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Janus Capital Group Inc. (NYSE:JNS)

Q1 2014 Earnings Conference Call

April 22, 2014 10:00 a.m. ET

Executives

Richard Mac Coy Weil – Chairman & Chief Executive

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

Analysts

Daniel Fannon – Jefferies LLC

Craig Seigenthaler - Credit Suisse AG

Mathew Kelly – Morgan Stanley

Robert Lee – Keefe, Bruyette & Woods

Michael Kim – Sandler O’Neill

Cynthia Meyer - Banc of America Merrill Lynch

Ken Worthington – JP Morgan Chase & Co.

Marc Irizarry – Goldman Sachs

Bill Katz – Citigroup

Operator

Good morning. My name is Anna and I will be your conference facilitator today. I would like to welcome everyone to the Janus Capital Group First Quarter 2014 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.

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 arrive 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’s my pleasure to introduce Dick Weil, Chief Executive Officer of Janus Capital Group. Mr. Weil, you may begin your conference.

Richard Weil

Thank you, Operator. Welcome, everybody, to the first quarter 2014 earnings conference call for the Janus Capital Group. Thanks very much for joining us. As in prior quarters, I’ll start with a summary. I'll turn to our Chief Financial Officer, Jennifer McPeek to take us through the results in more detail and then together we’ll turn to a couple of special topics that we hope will be useful to go through for the group in some detail and lastly, we’ll take open calls on the telephone as we’ve done in the past. So thanks again for joining us.

Q1 2014, the obvious headline story is net flows of $1.7 billion out, which is a significant improvement compared to prior quarter and compared to a year ago. We will get into the details of this number in two ways. As is normal for us, we’ll take you through the flows by investment discipline, by fundamental equity, mathematical equity and fixed income. And then in a special section of that, we’ll take a look at it another way. We thought it might be helpful for you to get some perspective on the volatility that you’re seeing in this number by taking a look at flows from a channel perspective as we think about channels.

Obviously $1.7 billion is a dramatic improvement over the 6.2 in prior quarter. It’s a drastic improvement over the $3.9 billion in net outflows in the first quarter. But we would call your attention to the fact that quarter to quarter net outflows, particularly as affected by our institutional business outside of the United States is a pretty volatile number and it’s hard for us to predict on a quarter by quarter basis where this is going. So we’re encouraged pretty much with the progress we’ve made in this quarter, but the real important thing for us to do is to continue the hard work of putting up improved numbers going forward.

The second thing I’d like to call your attention to about the quarter is while some of our funds struggled in some of the market conditions in the first quarter, value, outperforming growth, or some of the smaller caps, performing large caps, the thing that is particularly important from our perspective is that our three year track records have improved significantly over last year. At the end of Q1 2014, 64% of complex wide mutual fund assets are in the top two Morningstar quartile, compared to 31% a year ago. For us, this improvement is significantly important, obviously because in addition to the client relationship and selling functions, we have performance fees at Janus Capital Group which are significant and have been a drag in the past and this improving three year track gives us an opportunity to see significant improvement in our performance fees. And Jennifer will take you through the more detailed perspective on that improvement at the end of this section.

Third, our balance sheet, I’d just like to call attention to that. We have generated over $200 million of cash flow from operations over the last 12 months and in April we retired another $39 million of debt that came due. As you all know well from prior calls with us, it has been a priority of ours to maintain a strong balance sheet from the perspective that success in our business requires that we’re good long term partners for our client, that we’re good long term partners for our employees and for, candidly, our owners. And that partnership requires that we’re stable through the predictable cycles of the market and that stability in turn requires a strong balance sheet. So we’ve been working over the four years that I’ve been here to strengthen that balance sheet and I think we’ve arrived at a very good place with a very strong balance sheet and continued generation of significant positive cash flow from operations. So Jennifer will take you through that in some more detail further in the deck as well, but as you all know, that strength enabled us to raise the quarterly dividend by one penny recently.

Let me take just one more moment to talk about our business strategy going forward. As we’ve discussed on prior calls, we’ve been pursuing the strategy that we’ve titled Intelligence Diversification, and the main message here for 2014 and looking ahead is that we’ll continue to pursue that strategy, but let me review with you what that means for a moment. As some of you may recall, when I arrived four years ago, I took a look at the Janus business model and I thought, because of the volatile nature of the underlying beta in U.S and global equity markets, because of the volatility associated with the alpha we were seeking to produce in our performance, in our business model because of the volatility introduced by some of the performance fee structure on our mutual funds. And on top of those elements, the volatility induced by what was then a much more significantly levered balance sheet, felt to me like no matter how you operated the company; it was destined to be a fairly volatile roller coaster ride under that set of business conditions.

And so we evolved the strategy of Intelligence Diversification which said let’s continue to do what we do very well on the Janus platform, continue to do high conviction equity, a larger growth equity management and obviously different at Perkins with value and mathematical at INTECH. But let’s continue to be what we are and be excellent in that, but let’s add to that some diversifying elements in terms of product, primarily thinking about fixed income at the time and more recently we’ve been focused a little bit on liquid alternatives. And then not just products, but also client type, diversifying outside of the United States with our global business and diversifying with more attention and focus on institution as well as retail. And again, the idea behind that was in order to be the best possible partner for our clients, for our owners and for our employees, I thought it was important to evolve the business to a less volatile and in my way of thinking, more stable framework through this strategy.

And so that’s what we’ve been pursuing and we’re making good progress down that road. It’s obvious and important to note that organic changes like this take a significant amount of time to bear fruit, but if you look at our priorities, stabilizing our equity franchises, growing fixed income, building better distribution in retail and institutional, delivering on our client promises, and providing a foundation underneath all of it of operational excellence, we’re clear that these are the right priorities for us and we accept that they won’t happen overnight.

We feel like we’ve made very good progress over the last several years and we look forward to continuing that progress, but that remains the focus of our strategy. In a more narrow sense we recognize that essential to that strategy, essential to keeping our client promises, essential to stabilizing our equity franchise is first and foremost just getting some better investment performance in some of the areas where we haven’t done that as well as we could have and should have and that’s been obviously the highest priority. Next is making sure that we continue to do a great job in developing client relationships and supporting those relationships through time because in the end the coin of the realm is stable, happy, long term relationships with your clients, with your owners and with your employees and that’s what we aim to deliver.

With those words, please let me turn it over to Jennifer.

Jennifer McPeek

Thank you, Dick and good morning again everyone. So if you’re following along with the materials, I’ll begin on page five. I’ll start by highlighting the firm’s operating results for the quarter. First quarter Average AUM improved to $173 billion from $170.3 billion in the fourth quarter of 2013. Total revenue rose to $230.2 million, which was the result of the increase in average assets and some improvement in performance fees. This represented a revenue increase of 2% from the December quarter and an increase of 7% year over year.

Operating income was $66.9 million, nearly flat on a quarter-over-quarter basis and an improvement of 22% versus the prior year. Operating Margin for the quarter was 29.1%. Earnings per share was $0.16 this quarter. That compares to $0.21 in the fourth quarter and $0.15 a year ago. The quarter-over-quarter decline was due to the below the line item of fee capital mark-to-market, other income and taxes.

Turning now to slide 6, we summarize our investment performance as of March 31. Dick has already touched on the Complex-Wide Mutual Fund and I have a couple more highlights to add. The one year Fundamental Equity metric improved from quarter-over-quarter and the three year Fundamental Equity metric had more noticeable improvement as poor performance from the first quarter of 2011 rolled off. The percentage of Fundamental Equity Assets in the top two Morningstar Quartiles on a three year basis improved quarter-over-quarter from 39% to 59%. The three year metric as we’ve noted is particularly relevant since it’s also a performance fee measurement period. Fixed income performance continues to be very strong, with similar results to what we’ve shown previously.

INTECH performance showed moderate changes from the prior quarter, with the largest change being in the five year number, which moved from 42% strategy of beating the benchmark to 58%. For INTECH’s institutional client base, long term risk-adjusted performance isn’t much relevant.

Page 7 is a flows presentation. In the fourth quarter, as Dick noted we had outflows of $1.7 billion which compared to $6.2 billion of outflows in the prior quarters. Fundamental Equity flows in the upper right hand corner represent both Janus' Equity and Perkins' value, and we saw first quarter net out flows in this discipline of $2.3 billion which compares favorably to fourth quarter net outflows of $4.9 billion. Janus equity runway flows improved and that improvement was partially offset by increased net outflows in Perkins’ value strategy. Perkins’ strategies had $1.8 billion in outflows in the first quarter compared to $1.1billion in the prior quarter. And if you may recall during the fourth quarter we also had a large mandate loss of approximately $2 billion which was from a Janus Equity strategy. We did not have a similar loss this quarter. Moving on to INTECH in the lower left hand corner, we saw an improvement here in the flow story. However, as you can see in the five quarter historical trend, these mathematical flows vary significantly.

Turning to Fixed Income, flows improved moderately, primarily due to a decline in our redemption rate. Our first quarter annualized organic growth rate of 10% for fixed income, compares quite well to the active taxable bond industry growth rate which was in the mid-single digits in the quarter. As we stated last quarter, as we’re successful in growing our global institutional business and continue to compete for larger mandates, we expect the lumpiness in our flows to continue and as I’m sure you do, we find that difficult to predict.

Looking to Slide 8, management fees increased slightly quarter over quarter, with higher average assets being offset by fewer days in the quarter. The weighted average management fee for the quarter was 48.8 basis points. Performance Fees improved to minus $15.9 million dollars. This decomposes to minus $17.9 million in mutual fund performance fees and positive $2 million in separate account performance fees.

Slide 9 breaks down our operating expenses. Operating expenses increased $4.1 million compared to last quarter, with the compensation line item shown here in blue being the biggest driver of that increase. The quarter over quarter comp increases came from two areas. One, the seasonally higher payroll taxes and retirement contribution; and two the adjustment that we did back in the fourth quarter which as you probably recall resulted from an increase in our non-cash incentive pay percentage. The LTI bar which is shown here in green, declined by $5.8 million. That was driven by mutual fund share awards mark-to-market and a decline in our subsidiary SPI. Note in the footnote to this page, our current estimates for a full year LTI expense is about $60 million or about $48 million for the rest of the year. So that should help you in your modeling. This projection assumes flat AUM going forward. As actual results vary, we’ll update the full year estimate each quarter.

Our total compensation to revenue ratio, which includes that LTI expense, was 40.2% this quarter.

Slide 10, a look at our balance sheet. Total cash and marketable securities declined by 7% compared to the prior quarter, which was driven primarily by compensation related movements, which includes some seasonal vesting events and our annual bonus payments. As I mentioned during last quarter’s call, our strengthening cash positions is enabling us to consider returning more capital to shareholders. In that vein, we just announced an increase in our regular dividends. We also repurchased shares this past quarter, approximately $11 million of share repurchase. I’ll note that this level was up from the prior year’s first quarter, which is the most relevant comparison point. Share repurchase is something we’ll continually be evaluating based on market conditions and company strengths.

Of note and not depicted i0n these charts, on April 15 we retired 39 million of our senior notes as insured. We retired those with cash on the balance sheet. We also continue to intend to retire about 60 million in converts which is going to mature in July. We intend to use cash to retire that. Post these two deleveraging events, our credit strength will be higher than it’s been since before the crisis. I’ll reiterate Dick’s point that this is the culmination of a deliberate multiyear focus on building our balance sheet to support our business as the market fluctuates.

Now as we’ve done on prior calls, we would like to address a few of the frequently discussed topics that came up over the course of the quarter. Dick’s going to walk through a discussion around flows and I’ll finish up with a quick update on our performance fee outlook.

Richard Weil

Thank you, Jenifer. Turning to page 12, we present a breakdown of our flows by channel, by the sales channel and the way that we think of our business. Along the right side of the page we have Retail Intermediary, U.S Institutional and International being the three largest channel pipes in the way that we look at the business. Retail Intermediary for us is $107 billion asset base, ranging across things like our advisor business, our defined contribution business, our direct business and things of that nature. You can see that while the aggregate net flow number has demonstrated significant volatility, particularly in this quarter it’s moved up almost $2 billion from $5 billion net out in the fourth quarter of 2013 to $2.2 billion net outflow in the first quarter of 2014, the big difference there is the level of redemptions.

The level of gross sales across the topline has perhaps been a bit more consistent. Driving that number is of course as we discussed last quarter, we had a more than $2 billion single redemption in this channel in the fourth quarter of 2013. Its absence in this quarter speaks loud into why the gross redemption number moved from $10.5 billion to $7.4 billion net outflows and that really drove the change in that line.

Looking at the next box on the right hand side of the page, U.S Institutional; this is about a $42 billion channel for us. About 80% of those assets are managed in resident at INTECH per mathematical manager. As you look across those US Institutional numbers, I think you can see the pressure that we’ve talked about in prior quarters that INTECH faces in the US Institutional market. Failing new business in this space is tough at a time when U.S Institutions have been reducing their exposures to U.S equities in general as a general trend, and the second general challenging trend has been as you all know well, some of those institutions have rotated towards passive exposure in the U.S large-cap space for their asset allocation efforts and those two trends have been challenging and remain challenging, and I think that goes a long way to explaining why the gross sales number has been relatively modest. The redemptions are a bit lumpy and they’re hard to predict and you can see how they’ve laid out since the first quarter of 2013, but overall I think that’s the channel story there.

If we turn to the third box at the bottom of the page on the right side, International. This one is comprised of both retail and institutional assets. If you look, here the gross sales line demonstrates a pretty significant amount of volatility moving from a small number of $1.5 billion in the second quarter of 2013 to the very next quarter the largest number on the page is $3.9 billion of gross sales in the third quarter of 2013. That volatility in the sales line is primarily driven by institutional business, the lumpy institutional business in that historical case, large institutions in Asia doing business with INTECH. So in this channel International, I think the significant volatility you see is driven a lot on the gross sales line and it’s driven particularly by large institutional mandates when they happen to be won by INTECH. As we’ve talked about in prior calls and quarters, that’s not a particularly consistent feature from quarter-to-quarter. And so I think the combination of those three channels and the volatility we described there explains and sums to the numbers on the left side of the page, the total company long term flows.

And our caution here, in some cases, for instance the International businesses, it’s the gross sale line that seems to be more volatile and other cases it’s the redemption line that seems to be more volatile. But it’s pretty hard for us and we believe pretty hard for any of you to reliably extrapolate flows from quarter to quarter. So we simply caution that. These things have a certain level of volatility and indeed as we hope to grow our success in institutional channels, it may be that that volatility even increases with what will hopefully be more large lumpy institutional wins in the future. We’re hopeful that this view of flows by channel is useful to you in getting a deeper understanding of our performance and the changes that occur from quarter to quarter.

With that I’ll turn it back over to Jennifer McPeek.

Jennifer McPeek

Thank you, Dick and I’ll turn to the last page of our prepared remarks. Performance fees, we saw this quarter improvement in our mutual fund performance fees, which is both exciting, it’s long anticipated. Most of you that follow our stock have taken our suggestion to build a bottom up fund by fund performance fee model. Hopefully this slide will simply help you calibrate those models. I want to emphasize first that this page is neither a guidance on fees nor a prediction of fund performance, but rather simply to illustrate how we think about this internally, how we model the range of outcome for that particular revenue line item. Note, specifically that not only fund performance, but also asset levels and benchmark performance will affect the actual results.

With those disclaimers out of the way, first the left hand side of the page. Here, this is simply a historical chart that shows our actual performance fees each year. You can see again that in 2012 and 2013 we were close to the maximum negative performance fees on most of our funds. That minus $88 million in 2013 is the base line for comparison on the right hand side of the slide where we’ve included three potential performance scenarios for 2014. These scenarios start with actual first quarter performance and then show a range of performance expectations for the remainder of the year. The range is from plus to minus 400 basis points which is across all of the funds that have this fees. Then you can see in the right hand side of the slide, the Delta under these three scenarios in performance fees for the year of 2014. So that $ 42 million, $32 million and $24 million is the difference in performance fees versus what we saw in 2013 under the three scenarios.

So stepping back, the conclusion that you can draw from looking at these ranges is that, unlike a year ago when there was fairly little range of performance fee revenue expected, this year our financial results can vary more based on this performance factor. These modeling scenarios that we’ve shown resulted in a $18 million swing from best to worst and show that even in our poor performance scenario, we do expect that we would see significant improvement versus those 2013 models.

So with that, I would like to turn it over to the operator and open it up to your questions. Operator?

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen at this time we will conduct the question and the answer session. In the interest of time, questions will be limited to one initial and one follow up question. (Operator instructions). We’ll move first to Dan Fannon with Jefferies.

Daniel Fannon – Jefferies LLC

I guess just starting with Dick, following up on your comments around the international segment. Outside of INTECH, what other components of the business potentially are driving the increasing growth sales? And then as you look forward, are there products that are gaining more traction in that segment that maybe are smaller and not on the radar for us at this point?

Richard Weil

Sure. Thanks for that question, Dan. Obviously INTECH has been a big part of the story, particularly looked at from an asset perspective. There are also some significant revenues, but less from an asset perspective driven off the Mutual Fund businesses that we have particularly in Europe. But we’ve made strides recently to build out in Taiwan and Hong Kong and we’re hopeful that those businesses can drive forward. Our fixed income business has done quite well, particularly in Japan with the help of our partners at Dai-ichi and their affiliate DIAM. And so Fixed income I think continues to have significant opportunities outside the United States, but that’s not all. I think our Janus Equity strategies have some prospects. It’s a bit of a diverse set of opportunities and we’re hopeful that over time we learn business in the liquid business as well. So it’s a fairly broad group of strategies that have opportunities outside the United States. But it’s fair to say that from an asset base, INTECH has been driving a lot of the story looking backwards and it’s fair to say that on a revenue basis Retail looks a little more important than it does on asset basis.

Daniel Fannon – Jefferies LLC

Okay great and then just the follow up. I guess thinking about this year and the strength of your balance sheet and what you’ve -- you have some maturities coming due. Should we continue to think about 2014 as a delevering year and given the limitations with the Dai-ichi ownership stake that buybacks really won’t get much more than offsetting a dilution?

Jennifer McPeek

Dan, this is Jennifer. Thanks for the question. First part of your question yes, will continue to be a delevering year for us. In April we retired some notes and we have some more coming up in July. So we will be continuing a long our delevering path. Regarding your second question around share repurchases, we’re continuing to look at that. I think you saw us do some share repurchases in the first quarter and as our cash position continues to strengthen, we’ll be looking to increase our payout ratio, but I don’t have anything specific to give you right now.

Richard Weil

Let me just jump with one last addition to Jennifer’s comments. I think you referenced in your question Dai-ichi and unless I misheard you. There’s nothing in our deal with them that restricts our ability to buy back shares. We have to make sure they maintain a certain percentage so there’s some mechanics and plumbing between us and them, but we are not blocked from share repurchases based on our relationship with Dai-ichi.

Daniel Fannon – Jefferies LLC

Of those that if they -- if you buy back your percentage goes above 20 and then that’s -- in the original agreement that was where that threshold was kept and so they would have to either sell some of their stake as a result. Is that true?

Jennifer McPeek

Yes. You can look at the agreement as it’s filed, but that’s a more of a technical issue rather than a strategic or capital planning issue for us.

Operator

We’ll now move to Craig Seigenthaler with Credit Suisse.

Craig Seigenthaler - Credit Suisse AG

Just to Dan’s question, how do you solve that because if you can’t buy back stock, if that’s something that you can revise the contract with Dai-ichi?

Richard Weil

I must not be speaking clearly as I think. I’m sorry, Craig. I tried to say in answer to Dan’s question that the agreement does not block us from buying back shares. So forgive me for repeating, but it’s the same answer to you. We are not blocked from repurchasing shares. If we push the percentage of Dai-ichi ownership up to high, there’s some plumbing that we have between us and Dai-ichi to pull in some of their shares and there we have a very good relationship with them and that’s possible. We do not -- there are some mechanics involved in the execution of that, but essentially they’re very cooperative with us and we have the opportunity to buy back shares if that’s the judgment our Board of Directors makes.

Craig Seigenthaler - Credit Suisse AG

Thanks Dick. Very clear and just us my follow up, how do you weigh the attractiveness of share repurchases versus special dividend here because that could be another option for you guys?

Jennifer McPeek

Sure Craig. There are many options, increasing our regular dividends, special dividends or share repurchases. We like to have a balance among those three ways of returning capital. I think you’ve seen that in the past. One of the things about share repurchases that’s attractive to us is as we’re getting stronger, and there’s a lot of uncertainty still in the pace at which our fundamental strengthens, share repurchases give us a lot more flexibility. We’re looking into that as we’re going forward, able to dial that up or down as we see the pace of improvement in our business fundamentals. So I will say that that has an element of attractiveness for us in terms of just giving management the flexibility.

Operator

We’ll now move to Mathew Kelly with Morgan Stanley.

Mathew Kelly – Morgan Stanley

I just wanted to -- sorry about the echo, but I was wanting to touch on, it looks like when you look at some of the monthly data, you had some nice wins in Life Sciences and also you’re flexible in short term bond strategies. So was just curious if you see incremental demand picking up into the second quarter or if that’s just a month to month basis there and any other trends, any other funds that I’m missing that you see incremental stronger demand?

Richard Weil

I think we’ve been focused on the fact that the really well performing funds on our platform will have significant opportunities. And I think what you’re describing is just essentially the execution of that. We have a talented retail sales force that’s able to do quite well when they’re given reasonably strong performance to work with. And obviously Life Science this year, the additional thing has been there’s been a huge wave of interest in that sector, not just for us but in the market in general. So it’s particularly nice when you have excellent performance and an excellent team in an area that’s of special interest to the client base and that’s what been happening in Life Science. But more broadly speaking, this is just an example of the fact that when we put up strong performance, we’re able to move that significantly forward in the marketplace and that demonstrates the strength of the team and the opportunity going forward.

Mathew Kelly – Morgan Stanley

Okay, thanks. And then following up on that, in terms of your marketing spend, obviously you’ve been kind of delevering the balancing, kind of conservative on some of your expenses. But is there a point when some of the acceleration in some of these fronts that you’re seeing in traction for, we just talked about Life Sciences, but assuming there’re others as well, is there a point when you think that you kind of loosen up on marketing spend a little bit or you can drive stronger growth than you are now with higher marketing spend?

Jennifer McPeek

Hi Matt. I’ll attempt to answer that. The short answer is yes. There will be a point when the marketing spend is going to, in our opinion, deliver a higher return and that is definitely tied to performance. So short answer is yes, we’ll definitely see that becoming a little bit more attractive in terms of return on investment. But I’ll couch that with a moderation in assuming an increase in spend. I think nothing extensive, maybe single digits increases on a percent basis would you expect to see in the near term.

Mathew Kelly - Morgan Stanley

Okay thanks.

Operator

We’ll now move to Robert Lee with KBW.

Robert Lee – Keefe, Bruyette & Woods

I was wondering if we could get a little bit more color on the fixed income business. Clearly performance there has been pretty good and it’s been a steady source of inflows, but can you comment a little bit on your efforts and where they stand on broadening that to the institutional market, away from retail markets, whether it’s in the U.S or Japan or elsewhere and just kind of where you feel you stand with that?

Richard Weil

Sure. Thanks for the question. Over recent years, our fixed income businesses has been successfully growing at a nice clip because their focus which has been capital preservation and making sure that they’re conservative in times of high volatility and risk as an approach to credits based fixed income management, is a bit unusual. Most of the credit base managers are more volatile and significantly less protective on the downside. And so our approach to the fixed income business has given our team some differentiation from some of the other credit base managers and that’s been nice. And then they’ve done a terrific job of putting up strong numbers consistently over time and that’s obviously the most important element. So they’ve had opportunities in Retail and in Institutional and it’s been domestic and abroad. The Japanese market in particular with our relationship with Dai-ichi and DIAM has been a successful market for them.

That market tends to move in product cycles and we’ve been through one where they were very interested in U.S fixed income and to a certain extent international yield based fixed income. That’s been good for our fixed income business and for sales of fixed income in general in Japan. That appetite is probably rotating more towards equities right as we sit, but that’s a day to day, month to month thing. And so who knows how that develops on go forward basis and we’ll hope to be able to participate in that as it evolves. They’ve also had Institutional and Retail opportunities elsewhere outside of United States in the world. So it’s a pretty broad based appeal. If there’s a single sort of thread to it, global interest in U.S fixed income would be an important thread in the mix if you were looking for just one thread, but it’s really a more complicated story than that and they have opportunities, a pretty wide in geography and also in market segment.

Robert Lee – Keefe, Bruyette & Woods

Okay, thanks. And maybe as my follow up, you talked about clearly that you would expect volatility of sales in the Institutional channel at INTECH as mandates come in and out. And so I guess maybe it would be helpful there to get some color or perspective in number one in the quarter just past with the pump up in the gross sales driven by a small handful of mandates? Was it just a happenstance in maybe a large number of Institutional of mandates funded? And any color you may have on the pipeline and changes in RSP activity files, that type of thing.

Richard Weil

In the first quarter INTECH was successful and was funded at an increased amount of significant sales. I think that the increase was north of $1 billion and they were successful with those new mandates getting us funded in the quarter. As we pointed out, their wins tend not to be quarter to quarter consistent. So while we are trying every quarter, they may not fund at the same rate every quarter. The INTECH story more broadly speaking continues to be a balance of a lot of better opportunities outside of the United States and some pressure in the U.S Institutional businesses we’ve described now several times. And that balance creates the net opportunity set for INTECH on a go-forward basis. And I can’t give you more intelligent color than that, I don’t think.

Operator

We’ll now move to Mr. Michael Kim with Sandler O’Neill

Michael Kim – Sandler O’Neill

My first question, now that Enrique has been in his seat for I think around six months, just wondering where he is in terms of putting a stamp on the team and the investment processes and how you’re thinking about the timeline in terms of measuring his progress.

Richard Weil

I think Enrique is off to a terrific start. He’s a strong, mature leader and he’s been a terrific addition to the team. He doesn’t manage the funds. He manages the team, the process, the culture, the risks sorts of things. Those things take time to evolve. And as good a start as he’s off to, he’s only been on the ground now for six to seven months, and it takes time to fully implement those things. And so obviously it’s an ongoing process, but we’re thrilled with his start. We’re thrilled to have him on the team and I think he’s doing the right things. The linkage between that and performance in any given month or quarter is a little more indirect. He’s trying to create the conditions that maximize the opportunities for everybody to deliver success. And I think he’s making improvements and strengthening the team every day in lots of ways. And so that’s just an ongoing process. I don’t know how to give you a map of where he is now versus the future in terms of his so-called imprint. I can only tell you, I think he’s off to a great start. He’s making positive contributions and I look forward to us continuing to get better on an ongoing basis.

Michael Kim – Sandler O’Neill

Okay. That’s helpful. And then my follow up question, I know the institutional equities business beyond impact isn’t necessarily that bigger part of your overall asset base, but it does sound like institutional demand for more concentrated equity strategies is picking up. So just wondering if you’re seeing signs of that trend and how you might be positioning the franchise to maybe capitalize on that dynamic.

Richard Weil

The most important thing on that dynamic is going to be continued improvement in investment performance by our concentrated equity strategies. And as you know, we’ve been through some changes in terms of portfolio management leadership on those strategies. Doug Rao on the 40 and Marc Pinto on the 20 are our two most prominent concentrated equity strategies on the US side. And I think they’re hard at work strengthening those track records. That would be the most important element to allowing us to participate to a significant degree and increase the institutional demand and we’re not there yet. We’re not seeing institutional demand for those products play a significant role in the near term.

Operator

We’ll now move to Cynthia Meyer with Banc of America Merrill Lynch.

Cynthia Meyer - Banc of America Merrill Lynch

Maybe a question on performance; it seems like as you point out your three year performance is improving, but also your five year is declining a little bit and I know -- I don’t know if this is rolling off 2009 or something else and I know it doesn’t drive performance fees. So in that sense it’s less important, but I’m wondering if maybe it drives Morningstar ratings somewhat. And if you could talk a little bit about whether Morningstar ratings, when you look in your crystal ball, how they look and could that be any headwind to retail flows. Thanks.

Richard Weil

Thank you, Cynthia. I don’t have a roll forward forecast on the Morningstar 10 year ratings handy. Obviously the five year accounts is part of that 10 year period that the Morningstar looks at. We care about those Morningstar ratings over time and they’ll move around a little bit as quarters roll on and roll off from distant history. The three year number is particularly important not only because of the performance fee, but because I think a lot of the marketplace focuses on that in the most significant measurement period, obviously not Morningstar but a lot of the other folks in the marketplace pay a lot of attention to that. But we‘re focused on the Morningstar numbers. We present them here regularly as an indication that we think they’re important. And small variations are not too, too meaningful, but we need to keep moving up the curve with stronger performance on a go-forward basis. I’m afraid I don’t have what you’re really asking for which is just a roll forward view of those 10-year Morningstar numbers.

Cynthia Meyer - Banc of America Merrill Lynch

Okay, no problem. And then maybe a question on the added disclosure that you gave, it’s really interesting on flows by channel. And one question I have is on the international, the annualized redemption rate, as you say it’s very lumpy, but it seems fairly elevated for a new business and I’m wondering is that the nature of the clients or the channel or is there something else going on because it looks like averaging 30% or so. So would INTECH for instance have to replace those assets at a 30% rate all the time?

Richard Weil

It really is a combination of things. It’s a combination of some retail and some institutional. International retail tends to be a pretty darn high redemption rate business. It also is true that the business that we sell in Japan tends to be a pretty high redemption rate business as a structure of those marketplaces. So that plays into it. And then obviously some of it is the lumpiness of institutional mandates on the INTECH side as well. So it’s a combination of those features. It’s not easy to sort of simplify it into a single thread of explanation.

Cynthia Meyer - Banc of America Merrill Lynch

Right, but it doesn’t sound like it’s necessarily something that will come down to something more like the U.S Retail rate of 25% or something.

Richard Weil

Really hard for me to predict, but I think you understand it as well as can be understood. Predicting it is going to be difficult.

Jennifer McPeek

And I’ll add on to that, Cynthia that a lot of the retail markets that we are growing in overseas, they have high churn or high redemption rates, but they also have high fees. So, on a profitability basis they’re attractive, but they are not the same dynamics as you see in the U.S retail markets.

Operator

We’ll now move to Ken Worthington with JP Morgan

Ken Worthington – JP Morgan Chase & Co.

You indicated one of your priorities is to strengthen global distributions. And you’ve got some very strong performance in Contrarian, Global Life Sciences, balance and some other products. In terms of expanding distribution within the U.S, is this selected performance strength starting to either change the nature or number of conversations you’re having with potential new distributors? And if you can give any color in terms of the question that would be great.

Richard Weil

I think we’re clearly seeing interest and opportunity in Life Sciences and in Contrarian. The managers there have done an excellent job in -- I can’t narrow it down to new distributors versus preexisting distributors quite so neatly. We have a lot of relationships with most of the significant distribution already. So I’d be speculating if I talked about it in terms of new distribution versus preexisting distribution. But those things are a story of excellent performance in areas where folks have significant interest in and we’re obviously working every day to maximize those opportunities.

Ken Worthington – JP Morgan Chase & Co.

Okay. But it doesn’t seem like its opening new doors for example?

Richard Weil

Everything helps, right? Of course it is. The thing is I can’t … I don’t have an isolated fact set for you. I don’t have data to back up whether a couple of anecdotal things that have been reported in this. So I can’t really give you a rational picture of that story, but obviously in this business strong performing fund enhance reputation and enhance relationships and that I’m sure is happening out in the field. I just don’t have data on new distribution relationships and how much of that is due to those two firms.

Ken Worthington – JP Morgan Chase & Co.

And then in the past you’ve updated us on quarter end DIAM and Dai-ichi AUM. Would you be willing to do that again?

Richard Weil

I’m fumbling for the number here. We did not have in this quarter significant new DIAM and Dai-ichi sales in Tokyo. As of March 31 we managed $1.1 billion of assets for them, but the quarterly flows did not reflect a big delta from those sources.

Operator

We’ll now move to Marc Irizarry with Goldman Sachs

Marc Irizarry – Goldman Sachs

Dick, can you give us some color on fixed income? The organic growth rate picked up there, but it looks like it was more about redemptions slowing while small gross sales for fixed income maybe slowed a little bit too. Can you just give some perspective on your fixed -- more perspective on your fixed income business maybe the on the Retail side. Are you gaining? Where do you see the share gains coming from? And maybe just speak a little bit to the ins and outs there on fixed income.

Richard Weil

Sure. I think the team has done a terrific job. I think they are subject to the fear-greed cycle around rising rates and in fixed income markets more generally. But they have opportunities as clients are looking to rotate out of some of the more traditional players and looking for new things to add on to their menu. I think with some of the upset in the fixed income markets at other houses, our team has had an opportunity to do a little better and hopefully that continues going forward. We watch the retail redemption rates like you do. We don’t always know everything that goes into those decisions. It seems like a big part of the retail flow decision is fear of higher rates. And as that fear ebbs and flows, it seems to drive a lot of the retail redemption rate story, at least that’s what it looks like to us. But our guys have consistently put up good numbers. They stay true to their philosophy and there are opportunities that will ebb and flow a little bit with those forces, but I think it continues to be good.

Marc Irizarry – Goldman Sachs

Okay. And then just in Perkins and value, I guess that’s the one area where you saw redemption rates pick up there. Was there anything notable in terms of lumpy outflows there? And how should we think about the progression? I guess there’s been a little bit of a rotation if you will between growth and value that’s happened I guess recently. I don’t know if you’d give any recent color on maybe how flow trends are tracking there.

Richard Weil

I think Perkins has suffered as a conservative value manager in a fairly straight up market environment. That’s not going to be fixed overnight. Clearly we saw the net outflows worsen quarter to quarter and that’s a difficult situation. It’s worth noting and I think all of their composites except for midcap outperformed the index in the quarter. Now, midcap is of course their largest product and most economically significance. So, that’s a fairly big exception. But they’ve taken steps to strengthen their process and hopefully those will continue to prove that over time. We’ve just got to hang tough through what is a challenging market environment for what they do for a living.

Operator

We’ll now take our last question from Bill Katz with Citigroup.

Bill Katz – Citigroup

Okay. Thank you for getting me on. First questions, I might have missed it and I apologize. Did you quantify or qualify the pipeline for new business where it stands today I mean institutional business maybe a quarter ago or a year ago? I heard your comments on INTECH, the push-pull between U.S and non-U.S, but I didn’t catch what you might have said on the pipeline away from that.

Richard Weil

I didn’t comment on the pipeline. I don’t know have those figures for you today. I think INTECH continues to see significant interest outside the United States and we’re hopeful that can be converted into fundings in future quarters. They continue to see a difficult U.S marketplace where the U.S institutions are not really re-equitizing into U.S equities. And to the extent that they’re shifting, some of them are shifting into passive as opposed to active. And so the US continues to be a pressured market for them and the non-U.S markets continue to be markets of significant opportunity and that hasn’t really changed dramatically in recent quarters.

Bill Katz – Citigroup

Second question, this is on expenses. I’m sort of curious. If you look at your base comp, I know there’s some seasonal impacts here. I think basis of about 35% of revenues which I recall might be towards the higher end of your range. How are you thinking about the outlook for base comp on a go forward basis, particularly if some of the performance fees roll off against where you might be on any further build out for distribution globally?

Jennifer

I’ll go ahead and take that one, Bill. Thanks for the question. You’re right on the seasonality of the base comp expense. I think it’s about three and change in first quarter seasonal issues. We are trying to internally manage too our total comp to revenue number and that’s why we started providing that in, I guess, last quarter’s earnings call. Looking at that number, if you combine our range of low 40s and total comp to revenue and then take out the LTI guidance which we’re now giving, I think that gives you a pretty good sense of where our cash compensation will end up. It does fluctuate with revenue because of the way -- with revenue and with profits because of the way that we manage our variable comps. Hopefully that gives you enough to put a good number there.

Bill Katz – Citigroup

I guess you envision any step up spend to further build that distribution at this point?

Jennifer

If we do, it would still be within the ranges of our total comp to revenue targeting. So yes, we’re growing the business and assets are growing. Distribution is a good place for us to spend.

Bill Katz – Citigroup

Got you, okay. Thank you for squeezing me in and thank you.

Operator

And that does conclude our Q&A session. We’re on our way to turn the conference back over to Mr. Weil for any additional or closing remarks.

Richard Weil

We appreciate everybody’s attention this morning. Thank you very much. I hope everybody had a nice Easter weekend and we look forward to talking to you next quarter.

Operator

And that concludes today’s conference call. We thank you for attending.

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