from our Janus equity team. While disappointed at a small number of those departures, my personal view is that the real story here is exactly the opposite. People are getting this exactly wrong.

The story here is the talent coming in the door, which is overwhelmingly outweighing any departures. Considering the new talent, coupled with the excellent talent already on the Janus investment team, I am convinced we're on the right road and that we're getting stronger.

Looking at other key initiatives in our business, you are all aware that we've set strategic agenda of intelligent diversification. We've talked about that for several years now. We identified, first, fixed income as a strategic priority, and we've regularly reported to you on their excellence and growth. Clearly, this effort has been a significant success to date. And looking forward, we continue to see exciting opportunities for that business.

Our second major strategic initiative that we identified for you was our non-U.S. business, our global business. Today, in the prepared Q&A section, we will report to you on the growth and development we're seeing in this area. We'll address 2 elements of this strategic initiative. We'll talk about the exciting success we're building in our non-U.S. businesses. And separately, we'll talk a bit about the really terrific partnership that we have been developing with Dai-ichi Life and their affiliate DIAM in Tokyo.

Our third and fourth priorities, as you know, were U.S. institutional and our development of uncorrelated return in the alternative product area. We'll report to you in future periods on those efforts.

Lastly, in today's presentation, Jennifer McPeek is going to present a bit of a technical primer on performance fees. We want to be sure that we are as transparent as we can be about how these unusual fees have worked against our company in recent times, but are turning into a very material and positive option for us as we anticipate improved performance in the years ahead.

In sum, we remain focused on investment performance as our highest priority. In my seat, this means building a strong and stable investment team by getting and keeping the right people in the right seats. I feel very good about our progress. We continue to execute on our strategic initiatives around the intelligent diversification. And last, we remain focused on building a balance between business discipline and appropriate reinvestment in our business to maximize profits over the medium term.

With that, I'll turn it over to Jennifer McPeek.

Jennifer J. McPeek

Thanks, Dick, and good morning, everyone. I'm going to start on Page 5, and I'll move from the top to the bottom, walking through the key financial results for the quarter.

Third quarter average AUM and revenue were both about 1% higher than the second quarter, driven by market gains, which more than offset outflows. Third quarter average AUM was $165.2 billion, with revenue of $217.7 million, operating expenses of $158.7 million increased by 1%. That was primarily from higher mark-to-market adjustments and our long-term incentive compensation and a slight pickup in D&A expenses. Operating margin was flat at 27.1%. These results contributed to earnings per share of $0.17 for the third quarter, which compares to $0.08 in the second quarter.

A bit about the nonoperating items. The third quarter reflects a $0.05 per share quarter-over-quarter increase in net investment gains. There was a loss in the second quarter and a gain in the third quarter. As you may recall, second quarter earnings per share included a $0.04 per share noncash loss, which was related to the convertible note exchange. So in sum, an essentially flat quarter for the operating results and quarter-over-quarter improvement below the line.

Turning now to Slide 6. Our standard summary presentation of investment performance. Most of the figures on this page have not significantly changed from last quarter's presentation, with the exception of INTECH, our mathematical strategies, which saw an improvement in the 3-year number and a deterioration in the 5-year figure. Additionally, the 1-year number, which, of course, tends to be the most volatile for all of our strategies, improved substantially in fixed income. Our fixed income performance continues to be quite excellent, with 98%, 100% and 100% of the assets in the top 2 Morningstar quartiles over the 1-, 3- and 5-year time periods.

On Page 7 is our standard flows trends presentation. We experienced improved flows quarter-over-quarter. In the third quarter, we had outflows of $4.2 billion compared to $5.4 billion in outflows in the second quarter. This improvement was led by our mathematical strategies, which are shown in the lower left-hand box on this page, which had approximately $2 billion of non-U.S. mandate wins during the quarter. We are quite optimistic about the prospects of our international business going forward. And since we have gotten a lot of questions about it, we've also included a slide later in the presentation, which Bruce will provide some additional color on.

Turning to fundamental equity flows, which is in the upper right corner of this page, this bar chart represents both Janus equity and Perkins combined. We had third quarter net outflows of $4.9 billion versus $4.3 billion in the prior quarter. And this decline did include a notable large mandate loss in the third quarter of $1.3 billion, which is from a Janus strategy.

Finally, fixed income flows were near breakeven this quarter compared to inflows of $100 million in the second quarter. This slowdown coincides with the industry-wide slowdown in fixed income flows.

Moving to Slide 8. There's not much to note this quarter on the revenue side. Management fees increased in line with higher average assets. Performance fees on the mutual funds were negative $22.3 million for the quarter, which is offset by positive separate account performance fees of $0.3 million.

In response to popular demand that we have included an illustrated example of how these performance fees may evolve going forward. And at the end of our prepared remarks, I'm going to walk through that example. Hopefully, that will answer some of those questions.

So moving to Slide 9, let's break down our operating expenses. Operating expenses increased 1%, mostly due to the mark-to-market adjustment on the investments and advised mutual funds, which is something you'll see in our LTI line, and a slight increase in G&A. That increase is completely consistent with the expected quarterly volatility that we see in the G&A line item.

For many of you who ask questions during these calls about our investment funds for the business and whether and when we will start to see the operating expenses creep up, I'm going to give you a few comments now, anticipating that there may be some questions as well going forward. I think these are very relevant questions because we have been, indeed, very successful at holding fixed expenses in check over the last few years.

We do some internal benchmarking related to peers. And looking at those benchmarks, we see that both our absolute and relative fixed expenses have come down over the past 3 years. Of course, this was a deliberate choice on the part of management. But it was a choice related to what we saw as a challenging time following underperformance that occurred in our largest fundamental equity strategies in 2010 and 2011.

So we knew that bad underperformance would significantly impact loads and also profitability. And given that outlook, we had to tighten the belt. We are not going to give you specific guidance around future spending and investment, but the reason that I went into that digression is because I do want to reassure shareholders who are listening that we don't intend to starve the business or inhibit growth going forward. Our guiding principle on spending is that we want our business investment to be focused, timed for maximum growth potential, which is a nice segue into the next slide, Slide 10, which discusses our balance sheet.

So while we've noted that we've held the line on operating expenses in the past few years, we have, at the same time, upped our investment in longer-term growth through steadily seeding new products. You see this in our cash and investments division, which had grown over the longer term and this quarter, strengthened future growth, strong alpha and market data, which drove appreciation in the fee portfolio.

We had cash flow from operations of $78 million in the quarter. Uses of cash included purchasing Perkins minority interest per our contractual obligation, paying our dividend and doing both share buyback and opportunistic repurchase of our 2017 notes.

Now as we've done over the past few quarters, we're going to address a few frequently discussed topics that have come up to us in our Investor Relations team over the course of the quarter. I will hand it over to Bruce Koepfgen, who will walk through some comments on our international strategy and our relationship with Dai-ichi Life.

Bruce Lewis Koepfgen

Good morning, everyone. By now, you all know from prior calls that we believe that a strong international presence is an important part of our long-term strategy to diversify the business. To that end, we have made several key investments over the last few years.

First, we brought litho new leadership to guide our international initiatives. Second, we examined our business and decided to place relatively greater emphasis on client-facing resources. And third, since 2011, we have opened offices in Paris, The Hague, Zurich, Frankfurt, Taipei and Dubai, further expanding our international reach.

As with any strategic investments, the costs will naturally run ahead of the intended results. And even though our leadership team believes these investments are central to our long-term success and they will play out over time, we don't get or expect any credit for simply spending money. But as a result of these investments and with our strategic partnership with Dai-ichi Life, we are starting to see some positive results in our international business, which we wanted to share with you.

Since the end of 2010, our international assets have grown 20% annually and currently sit at $21.8 billion, still a fraction of what we believe the long-term potential of the business to be, but nonetheless the highest total of non-U.S. assets in the 40-plus year history of the firm. Additionally, non-U.S. assets have gone from 8% of total company assets as of December 2010 to 13% as of September 30 of this year.

Importantly, we are seeing a pickup in our organic growth as flows have continued to be positive in 2013. Year-to-date, we have had net inflows of $2.7 billion, representing 22% in annualized organic growth through September 30.

While we're still in the early stages of developing of this business and forging a strong partnership with Dai-ichi Life, we are pleased with early returns and enthusiastic about the prospects for this business.

Turning now for just a minute to Dai-ichi. Given that Dai-ichi is an important part of our international strategy and since we have recently passed the 1-year anniversary of announcing the agreement, I wanted to just give you an update on what has been accomplished.

It has been a little over 14 months since the announcement of Dai-ichi Life intended to acquire up to 20% of Janus Capital Group's stock. Today, Dai-ichi is our largest shareholder and the relationship has had a very positive start. Since the fourth quarter of 2012, Dai-ichi Life has invested approximately $1.7 billion of the $2 billion commitment of general account assets. The funds have been invested across fundamental equity, fixed income and mathematical strategies.

In addition to the Dai-ichi general account investments, we are extremely pleased with the distribution relationship with DIAM, which has resulted in total assets under management of $1.2 billion as of the end of September. Both companies are proactively looking for ways to expand our partnership, and we couldn't be more pleased with how the relationship has evolved over the last year. It is exceeding all expectations and adding significant value to the business. Jen?

Jennifer J. McPeek

Thank you, Bruce. In discussion with many of you who are on the call today, we've learned that there is quite a bit of variation in how people model our performance fees. Some of you build a fund-by-fund model, and that's exactly what we do internally here. While this is certainly a detailed approach and clearly more time-consuming, I think there's a strong case that can be made that it uncovers some valuable information, particularly because in our mutual fund performance fees, which have the 36-month performance period.

There's a lot of this future calculation that's already baked. And you can see trends and anticipate them without necessarily forecasting future fund performance. The team here has put together a couple of slides that hopefully will illustrate that. It's a little bit different approach than we've taken in the past, so we certainly appreciate any feedback you can give us after this call as to whether walking through this tutorial was helpful to you.

So let's turn to Slide 14. This is a generalized slide, which describes how we do a performance fee calculation for a single fund. There are 2 main inputs to the calculation. One is the average AUM and the other is the relative performance to benchmark net of fees. So both of these inputs have to be calculated over the same time period, which, for Janus, mutual funds is 36 months trailing.

So first, we'll draw your attention to the graph on the left, which illustrates the AUM calculation. And it clearly shows, perhaps an obvious point, which is the 3-year average AUM can be substantially different than the current AUM on the fund. The fund that experienced AUM loss a couple of years ago, which this graph might represent, has an average AUM here of $7.5 billion and a current AUM of $6.3 billion.

Now let's look at the graph on the right. This graph illustrates how we calculate what we call the performance fee adjustment. This adjustment, which is shown in the red line, is a function of 36-month cumulative relative performance net of fees. Each fund has their own custom hurdle rate, I'm just going to kind of call that out there. In this case, it's 8.5%. The hurdle rate sets the relative performance level at which each fund gets to either their maximum positive performance fees or their maximum negative performance fees, which is always 15 basis points. We always include a fund-by-fund build-up where you can see each fund's hurdle rate if you do decide to do this kind of modeling, and that is included on Page 21 in this presentation.

You'll also see that between the minimum and the maximum performance fees are step functions, which really means only that the performance fee rate changes every 50 basis points rather than being a straight line. On this chart, you'll see a gray line. That gray dash line shows what happens if the fund has performance that is outside the hurdle bands. This example shows that a fund that has minus 11% relative performance would just hit at the negative maximum of minus 15 basis points.

Okay. That was quite a mouthful. But hopefully, I've articulated a key takeaway that we get from fund level modeling. Understanding how far below or above the hurdle rate a fund is currently can allow you to solve for how much incremental performance is needed before the performance fees start to move. So because of this insight, we were able to give you guidance earlier this year that we did not expect to see in near-term movement in those performance fees in 2013. So we provided that guidance, but it didn't require us to actually forecast any future fund performance. We just knew that we were far enough below the negative hurdles on our largest funds. And therefore, it would most likely take us a while to start making headway.

So now turning to Slide 15. To close this out, we've chosen a specific fund to demonstrate the other insight that comes from fund level modeling, which is understanding the performance roll off phenomena. So this slide here has some actual data from the Janus Forty strategy. We're showing a hypothetical quarterly calculation for simplicity. I'd like to point out that in real life, the calculation is done monthly. We also rounded off some of our calculations, as the intent here is to illustrate how the mechanics work.

So first, let's quickly walk through the current quarter calculation, which is in the blue column on the right. Trailing 36-month AUM for the fund was approximately $5.5 billion. Cumulative relative performance net of fees over that same period is minus 10.9%, which is below the minimum hurdle. Thus, the performance fee adjustment is minus 15 basis points. So you multiply those together for annual performance fees of minus $8.3 million or minus $2.1 million on a quarterly basis.

Okay. Now I'm going to walk through a hypothetical. And let me emphasize that, again, a hypothetical scenario where we roll Forty Year to the end of the third quarter in 2014. Two assumptions are needed. We have to assume the future AUM and the future relative performance. In this example, we're assuming the AUM remains constant going forward, and we also assume that the fund performs flat to benchmarks, net of fees.

The new calculation is here in the gray column. So in this scenario, the 36-month rolling average AUM actually declined to $4.5 billion because the fund's assets were higher in the periods that are rolling off as we roll forward.

So now for the interesting part. You can see that the cumulative relative performance improves very significantly under this scenario. A go-forward performance assumption is pretty benign. But the reason that the cumulative number improved so much is because of the negative quarters that roll off. We have those quarters shown in the bar chart in the gray box on the left.

As a result, the cumulative relative performance goes from minus 10.9%, which is where it is currently, to a positive 1.3% in this, again, hypothetical scenario. And this equates to annual performance fee adjustment of positive 2.3 basis points. So when we run the math through on that, we get positive performance fees of $263,000 for the quarter.

It's a somewhat surprising result because intuitively, one might think that if we perform a benchmark, our fees would remain pretty static. It's not the case here because we have 3-year rolling and cumulative calculation. So what's leading the calculation is just as important as what's coming onto the calculation.

So hopefully, this example gives you a little bit better insight into how the performance fees work and gives you the tools that you need to model them at the fund level if you choose to do so. As always, if anyone has any questions or wants to balance your modeling results off of us, our Investor Relations team remains happy to take your calls.

Now we're done with the prepared remarks. We have some time for a few follow-up questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] We'll go first to Daniel Fannon at Jefferies.

Gerald E. O'Hara - Jefferies LLC, Research Division

It's actually Gerry O'Hara sitting in for Dan this morning. If you could just give a little more color on the International business, it looks like -- can you actually give us maybe some specifics on some of the funds that have been seeing traction in that space? Or is it more that it's just global assets that have been coming into U.S. products?

Bruce Lewis Koepfgen

Yes. Gerry, this is Bruce. Don't have fund-by-fund detail, but yes, I think it's kind of a collection of fixed income and equity investments coming in through DIAM, Dai-ichi and other sources.

Gerald E. O'Hara - Jefferies LLC, Research Division

Okay, fair enough. And just as a quick follow-up, clearly, there were impactful marks on the seed portfolio this quarter. Can you give us any sense of mix as to what you're seeding now? Is it sort of 50-50, global, international versus alternative? Or is it sort of similar to the mix of your existing asset base?

Jennifer J. McPeek

Gerry, it's Jennifer. Our seed portfolio is, I'd say, more diversified than our overall asset mix. It's going to be more slanted towards the newer products that we've launched. So if you go and look at new mutual fund launches over the last several years, 2 to 3 years, you'll get a sense of some of the places that are seeded in.

Operator

And we'll go next to Matt Kelley of Morgan Stanley.

Matthew Kelley - Morgan Stanley, Research Division

I wanted to ask first about the INTECH inflows. And just looking back over the past few quarters that you've given in the press release -- the presentations, sorry, that's the second quarter out of the past 5 that you've had kind of the spike up in sales and you're noting non-U.S. investment in those funds. So I'm just curious who these clients are and what specifically they're looking for. And if the -- what performance track record they are looking at to? Because I know that you guys gave the color on the 5-year, the 1-year versus the 3-year. So what are they looking at for performance and for putting money towards there?

Richard Mac Coy Weil

Yes. Matt, this is Dick Weil. Most of the significant improvement in the flows from INTECH this quarter were institutional flows from Asia. And they're looking at a lot of the same track records that are disclosed here. There's nothing particularly unusual about the kinds of products that they're buying. And they're looking at the fact that on a risk-adjusted basis and over long periods of time, INTECH has been consistent in delivering outperformance with really good risk control and with a diversified approach to the problem compared to what other asset managers do. So I think it's -- INTECH offers a differentiated excellence in how they approach the problem of generating outperformance over liquid indices. And if not capacity constrained, it's well risk controlled and it's very reasonably priced. And the combination of those things has been quite attractive for some very large Asian institutions, and we believe it will continue to be attractive. And further on that, we think that it has been a trend in recent quarters and probably will remain that there's heightened interest outside the United States for what INTECH is offering compared to what's in the U.S. We're seeing much more pickup and focus outside the U.S. We think and believe that eventually, we'll be able to get that better momentum in the U.S. But this is a lumpy business and it's very hard to extrapolate on a quarter-to-quarter basis because inherently, these accounts are large and hard to predict and don't occur on a quarterly basis.

Matthew Kelley - Morgan Stanley, Research Division

Okay. And then my follow-up is on the non-U.S. business update you gave. The $2.7 billion of flows this year, can you guys tell us what is Dai-ichi in that, Dai-ichi and DIAM? And also how much of the Dai-ichi general account assets have gone into INTECH?

Bruce Lewis Koepfgen

Sure. This is Bruce. Of the $2.7 billion, about $1.4 billion of that would be Dai-ichi related, and the balance would be picked up, as Dick just mentioned, primarily in the INTECH strategies that were placed in Asia. In Dai-ichi, to date, is $1.7 billion of the 2 general account assets, and about $1.4 billion of that was placed this year, $300 million the last year.

Operator

We'll go next to Michael Kim at Sandler O'Neill.

Michael S. Kim - Sandler O'Neill + Partners, L.P., Research Division

First, just be curious to get your take on retail flow trend across the industry. It just seems like investors continued to avoid fixed income funds more broadly, but we aren't necessarily seeing that translate into a more decisive move into equity. So just wondering how you see those trends playing out. And then more specific to Janus, where there could be some pockets of growth, assuming the macro environment remains somewhat uneven.

Richard Mac Coy Weil

Sure. In my opinion, we haven't seen the so-called great rotation and probably won't until you see even more volatility and higher rates on the fixed income side. And so going to your last part of your question, first, I think there remains for us some time and opportunity to continue to strengthen our track records to prepare for the day when that higher rate scenario and higher volatility scenario drives a lot more money into equities. What we're seeing in the industry is increased interest in equities and decreased interest in fixed income for all the obvious reasons. That obviously includes a significant uptick in interest and passive and ETFs, but it also includes good flows for well-performing active managers. And we believe that's a confirmation of our continuing confidence that when we do a good job and our active management offering good returns at especially good risk-adjusted returns, our clients will reward us with positive flows. So we take that as a positive sign that there's still a lot of interest in equities, and in active equities, we think that'll kick up when rates get more volatile and head further up. So we see that as a future opportunity that we're trying our best to prepare for.

Michael S. Kim - Sandler O'Neill + Partners, L.P., Research Division

Okay. And then second question, just coming back to the non-U.S. business. Any sense of potential impact on overall fee rates or margins as that side of the business continues to scale, particularly as it -- it sounds like a fair amount of the upfront infrastructure has already been built out at this point.

Jennifer J. McPeek

Michael, it's Jennifer. I'll try to address your question on fee rates. As we noted earlier, the recent growth in international has been dominated by institutional flows. And those institutional flows do have a lower fee rate than the retail side, so I think you see that in our mix. Generally, look at new business on a net present value basis. So the institutional assets, well, they have a lower fee rate, they tend to come in much larger chunks, they're stickier assets, and so they're quite attractive really to us. But if you're just trying to model the fee rate, I think that's the current trend. Over the longer term, we're going to see our performance reflected in retail flows as well, both domestically and internationally. So I don't think I would extrapolate a trend for very long there.

Operator

We'll go next to Ken Worthington at JPMorgan.

Kenneth B. Worthington - JP Morgan Chase & Co, Research Division

When you started the presentation, I think the first bullet was the focus on performance. So as you think about performance from here, what can you do to improve performance? Is it -- is your goal to focus on changes of personnel, additional resources, greater coverage, new products or is there something else that you think you can work on as a management team to drive better performance?

Richard Mac Coy Weil

Ken, it's Dick. I think, speaking individually from my seat, I've done what I can and should do in terms of making sure we have the right people in the right seats. And we have a very strong team and stable team, hopefully, going forward in place. With the addition of Enrique Chang, I think we're well positioned to deliver that. And that's most of what I can do from the CEO seat and what I should do. Now Enrique will obviously be pursuing issues of making sure that we're clear about all our client promises, making sure that we're getting paid for all the risks we're taking in our portfolios. He'll make sure that we're consistent in style with what has delivered good results in the past. So he'll be operating with the team in an integrated basis everyday to make sure that we're delivering the best possible efforts from our fundamental equity team on the Janus platform. And that's work that's obviously only just begun as he's been here, I'm going to guess, now a month. And so there's lots more to do on that front. But fundamentally, the most important thing I think the CEO can do is make sure that you have the right talent in the right seats, and I feel very, very good. As I mentioned earlier in the call, I think the story of Janus is the talent inflow that we've been able to create over the last several years and meshing that really excellent inflowing talent was the terrific talent that's already here. So I think that's the most important thing I can do from my seat. I consider the job pretty well complete from what I can do, and I've have handed the baton off to Enrique on the Janus platform and he'll carry it from there.

Kenneth B. Worthington - JP Morgan Chase & Co, Research Division

Okay, great. And maybe it will be helpful to just talk about the performance this year. I think a couple or many different categories have underperformed. I'd love to hear your color on maybe why it's underperformed. So for the Janus-branded funds, the value funds and then INTECH, why have those 3 equity categories underperformed this year?

Richard Mac Coy Weil

Well, I think it's not as broad as what you're describing, but trying to address the heart of your question. On the Janus platform, I think a number of the funds had a tough start to the year. We made some changes of some personnel. And since we've implemented those changes, the numbers appear to be stronger. And that's too short a period of time to be particularly meaningful or to crow about. But a mountain climb start with steps, and those are good first steps. On the Perkins platform, Perkins is a defensive value manager, and they have been for their 30-year history. And they're focused on protection of principal, as well as positive returns. And so in a market, which has really been screaming upwards since, what, the second quarter of '09, this is not a period of time in which you'd expect them to be at or leading the index, and they're not. Now they don't have an infinite permission from their clients to lag the index. But if you know their style and what they offer, they're trying to offer their clients protection against the downside in over a full cycle, good performance compared to the index with better risk-adjusted features, a smoother ride, essentially. So their returns are not particularly -- the fact that they're lagging at this point in this kind of a market is not particularly surprising, but it is problematic in a sense that the further they get from the index, the more negative flows we're going to see, and it's very -- it's a challenging period for [indiscernible]. So that's sort of is what it is. On INTECH, we tend to report what percentage of assets are above and below benchmark. That tends to create rather dramatic looking swings from when you're a little bit above the benchmark to when you're a little bit below the benchmark. And candidly, those are not necessarily particularly insightful or meaningful swings. INTECH's products continue to deliver on their promises by and large. Various strategies within are outperforming on a year-to-date basis, various strategies within are underperforming on a year-to-date basis, but really all within the range of expectation-given style. And I think what I try to say at the start was I believe that INTECH is keeping its promises over the medium- and long-term time periods to its clients, by and large, and I think that's true. But to get more specific, you've got to get into each strategy by each strategy and they'll all have slightly different results over different time periods.

Operator

We'll go next to Cynthia Mayer of Bank of America Merrill Lynch.

Cynthia Mayer - BofA Merrill Lynch, Research Division

So thanks for all the color on the hypothetical performance fees. And I'm just wondering, staying in the land of hypothetical, if your performance fees on those funds get back to flat cumulatively, how much of that would fall to the bottom line? And would you change at all your approach to comp as a percentage of revenues?

Jennifer J. McPeek

Cynthia, I'll take the first part of that question. Our performance fees fall to the bottom line, as you alluded to, accepting the amount that goes to our profit base, the compensation pools. We haven't disclosed that exact amount, and I don't think I'm at liberty to do so right now. So unfortunately, can give you a direct answer, but I think that you're -- what you're getting at is that all of that, with the exception of the part that we share with employees through compensation pulls does fall to the operating line.

Richard Mac Coy Weil

And let me address the second part of your question, Cynthia, this is Dick, with -- we've told our employees that we have a profits-based plan and when those profits have gone bad, the employees have endured that negative change. And when, hopefully, the performance fees go up and profits generally move in the right direction, they're going to share in that benefit according to the terms of this profits-based plan. And no, we would not consider giving them the downside and then not sharing the upside, that would be unfair and contrary to the deal that we've made with our employees. So we'll be consistent.

Cynthia Mayer - BofA Merrill Lynch, Research Division

Okay, great. And then in terms of the INTECH separate account assets, how many of those have performance fee structures at this point? And with some decent sales there this quarter and maybe ahead, how many of the assets coming in have performance fee structures attached?

Jennifer J. McPeek

So I don't have an exact number of accounts for you and can't give you forward-looking performance [ph], Cynthia, but our total private account assets that have performance fees are $13.3 billion, and that's in INTECH predominantly. So it is a growing number. A year ago, it was at $11 billion.

Operator

We'll go to Bill Katz at Citigroup.

William R. Katz - Citigroup Inc, Research Division

Just want to try and come back to the discussion on the good investment spend of the business. And if you can just tell me, Jennifer, perhaps if you just sort of think about the morning [ph] so you're not going to starve or inhibit growth, how do I sort of juxtapose that against some of the flow dynamics that you're seeing in terms of some of the higher fee products going out the door like growth and the value team? And then your comments about sort of bolstering the non-U.S. business relative perhaps to the U.S. business, maybe just help me sort of think about the margin dynamics there?

Jennifer J. McPeek

Sure, Bill. It's a multifaceted question you've asked, but I'll try to get it, what I think is the heart of it. When I talked about not wanting to starve the business or not intending to starve the business going forward, what I was trying to communicate is that the management team here is ready to invest when we see a window of opportunity to really take market share. And in order for that to happen, you have to have a lot of things come at the same time. So we'll have to have the right kind of track record in products where there's a lot of demand. And when that happens, we're prepared to invest and to really drive growth. So it was around our philosophy and I think we're watching all of the leading indicators to see when that happens. I don't want to imply that there's not operating leverage in our model going forward. I mean, the marginal amount of investments that's required is not significant enough to offset operating leverage. We do have pretty strong operating leverage like all of our peers do. I think we have marginal profits that are well above our average level right now. So I think you'll continue to see, if we do get that asset growth, that our margins will improve.

William R. Katz - Citigroup Inc, Research Division

And then second question is just as -- and Dick, I'd be curious to your thoughts here. You mentioned you feel like you have the right team in place right now. And if you look at underlying flow trends, it's still somewhat mixed as is performance. What do you think is the lead lag, what's the reaction from the gatekeepers, that are on the institutional side or some of the broader retail distributors that you're working with, to these changes? And when might there be some type of stabilization in the redemption pressure?

Richard Mac Coy Weil

It's a great question, and none of our crystal balls are really good enough to give you a great answer. The truth is that the change in personnel is upsetting to some and even comforting to others, but it is a hard thing to quantify. And you put that in a blender with the performance of whatever strategy the client involved may be in and you get a sort of blended set of effects. We don't anticipate that the flows are going to get a lot better until we demonstrate consistently stronger investment performance. I think we have started, as I've mentioned, to do that. I think we have the right people in the right place to do that. But it's going to take some time and we're clearly not out of the woods yet. So I can't give you a specific time period, that's a better answer than that. But I think we're on the right road. I think we have the right people on board. I think we're doing the right things. It's going to take some time, and it's going to be painful in the interim until we can get that better pattern firmly established.

Operator

And that does conclude today's question-and-answer session. I'll turn the conference back over to our speakers for any closing remarks.

Richard Mac Coy Weil

Thank you, everybody. We look forward to talking to you again next quarter.

Operator

And that does conclude today's conference. Again, thank you for your participation.

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