Janus Capital Group Inc. Q4 2009 Earnings Call Transcript

Jan.28.10 | About: Janus Capital (JNS)

Janus Capital Group Inc. (NYSE:JNS)

Q4 2009 Earnings Call

January 29, 2010 10:00 am ET


Tim Armour - Interim CEO

Dick Weil - CEO

Gibson Smith - Co-CIO of Janus Capital Management and Portfolio Manager

Greg Frost - EVP and CFO


Ken Worthington - JPMorgan

Roger Freeman - Barclays Capital

Craig Siegenthaler - Credit Suisse

Cynthia Mayer - Bank of America

Michael Kim - Sandler O'Neil

Marc Irizarry - Goldman Sachs

Bill Katz - Buckingham Research



Good morning. My name is Priya and I will be your conference facilitator today. I would like to welcome everyone to the Janus Capital Group Fourth 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 statements. 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 date these statements were made. Investors should, however, consult any further disclosures Janus may make in its reports filed with the SEC.

Thank you. It is my pleasure to introduce Tim Armour, Chief Executive of Officer of Janus Capital Group. Mr. Armour, you may begin your conference, sir.

Tim Armour

Thank you very much. Good morning. Thanks for joining us. With me this morning, is Greg Frost, our Chief Financial Officer; Gibson Smith, our Co-Chief Investment Officer, and the newly appointed CEO, Dick Weil, who joins us this morning. He does not start officially until next Monday February 1st, but in a couple of slides from now I will allow Dick an opportunity to introduce himself and talk a little about his background, why he wanted to come to Janus. Dick is not here to take operating questions about the business, but he's very willing to discuss what attracted him to come to Janus to begin with.

So with that let me start on the first slide and we will go through about 15 slides and then we will open it up to questions. So the first slide is slide number two, where we cover fourth quarter 2009 and the full year results. I would as sort of a headline to this, fourth quarter of 2009 reflects continued recovery for Janus Capital, with earnings from continuing operations earnings per share of $0.20 that's up from $0.05 last quarter and $0.05 a year ago and resulted in a full year earnings per share from continuing operations of negative $4.55, down from $0.86 in 2008.

Now recall that in third quarter, our 2009 earnings per share were affected by $0.10 per share charge and on the year, we had a $5.03 per share charge driven primarily by first quarter goodwill and intangible impairment.

If you step out those one-time events and sort of take a look at the quarterly flow through Janus, we made pretty steady progress throughout the year. The first quarter was $0.02, second quarter was $0.10, third quarter was 15, and this quarter, fourth quarter is $0.20. We're showing steady continued recovery in Janus.

In terms of long-term net flows, we achieved breakeven levels in the fourth quarter versus negative $600 million last quarter. If you look at it on the total year, we are actually up $900 million versus negative $600 million in 2008. That reflects sort of some cross currents in our three different franchises.

The good news is for Janus, we had $1.5 billion of net inflows, $2.4 billion negative on INTECH and I'll talk about that a bit later and then $900 million for Perkins. If you just sort of stand and look at where we ended the year with assets under management of $159.7 billion, that's up 5%, versus the previous quarter and up 29% versus the end of last year, and if you look at sort of the dark days in March, where we reached our low point in AUM, we're up 66% versus a low point.

So, I think, sort of the theme of continued recovery is pretty evident in what's going on with assets under management.

On a complex-wide basis, if you take a look at our performance when we look at on a Lipper basis, we look at the top two quartiles. We would like to, on a sustained basis, be in the top two quartile, 75%, 88% and 86% on a one-, three- and five-year basis. We're above median performance across all of the funds that we offer.

If you will turn the page, I have a brief summary here of some of the 2009 key accomplishments. Despite the near-term under performance for INTECH across all three franchises, we have delivered strong, long-term relative investment performance.

If you look in terms of market share, in a market that continued to favor fixed income and that's not a dominant part of our offerings we were very encouraged that in 2009 our Janus equity and Perkins value funds were able to, in fact, gain market share. The combination of those two businesses had organic growth of 5% for the year, compared to 2% across the equity mutual fund market place.

On the bond side, we have some really tremendous news, and Gibson will share some of the details of that in a moment, but Janus fixed income posted an organic growth rate of 88% in 2009 more than three times higher than the 25% organic growth in the fixed income industry. So, we're really starting to reach our stride on the fixed income side of the business.

We also completed the JIF/JAD merger that we talked about. This was a major effort. It's a transaction that increases the availability of our products to a much broader group of intermediary investors and actually simplifies our product platform. It sort of streamlines our business and I think underneath it, it reflects our strong commitments to the advisory channel, which was one of the engines of growth in 2009 and we look forward to continue.

We also executed the successful capital restructuring in July. Recall that we strengthened our balance sheet that resulted in total debt being reduced by $316 million, an interest expense on the year, down by $16 million. So we're in a much better place in terms of our balance sheet.

We also achieved full-year fixed and discretionary cost savings. With the downdraft we went through at the end of 2008 and the uncertainty in the market place, we committed to take $45 million of expense out by 2009 and we have, in fact, achieved that goal. We still remain mindful and are very attentive to sort of managing our costs in the business given all the uncertainty we faced in the market place. So, we feel good about that.

Then finally in the last call, I mentioned that I felt pretty confident that we would have a new CEO to introduce to the street when we had this call. Here is Dick Weil here in front of us. We feel very lucky to have him. He brings a wealth of global experience to the role. He has demonstrated that he has the vision and the leadership to build a world-class investment management organization.

I can say as one of five Board members that we're part of the committee and the search committee, we saw in excess of 200 candidates. We really went deeply with 30 of them. We got it down to five lead candidates that we liked. Independently, all five members on that committee ranked each of the candidates and all five ranked Dick Weil as their top candidate. We made him the offer and we're very happy that he accepted our offer and he's here to join us.

So Dick, if you would like to say a few words, we would welcome that.

Dick Weil

Well, thank you, Tim and thank you very much for those kind words. I am tremendously excited to be joining what is a very strong investment team and investment culture across the Janus Capital Group. It's just a wonderful opportunity for me. I believe that my successful experience across the institutional and the retail business inside the U.S. and outside the U.S., my experience in having a deep and constructive partnership with investors, albeit mostly in fixed income, but PIMCO and colleagues and affiliates still did work across the equity markets also, provide me with a greater foundation to work with this team to deliver increasing levels of success.

So I am excited to be here. I'm grateful for the trust that the Board has shown in selecting me and I couldn't be happier to join you today.

Tim Armour

Thank you, Dick. As I said before, our plan is Dick will not be fielding questions today specifically about the business, but we did want to take the opportunity to introduce him to you. If you turn to the next slide, slide number four. It sort of captures what happened in long-term flows with the total company and each of the three franchises. With 2009, we had positive total company long-term net flows, but they were driven by Janus and Perkins and if you see in the upper left hand graph, positive $900 million versus negative $600 million a year-ago.

We continue to make progress and it really points out the benefits of diversification and having Janus, INTECH and Perkins franchises and Janus and Perkins helped to offset some of the outflows in Perkins or in the INTECH.

We had $1.5 billion increase in long-term net flows year-over-year and that was driven importantly by reduced redemptions at Janus. You see the number there of positive $3.9 billion. The year-over-year improvement was also driven importantly by contribution from the fixed income side. Of that $3.9 billion, 72% of the net flows came from the fixed income side of the house and in a market where fixed income was really the engine.

If you just stand back and look at the total mutual fund market place, equities grew by about 2% and fixed income grew by 25%. So, the irony is we had great performance across fixed income and equities, but it was only on the fixed income side that we really saw the traction and the growth. With an improving market next year, our hope is we'll get sort of more broadly distributed growth across all the lines.

I would also say that 39% of our mutual fund in Janus posted positive net flows. We had Janus Overseas, Balanced, Short-Term bonds, Forty, and Flexible bonds all had net flows in excess of a billion dollars or more for the year, which is just tremendous.

Our organic growth for Janus was 6% compared to industry organic growth, when you blend the bond and equity side of the business of 8%.

For INTECH, year-over-year declines in net flows were driven primarily by decreased gross sales. While we did have outflows in the business, actually the outflows were modestly lower than a year-ago. While they did pick up a bit at the end of the year, the real issue for INTECH was the lack of flows and while underperformance is certainly contributing to this, we've seen an institutional market that really presented some strong headwinds. Overall search activity in the U.S. is down dramatically from 2007 and 2008 and there was very little search activity in Large Cap Equity.

Plan sponsors have been slow to make rebalancing decisions which usually we are the beneficiary of and given the volatility they have experienced and liquidity has continued to be an issue. There hasn't been new money flowing in on the institutional side, especially in the Large Cap Equity side.

However, internationally, search activities increased and INTECH continued to win business and I'll talk a little bit about that in a moment when we get to slide eight.

For Perkins as you see down there, a very steady improvement. By the time we get to 2009, you see $2.6 billion to the good. Net flows were positive for every quarter over the course of the year and marks the eighth consecutive quarter with positive long-term net flows. So a terrific sustained performance by Perkins. Organic growth was 29% compared to the equity mutual fund market of 2% during the year.

So if you turn to the next page, I will sort of decompose a little bit. The split of sort of the contribution from the Retail Intermediary channel versus Institutional versus International. The headline is really that Retail Intermediary posted a $6 billion of positive long-term net flows in 2009. That was really as you can see in the chart on the left hand side, significantly reduced redemption rate and a net of $6 billion for the good. That was driven by sort of across the board performance.

If you look for the year, which this chart shows; the Broker-Dealer sub-channel had $3.3 billion of net flows and that compares to $2.4 billion a year-ago. The Investment-Only retirement, which is a really important channel for us, we're a leader in that category, and these are high-quality, very persistent assets, had a $1.3 billion of net flows and that compares to $500 million a year ago.

Financial institution posted pretty much a breakeven compared to the $900 million a year ago and the story for the quarter was a continuation of strong gross flows really across all channels. We had no significant mandate losses for the quarter. The Retail Intermediary channel just has been an engine for us for the quarter. We had net flows of $2.1 billion, which equate to an annualized organic growth rate of 9%. So we are very happy with the performance in that channel.

I would also point out the supermarket retail channel with our largest contributors being Schwab and Fidelity, continues to be an important channel for us. If you know that channel you know that one of the secrets to getting good flows out of the supermarket retail channel is to have performance that is good enough to warrant your being on their select or guidance list.

Last year, at the end of 2008, we had 16 of our funds in the select or guidance list for Schwab and Fidelity. This year we had 21 funds currently on that list. So that's a real good engine of potential growth.

The institutional side of the business, if you look at sort of the middle graph, really tells us the story while redemptions abated a little bit, it's the outflows going from 8.8 to 3.7 really tells the story of a market that's pretty much frozen in uncertainty and, continued lack of mandates and lack of searches.

If you look at this across the board the Janus managed business was up slightly, but it's quite small. For INTECH, net flows for the quarter were minus $2 billion as a result of continued under performance and continued weakness in growth sales and as I said, I'll talk about that in just a moment.

For fixed income, the institutional side of the business has always been sort of a hope for us and we finally cracked that. We got our first fixed income mandates and it's, I think as you know once somebody is the first one in the pool, more will follow.

We feel pretty encouraged by the level of interest we're getting in the institutional market in our strategies and capabilities and fixed income. The one not funded pipeline continues to be soft and final activity is also weaken. We're hoping as we get in out of the doldrums of 2009, that 2010 will pick up a bit.

On the international side if you look on the right-hand side, it shows the net line at zero. Actually, it's just marginally above year ago levels and it represents the 11th consecutive year a positive long-term net flows for the channel.

The story in the fourth quarter was while we had some mandate wins for INTECH, and again, I mentioned before INTECH has seen some strength in the non-U.S. part of the business, that strength was more than offset by one redemption that reallocated away from U.S. equities and that's a real issue.

In the non-U.S. market, U.S. equities are just not an attractive investment strategy right now and net flows for the fourth quarter were off by $100 million. Despite the underperformance in large cap growth products, the INTECH's global and international products continue to do well and Janus and Perkins have positive flows while INTECH had net outflows.

So when you turn to the sixth page and I'll just talk a little bit about the long-term relative investment performance. The headline and first bullet says 51% of our complex-wide mutual funds had a four or five star rating. Now, this is down somewhat from the number I shared with you for the third quarter. The quarter-over-quarter decline is not a result of subpar performance, but rather a function of the way Morningstar calculates a rating and how they factor in the strength of a 10-year performance.

In 1999, Janus funds experienced really significant relative outperformance versus their category. Then when the technology market cracked this performance really waned in. So we're rolling up that really strong 10-year period and that year in 1999, and we're picking up a weaker year.

So on a 10-year basis, Morningstar weights the 10-year results 50% of the weight. So, we see the decline in fourth quarter. However, if you recall that it's a forced distribution curve for Morningstar, only 32.5% can get a four or five star rating and we have 51% that have a four and five star rating, and we feel pretty good about that.

For Perkins, you can see that 75%, a 100% and a 100% on a Lipper basis have one and three and five-year total returns above median. It was a great year for them. On a one-year basis, their mid cap value did experience a decline in relative performance. That fund was ranked in the 76th percentile relative to peers as of December 31. As of the year ending December 31st, that 76 compares to just the previous quarter it was in the 19 percentile.

So you see a dramatic change in sort of the one-year rating and that reflects quarter-over-quarter decline that was driven by really significant outperformance of many of the deep value peers. As stocks that underperformed in the first half, outperformed in the second half and those are not names that Perkins would necessarily invest in. The key is that on a relative basis, the underperformance is over a very short-term and Perkins long-term performance remains extremely strong.

Then with INTECH, we're not happy about the recent underperformance at INTECH. We continue to believe in the investment process and I'll share with you in, I think, in slide eight some of the details. We don't want to minimize what the clients have experienced the relative underperformance over the intermediate term.

It's primarily focused in our growth products and it's somewhat been muted by the risk managed approach, but it's still an unexpected and undesired underperformance. I'll share a little bit about where we are on that on the slides that follow.

On page seven, this takes a look at both the complex-wide and Janus equity mutual fund performance through a [Lipperland]. If you look at the top half which is complex-wide, it shows you on a one, three, and five-year basis. We really have stellar longer term performance. If you look over on the right-hand side on a five-year basis, 61%, 78%, 81%, 83% and 86% on a Lipper basis have been in top half. So on a sustained basis, it's getting better and better. Even on a one-year basis, in 2009, we had 75%, say, we're above median performance.

If you look down in the bottom half, which really just isolates the Janus equity mutual funds, we tend to have relatively higher tracking year in the way that we pick stocks and assemble portfolios. That was evident when we hit a downdraft in 2008, if you look at that 41% in the left hand column on a one-year basis, only 41% were in the top half.

You can see the resurgence in how we really came back strong by sticking to our research and investment process. We now have 89% that are in the top half. So a terrific recovery and it's showing in the long-term numbers, where we have a five-year, 88% and on a three-year, we're 94% above median. So, we feel great about that.

Turn to page eight and I'll talk a little bit about sort of the INTECH stories. I think the headline is that INTECH continues to face challenges in the U.S. large cap equity space, but in fact there is some cross currents that are sort of encouraging, but its winning business for the global and international strategies.

Obviously, the recent underperformance is disappointing but I will say, as Bob Garvy said on this call last quarter, it is within the range of expected outcomes and it's not unprecedented. We've been through this before.

While 2009 was a year in which INTECH strategies underperformed, longer term performance has largely been concentrated in large cap growth strategies. They represent probably about 40% of the asset base. As I mentioned, the risk controls we employ had somewhat moderated the underperformance. We haven't truly blown up a client's portfolio. We've underperformed a benchmark.

By any measure 2009 was a difficult year for INTECH. With search activity largely frozen for most of the year, inflows were well below year ago levels and the outflows as I said were on a par with 2008, but I will say, it's picking up as we go through the end of 2009.

We saw an upturn in relative performance at the end of the year in 2009. The fourth quarter broadly most strategies outperformed their benchmark, but I don't want to put that in the bank and say, the war is over. We still have work to do and it's going to be a long-term process.

Anyone, who has managed money for clients has had the experience of sustain periods of below expectation performance. For INTECH, sudden and dramatic declines in relative stock price volatility, like we experienced in 2008 and 2009, those are not ideal equity markets for INTECH, for it's processed to deliver above benchmark performance.

The expectation is that's the kind of market where we would kind of expect that we're not going to outperform it. We're not happy with it and our hope is that in 2010, we will experience a return to more normal relative volatility levels and a more stable environment.

If I were to highlight as you go down this page a little bit sort of some of the stories behind INTECH, obviously, U.S. plan sponsors have been slow to make rebalancing decisions and it's hurting our gross sales domestically. Despite the outflows we had, if we had had the inflows in sort of more normal levels, this would not have been the terrible year on a net flow basis.

Large cap equity search activity has significantly slowed among U.S. plan sponsors. That's obviously in response to the global financial crisis. Sponsors are slow to make rebalancing decisions and given the volatility that they have experienced over the last two years, it's continued and that market is still a bit frozen.

Conversely, as I mentioned before, search activity in the international market is increasing and INTECH is continuing to win business in that space. Some examples I would cite are global core which accounted for $2 billion in AUM in the fourth quarter in 2009. It reached its five year track record which is an important milestone in the institutional market place. It has outperformed its benchmark by 166 basis points over that period.

In the European market, we are getting involved in searches and we're winning searches. The international equity reached its three-year track record in December and it has outperformed its benchmark by 164 basis point over that period.

So during the fourth quarter, INTECH has continued to commit significant resources to clients and consultants. For consultants, we really have a strong institutional relationship with the consultant community. We're going to continue to be pro-active in this effort.

I think the team has done a terrific job in telling the story that these are disappointing underperformance, but not unprecedented and not unexpected and we've been able to be very successful in a number of clients holding on to business and letting them sort of weather the storm with us.

The risk management investment process at INTECH has helped mitigate this and while the underperformance is disappointing, it's not substantial magnitude. So despite the underperformance, INTECH's firm like batting average and that is sort of if you look kind of month-to-month, how INTECH has done beating its benchmark, on a gross basis, on a one, three and five-year basis and you look at the 10 primary strategies, 71%, 83%, 92% of the months in a one, three and five-year period, INTECH has outperformed its benchmark. Those are terrific long-term numbers and it's the basis in the institutional market for sustaining their business with INTECH and for building on our future.

So I'd emphasize that we're very confident in INTECH's mathematical investment process. It's well-positioned for the long-term growth despite the disappointing current underperformance in the near term. We've been in this position before. We've turned it around and served our clients quite well, and we have confidence this will continue.

So with that, I am going to turn it over to Gibson Smith and sort of shift the focus more to the Janus brand side of the house and ask him to go through sort of an investment overview. Gibson?

Gibson Smith

Okay, thanks Tim. I'd like to spend a few minutes this morning focusing on the Janus investment team. As the leaders of the investment team, my partner and Co-CIO, Jonathan Coleman; our Director of Research, Jim Goff and I are very proud of the accomplishments of this team.

It is undoubtedly have been one of the most challenging times to be an investor. Navigating the difficult markets, both our equity and fixed income teams have shown an unwavering commitment to our investment process and continue to generate competitive returns for our clients.

Our bottom-up, in-depth primary research is focused on developing independent and differentiated views, which in turn allows us to concentrate our investments in the areas in which we have the greatest amount of conviction. This is what we believe drives strong competitive results over the long term.

In addition, the evolution of our investment process over the years as well as enhancements to the investment team have also contributed to our success.

I'd like to discuss a few of these with you today. We're on slide 10. First we recognized that our strength is our people and that people are the most important ingredients in our process. We have assembled an incredibly strong group of tenured and experienced investors in our fixed income and equity teams. The collective team of equity and fixed income analysts averaged nearly a decade in the industry and more than five years at Janus. Many of our analysts have been at Janus for over 10 years.

We also have a very tenured team of portfolio managers with many of our teams serving at Janus for over 13 years with extensive industry experience.

An additional point around the Janus investment team, I think, is important is that all but one of our portfolio managers started at Janus as an analyst and worked their way into a portfolio manager role. We believe that this evolutionary process of our portfolio manager strengthens the culture as well as enforces the importance of our research process.

Moving to the enhancements we've have made that have strengthened the investment team; first, Barney Wilson, Portfolio Manager of our Global Technology product was named Assistant Director of Research earlier this year helping Jim Goff to drive the research effort that's best in class.

We launched a junior analyst program two years ago. The investment in this program have come to fruition with three individuals promoted to equity analysts in 2009. We've added seven junior analysts and 17 research associates who help in the research process that many asset management firms would be referred to as analysts.

In addition to training and development, we recognize that strong investment talent is key to the long-term success. We have made significant investments in our research efforts over the last decade. We have grown the equity and fixed income analysts team to 53 people representing 38 equity analysts and 15 fixed income analysts.

The expansion of the team has facilitated greater breadth and depth of coverage. Today we cover nearly three times the numbers of companies we did at the beginning of the decade. We've also been able to improve the depth of coverage, digging into the capital structures of the companies for analyzing, looking at both the debt and equity of the company.

To this point, the equity and fixed income teams function within an integrated business model and collaborate within the seven global sector teams. We believe this integrated business model and collaborative process between equity and fixed income markets makes us better investors in these volatile and often correlated markets. We also believe the collaboration between the teams helped us to better navigate the financial crisis.

Another major enhancement relates to our increased focus on risk management within both fixed income and equity. Dan Sherman in the Head of Risk Management (inaudible) in fixed income has made risk management an integral component of our process. Portfolio sensitivities and scenario analysis continue to be a key focus as well specific attention paid to the down side. We value the role of risk management have played in helping this performance and risk-adjusted returns.

Ultimately, the investment enhancements we have made have resulted in strong competitive performance. As you can see on the slide, 89%, 94% and 88% of the Janus equity mutual funds are in the top two quartiles on a one-, three- and five-year total return basis as of December 31, 2009. Over that same period, 25%, 100% and 100% of the Janus fixed income funds are in the top two quartiles on that same one, three and five-year basis over the same period.

We remain committed to investing in our research team to ensure that our business is best positioned for the future.

Turning to slide 11, we highlight the strong long-term performance across our offerings. As you can see, we have numerous funds in the top decile on a since inception basis. These are diversified across small cap growth, the international, value, our [friends] over at Perkins and fixed income.

This slide also highlights many of our funds with solid long-term track records versus our Lipper competitive universe. We feel we have delivered for our investors but we need to keep working hard and stay focused.

When Tom Bailey founded Janus 40 years ago, he built an investment centric firm that has added value to clients by doing its own in-depth fundamental research. We are very excited to celebrate our 40-year anniversary at Janus this February as well as the 40-year anniversary of the Janus Fund managed by Jonathan Coleman and Dan Riff. I believe that today Janus has one of the best investment teams in the business.

We're all committed to ensuring that the tradition of research excellence started by Tom and carried out by so many over the years continues for at least another 40 years.

In closing, speaking for the investment team, we're pleased to have someone of Dick Weil's caliber joining the firm. He comes from what is undoubtedly one of the world's most successful investment organizations. We look forward to working with Dick and leveraging his experience and capitalizing on our strength.

Now I will turn it over to Greg Frost to cover the financials for us.

Greg Frost

Thanks, Gibson and good morning. As Tim mentioned, we recorded fourth quarter earnings per share of $0.20 and margins just over 30%. As Tim mentioned, I do recall that the third quarter had certain charges for litigation severance of around $0.10 or roughly 14% of revenue went there. So as I kind of think about third quarter of 15 going to fourth quarter earnings of $0.20 and margins in the 26%, 27% range in Q3 going to 30% in Q4.

Average assets and revenue up roughly 10% in Q4, compared to the previous quarter and obviously up significantly from fourth quarter of 2008.

One note on the revenue line, we did see a little spike up in performance fees. Do recall that we have performance fees both on our mutual funds as well as separate accounts. The mutual funds tend to be a little smoother as that is accrued for and paid monthly. While separate accounts could be a little lumpier, they tend to come in on a quarterly basis or in certain cases on an annual basis.

In this particular quarter, we had one of our large Janus separate accounts reaches one-year anniversary and we recorded the full year's performance fees in the fourth quarter. So going forward, I would think you would still see a little lumpiness on the performance fee side on the separate accounts. Again, we do have an appendix page that details up the mutual fund performance fees.

On the operating expense side, if you strip out the Q3 charges again expenses were up roughly 6%, again on revenue growth of 10. The higher expenses were largely due to the variable expense side as well as slightly higher marketing costs as we start to get out and tell the wonderful performance story that Tim and Gibson have highlighted this morning.

Turning to page to 14, that's the last page for me. Like every other asset manager out there, the rebounding market certainly provided a lift for us throughout the year. The improving margins and earnings quarter-to-quarter throughout 2009 was really obviously due to higher revenues as well as, as Tim mentioned, our achievements of our fixed and discretionary cost saves that we put in place, while the market was going through its very volatile period at the end of 2008 and early 2009.

As a reminder, the full year results do include the first quarter goodwill and intangible non-cash impairment charge.

Looking ahead to 2010, we do feel that with our performance with the [Healy] market that we do feel it's important to begin investing in our business again.

We will be targeted in prudence with our investments, but we do plan to increase our sales presence both domestically and abroad. We still plan to invest investment talent both at the Janus side as well as Perkins. We want to increase our overall marketing spend. We want to get out and tell about the wonderful performance story. We also as everybody knows you cannot lag technology too far. We did not invest hardly at all in technology in 2009, and we do need to get back ahead of the curve their or risk being involved behind the curve as we look out to future years.

There's a couple of things I also want to point out for 2010 that we know we are coming. As an outcome of the market timing situation a number of years ago, we are required to submit a proxy for trustee election every five years. We do expect this to cost between $7 million to $10 million and the majority of that will hit in the first half of 2010. So do be aware of that.

Also I do want to remind people that when we announced the Perkins acquisition of the incremental 50% in the second quarter of 2008, which we closed on at the end of '08, we did at that point mention that we put in some compensation schemes that really were designed to incentivize the Perkins folks to grow their business and to deliver top performance for their investors. This expense will run through the long-term incentive line on our P&L and they were delivered in the form of senior profits interest.

Given their revenue growth of 2009 and their performance, I would expect to see something in the ballpark of $5 million to $10 million, annually, over the next say, three or four years, and that will be spread evenly across the year. So, again $5 million to $10 million of incremental expense in 2010 for the Perkins senior profits interest.

So, all in all, you know all that being said, given where we are, given the momentum we have in 2009 and the positive operating leverage, we clearly took cost out of the business. We're ready to reinvest back in this business, but given the one-time costs that we talked about with fund proxy given some incremental costs at Perkins that I've mentioned, we still target long-term margins of 30%, but given the market environment in some of these costs, we maybe slightly below that in 2009. Again, in a revenue growth mode with higher markets, we should be able to achieve a 30% margin.

Lastly on the balance sheet side, as Tim mentioned we clearly are in a better place than we were a year-ago. We continue to build what we consider to be a much stronger balance sheet. Our cash on hand today is clearly we can cover the 2011 and 2012 debt maturities with some leftover. Our leverage ratio which was much higher a year-ago, is roughly kind of 3.3 times that to EBITDA at the end of 2009 and trending down as EBITDA continues to grow.

So as Tim mentioned, we feel like we're in a good spot here and we'll continue to focus on our strong balance sheet.

With that, I will turn over to Tim to wrap up.

Tim Armour

Thanks, Greg. So I am on page 15, which is the last slide we'll cover and I hope from the speakers this morning, you kind of get clearly the theme and the reality of the recovery of Janus Capital is continuing.

We have strong fundamentals that position Janus for success going forward. Our long-term relative performance continues to be strong across Janus, INTECH and Perkins. On a three-year basis, 88% of our funds are on the top half. If you look across the landscape and a very difficult market there, a very few firms that have that kind of powerful sustained are constant above par performance.

I mentioned before, we continue to be confident in INTECH's mathematical investment process. It's well-positioned for long-term success. It's going through a near term patch and our encouragement is we think in 2010, there is a good opportunity as the market improves, so will INTECH.

We're very excited to have Dick with us. He brings a global perspective, prudent leadership and I think he will be a constant at Janus. He didn't mention at the front end, but he was born and raised in Colorado. He knows Denver. He is happy to be here. He is moving his family here and we just think this is going to be a good long-term hire.

Greg mentioned the strengthened balance sheet, it improves our position. We're going to continue to manage expenses. We're looking for long-term sustained financial improvement. Then management plans to invest in the business in order to facilitate long-term growth prudently on a very smart pace sequence basis remained focused on profitability.

So, you know, as we enter 2010, we got strong brands. We have consistent long-term performance of both the market. We have demonstrated an investment in research skill on a sustained basis. We do have the ability to attract and hold world-class investment talent. One of the terrific things, since I have been in this chair for seven months, I have gotten to know the investment team a lot better on a personal basis. I am just stunned by the level of quality and sort of the commitment and passion people have for investing here. It's part of the engine and its part of what makes Janus wonderful.

I think we have outside opportunities for growth. We have capacity on our equity side. The bonds are showing great signs of strength and I think we'll have room to grow. Internationally, institutionally, our retirement business, our advisory business, we're well-positioned for growth in all of those categories. We've had above par performance in a very weak equity market.

I think all of us are sort of looking forward to 2010, I would say even when the risk appetite comes back again and people decide to rebuild their portfolios that have been hurt by sort of the downdraft in the market with I think high relative performance of 88% of our funds on a three-year basis, we're best positioned to generate high mutual funds organic growth in the future. I think that just says that we're well-positioned for the potential of the market come back. So, we feel very good about the fundamentals and the prospects for Janus going forward.

With that, I will stop, and Operator, we welcome openings of the questions.

Question-and-Answer Session


(Operator Instructions). Our first question will come from Ken Worthington with JPMorgan.

Ken Worthington - JPMorgan

Maybe first for Greg, a little more flavor on the performance fees. Like, obviously, in the back of the deck, $3.9 million from the funds, you mentioned the rest in the separate accounts. My understanding was separate accounts are mostly INTECH. INTECH performance is down one year, three year, five year, year-over-year. How do you get improving performance fees from deteriorating performance or is the separate accounts in a different area of the firm?

Greg Frost

The one in particular that reaches one-year anniversary, Ken, was a Janus separate account. We are starting to see certain Janus accounts that have performance fee aspects to them.

Ken Worthington - JPMorgan

So Janus separate account meaning non-INTECH like the growth side?

Greg Frost


Ken Worthington - JPMorgan

How big are the assets in the Janus separate accounts now?

Greg Frost

I don't have the number right with me, Ken. It's not hugely material. This one in particular, it's a big number in the quarter only because we [affect] it's a one-year number. The account reached its one-year anniversary and re-accrued for and received cash during this quarter and that's our accounting policy. So it's a little bigger because of that one-year nature, but the overall assets and the performance fees in the Janus side aren't hugely material.

Ken Worthington - JPMorgan

Then, Tim, from the last few quarters INTECH redemptions of $2.5 billion, is that, in fact, a decent run rate for the maybe very near term next few quarters. You mentioned RFPs are increasing. Do you guys kind of feel that the higher RFPs will actually lead to higher sales and kick down those redemption numbers or should we just kind of, for conservativeness, keep that $2.5 billion run rate in our models.

Tim Armour

Well, [Kenneth], my citing point is, obviously, we don't give guidance, but what I would comment on is, very much similar to 2009. The negative flows, while it was contributed from outflows and redemption, it was really the lack of inflows.

Our plan is sort of a conservative plan looking for a sustained level of outflows because these things don't turn around quickly, but we see evidence that we're planning on a higher level of inflows than we had last year. I think that's realistic. We're seeing it in the marketplace. As I mentioned before, that's strongly driven by what we see in the international markets where search activity is increasing and INTECH is continuing to build and win business in that space.


The next question will come from Roger Freeman with Barclays Capital.

Roger Freeman - Barclays Capital

Can we ask, Dick, just some larger bigger picture questions?

Tim Armour

Go ahead.

Roger Freeman - Barclays Capital

Dick, I guess given your prior experience at PIMCO and launching businesses there, in the fixed income area, just, what is this sort of conceptually that you think it sort of takes to get a quality business up the curve to meaningful size. I mean from getting into the institutions sort of marketing the product having a diversified offering. I guess answer it, however, you would like.

Dick Weil

I'll do my best. I think the magic in this business is created with the investors and the heart of what we do in the investment business is investing. So the goal here is the risk adjusted returns that we generate for our clients. I think a successful business approach then takes that raw material, if you will, and effectively packages it and positions it across the various types of distribution.

So I think the goal of a successful business is to take investment excellence and make it available in the context of the various retail and institutional channels, domestically and globally. I think candidly PIMCO has had a great success in that effort. I've learned a lot through my time there and I would hope to bring some of those lessons with me to build on the substantial success already existing at Janus.

Roger Freeman - Barclays Capital

Then I guess maybe for Tim or Greg, I was just looking at the flows in the fixed income complex. It looks like about half of them over the last year were in the short-term bond fund which I presume has benefited from some shift in money markets looking for short duration, better yields. Do you worry about that reversing as that cash goes to higher risk opportunities? Is this (inaudible) were happening?

Gibson Smith

Actually, let me address that actually if I think it's an important theme that's happening in the markets today in light of the zero interest rate policy that exists in the system. I think this trend will continue as long as our Fed policy remains committed to a low short-term interest rates. We are watching that closely. We do think that over time as investors gain more clarity around the economic recovery as well as a policy move out of Washington that some money will move out the curve and fixed income and back into the equity markets. We're watching that very, very closely.


The next question will come from Craig Siegenthaler with Credit Suisse.

Craig Siegenthaler - Credit Suisse

First just on the comp margin, I know it's a difficult item to talk about, but it's a real important item here and it's bounced around a little bit after you adjusted the unusual items last quarter. In the fourth quarter, I'm just wondering is the comp margin run rate a good starting point for first quarter or should we see certain items like payroll tax because of first quarter [lag]?

Greg Frost

We do tend to see a little blip in the first quarter, Craig. That's payroll tax, social security reset, et cetera. So I would suspect we would see a little blip and if you go back over the few years, I think you'll see that with us but other than that, I believe the fourth quarter has a decent run rate.

Craig Siegenthaler - Credit Suisse

Then even with performance fees going down too, that might also have a little bit of impact on it.

Gibson Smith

No. No, because a lot of those expenses, the comp lines is variable with revenues. So you're not going to see necessarily a change in the percentage that I think you're looking at.

Craig Siegenthaler - Credit Suisse

It's the same ratio, okay.

Gibson Smith


Craig Siegenthaler - Credit Suisse

Then just a follow-up on that Perkins value funds and the credit funds really driving organic growth here, maybe you can help us figure out what is holding back some of the global and growth retail funds, you know, especially you had a very good fund performance last year?

Gibson Smith

I think the answer is it's the market that's holding it back. We think it's well positioned for growth but, again, as you know, this market place has A) not been attractive for U.S. equities and two, there has just been fear in the water and it continues. Our hope is it takes time to work out of that but our hope is optimistically that 2010 we'll see sort of a reduction in that fear and a little more confidence and maybe a willingness to take risks.


The next question will come from Cynthia Mayer of Bank of America.

Cynthia Mayer - Bank of America

Question for, Dick, on distribution if that's okay. It's just basic question. If you look at the various channels, you know, the Broker-Dealer, Investment-Only, Supermarket, Institutional, International, do any of them strike you as having a low-hanging fruit which would have a easy to grab in the next year? Or conversely, which team like the channels that have the longest ramp up and need the most investment?

Dick Weil

That's a very smart question but I'm afraid I'm not in a great position to answer it. I haven't yet started it and to give that question an intelligent answer, I would have to know much more about our relative positioning in a more micro sense in each one of those channels and sub-channels than I currently know. So forgive me, but I don't feel like I can give you the best answer at this point.

Cynthia Mayer - Bank of America

I pass that over to Tim then?

Tim Armour

The one thing I maybe would rear back a little bit is calling it low-hanging fruit because I just don't think it exists. I do think to the point a precondition for us is sort of penetrate any of those distribution channels is the sort of this gating item where the equity market grew 2% last year.

It's just there still with the hold back and the unwillingness to jump back into the market, and Gibson just described there is still a focus on keeping short-term rates where they are, and I just think our hope is that if you accept the precondition that maybe the market improves and people's willingness to sort of take a little bit more risk, then I think the strong performance we've had in the intermediary market and the advisory market will work for advantage.

One of the things that we're looking at is as these distributions platforms consolidate and more power is concentrated in more people. I just think the indicated action is, "Oh you better deliver consistent performance because if you don't you're going to just be toast." I think we're rising to that challenge at Janus and especially at Perkins in the near term here where they have had tremendous growth in that channel.

One area I do think where there is opportunity and we got to figure it out is in the Investment-Only channel, 401(k). In that channel, over 50% of the flows are going into the sort of packaged embedded device products delivered by the likes of Vanguard and T. Rowe Price and Fidelity. We are sort of prevented from entering that poker game as sort of an Investment-Only player and yet the participants really want sort of a quality of sort of a brand like Janus or Perkins or INTECH in their portfolios. So that's a challenge to us if we can figure out how to do this I think we will get two things. One is, we will get flows; and two, I think we'll force the big vertically integrated players to open up their platforms to the likes of Janus. So I see that as a real opportunity.

Then finally, in the non-U.S. part of the market, I think that's a big opportunity in order for us especially on the Janus side because INTECH has been very successful in order for us on the Janus side to make headway there we have to have more success on our domestic institutional marketplace.

We're getting cooperation from the portfolio managers to sort of participate in those searches. We are focused on the strategies that make a lot of sense in the institutional market and I think going forward, you are going to see with Dick's help some progress in the institutional market and renewed commitment. So, that's the best answer I will give you.

Cynthia Mayer - Bank of America

If I could just ask a secondary quick question. You mentioned the Morningstar system and you're an expert on Morningstar obviously. When you project forward you see any further loss in fund star ratings as we move into 2010? Or is that process pretty much done just through losing 1999?

Tim Armour

Sort of think through sort of a time series right now of like 10 years from 2000 forward and to 2010. I think if you look at that when the market cracked back in 2000 and 2001, we had some weak performance period. So I think as you go forward, my prediction would be you're going to see near-term better performance coming on and weaker performance falling off. Well, I think it's 51% is where we are in four and five star ratings. I just think over time, that if we could sustain our performance, you're going to see that number go up. That would be my prediction.


The next question will be from Michael Kim of Sandler O'Neil.

Michael Kim - Sandler O'Neil

First in terms of margins, I appreciate the slides on expenses, but how quickly could you potentially rein in some of your reinvesting plans assuming the broader markets do retrench here and would you maybe think about pulling back on some of the hiring initiatives that you talked about earlier?

Tim Armour

Fair question. I guess what I would say is, these investments are designed for the long-term growth of this firm. All that being said, if the market would roll back over significantly as we talked about, they will be measured in sequence throughout the year and if we had to, we could pull back on some, but I think we also pretty passionately that that we need to get back reinvestment of business, we need to get people out there telling the good story. But, if the market would turn significantly down, we could pace back.

Michael Kim - Sandler O'Neil

Then, I guess just in terms of potentially strengthening the balance sheet, if I recall correctly, I don't think you've any meaningful debt coming due until 2017. So does that suggest that you would consider maybe buying back some of your existing debt in the open market?

Tim Armour

I had mentioned that we do have cash on the balance sheet today to cover the maturities coming due in '11 and '12. You're right then the next meaningful one after those would be 2017. I'm not going to disclose our plans. I think we talked about before that we always look for those items that would provide the highest rate of return for our shareholders and that could include a myriad of things including reinvesting back in the business and our subsidiaries as well as taking a look at things like you mentioned. So we're always looking at it. We'll, certainly, also will be spending some time with Dick getting through it and I think you'll see things as we go forward.


The next question will come from Marc Irizarry with Goldman Sachs.

Marc Irizarry - Goldman Sachs

Just in terms of the 30% operating margin target, can you give us some of the assumptions beyond in terms of market performance? Then also on headcount, how is that playing into that margin assumption and maybe, Greg, you could tell us where we are in terms of headcount at the end of the quarter versus at the end of the year versus the end of last quarter?

Greg Frost

Let's see. Let me take that. I am not going to go into all the assumptions that were in that number. I think as we talked about, 30% or higher is always our long-term goal here. There is always going to be periods where you're investing in the business, where the market takes some things away from you that that may not be achievable.

But all that being said, I think that the investments that I talked about, there is obviously some headcount in there. There is, obviously, some of those initiatives aren't necessarily headcount-driven either. So I'm probably not going to answer your question fully, Marc, only because I can't. Headcount-wise to give you the numbers that will be disclosed I think in the 10-K. Anyway, we were at 11.26 at the end of 2009.

Marc Irizarry - Goldman Sachs

What was that like versus the third quarter? I guess we have that number?

Greg Frost

Third quarter, it's probably fairly flat from third quarter. We didn't do a whole lot in 2009 from a hiring perspective other than back fill open positions.

Marc Irizarry - Goldman Sachs

Then just stepping back to INTECH redemptions for a second, it looks like the rate did pick up obviously this quarter, but is there some seasonality in the redemption in the way that some of the manager replacement activity took place that you can talk about? Was fourth quarter a bit more seasonally higher in terms of manager replacement?

Greg Frost

Not necessarily. I think sort of the broader forces in the market of sort of are concerned about taking risk and sort of plans being frozen and needing liquidity is driving much more than seasonality. In fact, we saw a little bit of a step-up in redemptions, but we also saw a step-up in flows for INTECH in the fourth quarter.

We also, as I mentioned, we had above par benchmark performance in the fourth quarter. So I think with INTECH, it defies a simple story. There are a lot of cross currents going on and there is good news and bad news, and over the longer term, we remain positive.


Our final question will come from Bill Katz with Buckingham Research.

Bill Katz - Buckingham Research

A quick question on Perkins. That seems to be a tremendous opportunity for you. I'm sort of curious on the platform overall, you highlighted a large cap fund I saw you hitting on impressive one-year mark. Are there any capacity constraints given the strong results of some of the small and mid cap products?

Tim Armour

Today, I mean, we, obviously, prefer not just for Perkins but for everyone of the funds that we manage, with the trustees and with the business and with the portfolio manager, we're constantly looking at are we bumping up against sort of an asset level that's bloated in and will hurt the investor experience. Right now, I can say no, we're not there. We look at it every quarter.

I think especially as the market dropped down in 2008 that helped actually release more capacity because the asset level went down. The markets come back a bit, so we don't have any current plans. We're not bumping up our head against that. The portfolio managers haven't sort of come forward and say, hey, I can't do this. When I look at sort of the amount of trading volume and the names I have, is making it difficult for me to navigate. We're not there, but I will tell you we look at that all the time and it's not just for Perkins.

Bill Katz - Buckingham Research

My other question is just on INTECH itself, just sort of curious, you mentioned before you said commit to service and [support] were seems logical. Are there any opportunities here to take any expenses out of that part of the business?

Tim Armour

You know, they sort of shrunk the expense base at the end of 2008 as we went through this. They operate pretty leanly to begin with and they have relatively high margins. So, the real leverage is in growing the business and getting close. It's not in sort of driving expenses out.

But if we had a significant downturn from where we are here, we have the ability and working with INTECH and we have had that discussion, what would you do next. But the right answer for INTECH is sort of focus on serving their clients and doing a good job on the investment side to sort of drive the performance over the long-term and that's we remain committed to that.

All right. So thank you very much. We appreciate your participating in this and letting us share our story with you and thanks again and welcome again to Dick Wile joining us. Thank you.


Ladies and gentlemen, thank you for participating in today's conference call. You may now disconnect.

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