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Janus Capital Group Inc. (JNS)

Q2 2010 Earnings Call Transcript

July 22, 2010 10:00 am ET

Executives

Dick Weil – CEO

Greg Frost – EVP and CFO

Analysts

Cynthia Mayer – Bank of America/Merrill Lynch

Bill Katz – Citigroup

Jeff Hopson – Stifel Nicolaus & Company

Ken Worthington – JP Morgan

Robert Lee – Keefe, Bruyette & Woods

Marc Irizarry – Goldman Sachs

Mike Carrier – Deutsche Bank Securities

Michael Kim – Sandler O'Neill & Partners

Craig Siegenthaler – Credit Suisse

Roger Freeman – Barclays Capital

Roger Smith – Macquarie Research Equities

Jonathan McMillan [ph] – Susquehanna

Mac Sykes – Gabelli & Company

Operator

Good morning. My name is Sera, and I will be your conference facilitator today. I would like to welcome everyone to the Janus Capital Group, second quarter 2010 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 www.jenus.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 affects the operations, performance, business strategy, and results of Janus, and could cause actual results and experience 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 Web site www.janus.com, and on the SEC's Web site www.sec.gov.

Investors are cautioned not to place undue reliance on forward-looking statements, which speaks only as of the date on which they are made. Janus does not undertake to update such as statements to reflect the impact of circumstances or events that arise after the date these statements were made. Investors should, however, consult any further disclosures Janus may make in its reports filed with the SEC. Thank you.

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

Dick Weil

Thank you, Operator. Thank you everyone for your time today, and welcome to our second quarter 2010 conference call. Before we get started I would just like to call your attention to two changes in how we are making our presentation this quarter in order to help you better understand the company and align your understanding better with my own. We are focusing on investments styles in our presentation rather than legal distinctions.

We’ve combined flow and performance metrics for Janus Equity and for Perkins into a new classification called fundamental equity. And additionally, we’ve broken out fixed income separately as this is an area of particular focus for us going forward. INTECH disclosure remains the same, but tied with mathematical reflecting their investment strategy. We’ve included all the data provided in the past in the appendix for your convenience. So with that preamble, let's get going.

Janus Capital Group earned $0.17 in the second quarter 2010, flat versus the first quarter and up from $0.10 one year ago. Assets under management, as you saw in our release earlier this morning, ended the quarter at $147.2 billion, down 11% versus the end of the first quarter, largely in line with the US equity markets; US S&P was down almost 12% for the quarter. Net outflows for our Group in the quarter were $1.3 billion.

I would like to give you some context for these results. During the second quarter and really for a substantially longer period than that our equity investors have been fighting a really terrible market. As you all know, beginning in May, volatility shot up and equities fell sharply. The S&P fell, as I said earlier, approximately 12% on the quarter.

Active equity flows were suffering in comparison to both passive and fixed income. In the US mutual fund industry, for example, active equities saw $11 billion in outflows, while fixed income saw $62 billion in inflows and passive equity saw $32 billion inflows in the quarter.

Lastly in context, research activity remains down particularly for mathematical and quantitative strategies. Despite these challenges, I'm encouraged that we've made the important progress across a wide range of our initiatives. First and most importantly, mathematical equity strategies at our INTECH subsidiaries saw a much improved net outflow of $1.5 billion in Q2 compared to $4.3 billion in the first quarter.

INTECH’s mathematical approach is very much better than many of its quantitative peers with $2 billion of net inflows in the quarter driven largely by existing clients. We are encouraged by their inflows in the second quarter, but we also recognize that one quarter does not make a trend; they continue to face some very challenging industry circumstances.

I was also very pleased with our accelerating fixed income business. Second quarter net inflows of $1.2 billion brought our year-to-date flows to over $2 billion. We are seeing increasing interest and acceptance of Janus as a fixed income provider. We think we have lot to offer as a compliment to some of the larger BMS in that space.

Fundamental equity, including Janus and Perkins products, saw net outflows of $1 billion in the second quarter. This was disappointing given the substantial progress we're making in our advisory channel, and I’ll cover that a little bit more, later. It was driven largely by two significantly reallocations away from us in a single strategy. In particular, as part of the larger, we lost $1.8 billion to a single reallocation decision in the insurance channel where the client assured us it was not performance related.

In our first quarter call, I laid out some priorities for you that we were working on at our company. First and most importantly was the improving performance in our mathematical strategies at INTECH. And then I mentioned three areas where we are investing, growing our strong US retail franchise, aggressively growing our fixed income business and strengthening our institutional efforts for Janus and Perkins. Candidly, this last one is going to take some significant time.

First and foremost, I'm encouraged that our mathematical equity performance has improved dramatically at June 30; 83% of the mathematical strategies are outperforming their benchmark over three-year period at June 30. Well over 90% of the assets are outperforming for three years ended June 30. The two largest strategies in INTECH comprising approximately one-third of their total assets are ahead of benchmark gross of fees for 1, 3, 5, 10 and 15 years.

Looking at the areas where I mentioned we were investing. We continue to improve our position in the advisory channel, the positive net flows of $1.4 billion, representing an annual growth rate of 14%, which has been driven by particularly strong success in both Janus and Perkins products.

Our fixed income business is developing quickly at an annual growth rate of 63%, admittedly off a small base. And we've seen institutional net inflows of $600 million in the first half of the year in our fundamental equity strategies.

So before I turn it over to Greg, let me try and summarize our quarter. We made strong progress in our key objectives, which will serve to strengthen and diversify our company in the future. Investment performance remained strong, and particularly the improvement in our mathematical strategies is encouraging. Investment performance is the heart of what we do. It's the most important part of our company.

However, we continue to face some challenging environment. Going forward, we are going to continue to focus on good execution of our plan. We believe that we are seeing increasing interest in US assets with US equities outperforming developed equities by 980 basis points over the last 12 months. At this point, we think US equities in corporates represent substantially better value than government bonds and that should be encouraging for our business.

Our active managers have good opportunities to outperform passive strategies, elevated volatility create opportunistic entry and exit points for us. And the market environment should continue to provide an excellent tailwind for our rapidly growing fixed income business.

With that, I will turn it over to Greg.

Greg Frost

Thanks, Dick, and good morning. I'm going to cover in a little more detail flows, performance, the financials of the company for the quarter, as well as a little bit more color on the investments that we are making in the business during this year.

So turning to page 5, as Dick mentioned, firmwide flows were certainly affected by the one large reallocation out of Janus managed equity strategy, and although firmwide net flows remain negative, there are a number of bright spots to consider. Despite industry headwinds, firmwide gross sales increased 26% from the first quarter and almost 40% from one year ago.

Fundamental equity sales continue to be driven by our retail intermediary distribution teams across a wide variety of products. INTECH flows improved meaningfully in Q2 from higher sales driven by the $1 billion mandate funding from an existing public funds client, which we talked about a little bit last quarter and lower overall redemptions.

INTECH’s improving performance should help the flow picture we have seen over the last several quarters, but we also understand that inflows and outflows are lumpy in the institutional channel where INTECH plays and flows generally lag performance.

Lastly, our fixed income business continues to show solid growth. In addition to robust sales through intermediary channels, we are also seeing traction in the institutional channel as evidenced by a $600 million mandate win during the quarter, our largest funding to date.

Turning to page 6, I’ll highlight three main themes on the performance side. First long-term performance continues to lead the industry with 82% of fundamental equity funds and 100% of fixed income funds beating peers over a three-year basis. On a five-year basis, the numbers are stronger, fixed income remains at 100%, while 89% of fundamental equity funds are beating peers. When compared to the largest 20 mutual fund firms, Janus ranks number one on a three-year basis and at number two on a five-year basis for those funds beating peers.

As Dick mentioned earlier, INTECH performance over the short and intermediate term periods improved significantly in Q2 from 0% of strategies being the respective benchmarks on a one-year basis last quarter to 42% at the end of Q2. And over a three-year period, the rise is even more significant from 42% of strategies being benchmarked to 83%. And lastly, on a one-year basis, and although the Lipper numbers are down slightly from the longer-term numbers, still almost two-thirds of our fundamental equity products and half of our fixed income products are beating peers.

Our CIOs watch performance very closely and see no reason for concern with the numbers. In fact on a year-to-date basis, almost 70% of our complex-wide funds are beating peers.

Turning to the financials on page 7, as Dick mentioned, EPS totaled $0.17 in the quarter, consistent with the first quarter and obviously up sharply from a year ago. Overall, the quarter was very straightforward. We saw slightly higher revenue from Q1 from one additional day of accrued fees in the quarter. We had a $0.01 nonoperating gain on the sale of some unconsolidated fee capital during the quarter, and we had a $0.03 charge for the recently completed fund proxy that we have been talking about the last several quarters.

The proxy charge in the quarter was just over $8 million. It represents 3.2% of revenue, and clearly impacted our margins. In addition to reelecting the fund trustees, fund holders also approved the addition of performance fees to the Janus fund, the Janus 20-40 funds, the overseas fund and Perkins global value fund. This represents approximately 37% of assets under management today.

The additional fees will begin hitting the P&L in the third quarter of 2011 and will phase in over the subsequent two quarters. We have more information in the appendix on pages 13 and 14 for your benefit.

And lastly on page 8, we discussed broadly our reinvestments in the business in 2010. We’ve done this in the last couple calls and we felt like this call with some additional detail is warranted this call. As of right now, we expect to spend between $15 million and $20 million on a cash basis. This excludes the amount of money we spent on the fund proxy. We expect to spend that during this year. Over half of the spent will be in the form of additional resources and brand spend with the remainder being capital in nature, the primary driver being technology. We can certainly adjust this spend going forward should market conditions prove challenging.

We are investing in our fixed income business as Dick mentioned, including trading and investment talent and the launch of two new global strategies later this year. We are investing in our growing advisor channels by enhancing our internal sales desk to maximize our sales opportunities and significantly enhance our technology infrastructure and data transparency capabilities.

And lastly, we are focused on the Janus brand and have stepped up our advertising efforts, both print and in the digital space. As Dick mentioned, we have made good progress in our 2010 objectives and our investment dollars are directly aligned with these objectives.

With that, I will turn it back over to Dick to wrap up.

Dick Weil

One last word on investments before we take questions. In this difficult environment, clearly we need to be very careful and conservative about how we are investing. Yet, we must continue to invest properly to assure the medium and long-term future of our business. Our frame work is that investments need to be modest and they need to meet a disciplined test.

Senior executives need to be accountable for promises regarding generating results, which are better than our cost of capital over 3 to 5 years. That’s the framework we are putting all the investments that Greg described through, and I will hold people accountable internally for those standards. Over the medium term, we remain committed to delivering margins above 30%.

I think that's it from our side. We will take questions now. Operator?

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Cynthia Mayer with Bank of America.

Cynthia Mayer – Bank of America/Merrill Lynch

Hi, good morning. Just maybe if you could clarify a little bit on the money that the investments in new initiatives, you said $15 million to $20 million in 2010, does that – how much of that has already been spent and how should we think about whether that’s going into marketing or comp?

Greg Frost

Cynthia, this is Greg. Just about half of the money has been spent year to date, and as I said about just a little bit over half of the $20 million is divided [ph] up between people and brand. I think the bulk of that probably is people and resources and obviously the other part of that would be capital in nature and would be capitalized and amortized over three to five years.

Cynthia Mayer – Bank of America/Merrill Lynch

Okay. And other than the initiative, how should we think about comp going forward? It look like it ticked up a little bit but not as much as revenues. Basically actually your comp to revenues ratio is the same. Would it continue to pick up if the market recovers?

Greg Frost

Yes. A fair amount of our comp is driven half the revenues for the firm as we talked about in the past. So I would expect that to be fairly consistent going forward.

Dick Weil

It’s driven by the revenues and also heavily by investment performance.

Operator

Your next question comes from the line of Bill Katz with Citigroup.

Bill Katz – Citigroup

Thank you very much. Just in terms of the pipeline for new business, it seems like you are getting some immediate traction on the institutional business, maybe your legacy of where you are before. But more generally, could you talk about the pipeline and how the calls and interactions are going with the consultant community and where you see the best lift in near term?

Dick Weil

I think we are being very well received across a range of the larger consultants, including some opportunities outside the US. So we are experiencing increasing momentum in those relationships. This is new to Janus, so it starts from a low level and fortunately for us there is significant demand for fixed income in the marketplace causing consultants who might otherwise take a longer period of time to build relationships with us. They are now willing to move more quickly. So we are very encouraged by that.

And I will also note that the success in the fixed income business was driven by Gibson Smith and his team, not by me. They are doing a very, very fine job.

Bill Katz – Citigroup

It’s helpful. The second question is just coming back (inaudible) for a second, you mentioned the business could be lumpy and a little bit of lag to it. What’s been the general lag over time between improvement in performance and a deeper reflection of inflows? Historically is it a six, nine-month window or a little bit longer than that?

Dick Weil

I think that’s a very hard thing to generalize because it’s very circumstantial, the context of the specific circumstances around performance make a big difference. I'm not able to give you a general rule of thumb that I would trust as an answer. I am sorry.

Operator

Your next question comes from the line of Jeff Hopson with Stifel.

Jeff Hopson – Stifel Nicolaus & Company

Okay, thanks a lot. Curious how much you think your clients are – and potential clients are recognizing the INTECH performance improvement? Obviously, I am sure you are out there communicating that. And there are some other that have had even more challenges in the quant area, and one has lost significant assets. Any sense of whether your position to pick up some of that or do you see the money just kind of moving out of quant overall?

Dick Weil

It’s a very, very good question. Domestically we are not seeing significant new search activity for quant mandates. And therefore in the US I think it’s pretty hard to answer your question based on data that we know. Our performance I think is better than many and the fact that we pursue a mathematical strategy as opposed to using quantitative tools to predict fundamental, which I call “quantamental.” The quantamental folks I think have been in real trouble and are very challenged to defend their process. I think there were some questions recently raised by external folks over the validity and strength of the INTECH process and we look at the current improvement in performance as really confirming the great value and strength of what they do for living.

So we are optimistic in a long-term sense but in a short-term sense we are realistic that this area faces real challenge and that there aren’t a lot of new mandates available inside the US.

Jeff Hopson – Stifel Nicolaus & Company

Okay. And if I could follow up. On the fixed income side, obviously the overall industry has helped. So how much is it industry, how much is it specific Janus actions that are responsible for the improvement, would you say?

Greg Frost

I think we think our fixed income business is it’s bottoms up, it’s credit driven. We think it’s a good complement to the bigger ones out there. So I would say that our business, to answer your question, I think a lot of it is what we are doing here. We didn’t see the underperformance that the other firms saw over the last several years. And I think there is a really good story to tell that’s very complementary to Janus.

Dick Weil

When selling our fixed income product, people need to be confident in the results, which stand for themselves but also in the process, and what Gibson and his team have done is built a very robust process and that’s the key element to generating confidence in the very sophisticated buyers within their dealing. So, I think that’s the main attributors. What we are doing here is what Gibson and his team have built in terms of a very robust process.

Operator

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

Ken Worthington – JP Morgan

Hi, good morning. Dick, on 12b-1 fees, the SEC is proposing changes. Do you expect the additional disclosure on the mutual fund confirms on the cost of marketing and distribution to have an impact on either retail or broker behavior or is it really a nonevent?

Dick Weil

Well, the first thing I would say is with respect to share classes at Janus that had 12b-1 fees over 25 basis points, as of 6/30, it represented less than 2% of the total company AUM. So I think that’s very helpful in sizing the issue with respect to our company. More broadly, it's too early to quantify the impact of yesterday’s announcement. We're digesting it and studying it with the rest of our peers. And there is an open common period that ends on November 5, which we will be watching closely. Okay?

Ken Worthington – JP Morgan

Then you had another PM departure at Janus. Historically the PMs have stayed around for a very long period of time. (inaudible) comment it’s just two in a relatively short period of time, anything to say on that?

Dick Weil

Well, I think they are two very different individual circumstances that you are describing. Lauren Saltio [ph] left us and we were very disappointed by his decision to go and work at another firm partially out of New York and I think part-time out of his home country in France. And that was very disappointing to us. We've replaced Lauren with a series of internal resources that we think are terrific and would do a great job across a range of his responsibilities. And we are also taking a look at internal and external options as new managers for the worldwide fund and that process hasn’t come to a conclusion.

Separately and I think very differently effective on July 1, we appointed Chad Meade and Brian Schaub to take over as Co-Portfolio Manager on Janus Venture Funds. As a result of that Will Bales made a decision to leave the firm. We were sad to see Will go. We have great respect for him as a person and as a Portfolio Manager. We worked with Will to try and find other opportunities for him within our company but in the end he elected to make a personal decision and depart. And we wish him the best.

But these two situations I think are individual and not representative of a broader class of events.

Operator

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

Robert Lee – Keefe, Bruyette & Woods

Thanks, good morning. Maybe back to fixed income a little bit. Dick, notwithstanding the strong performance, good growth there, and you've outlined some of your plans. I mean thinking maybe a little bit longer term even with the exceptional growth rate you have it’s still a pretty small business overall in the context of both Janus and peers. How do you think longer term that the need or interest in whether it's acquiring complimentary fixed income skills, whether it's municipal area or someplace or, you know, do you see that as being something you would consider over time to really build more scale in that business and more aggressively diversify the offering?

Dick Weil

Yes, thank you. That's a good question. The most important thing in an investment management firm in the culture. And the problem with inorganic growth is it’s very hard to attain a single healthy culture and therefore I think people often underestimate how difficult it is to achieve success in acquisitions and the asset management space.

So our main focus right now is growing our business organically. That said, if there were terrific opportunities that allowed us to more rapidly develop and in that context I had confidence that we could maintain the right culture, we would take a hard look at those opportunities. But in the center of our vision right now is growing our business organically. I think it’s happening with great success. We have a lot of confidence in the team that we currently have and we are looking forward to the future in that respect.

Robert Lee – Keefe, Bruyette & Woods

Okay, and then maybe a follow up. This relates to the mandate loss that you referred to earlier, which I guess you mentioned was from a reallocation from the insurance company. There's been some trends where yourself and others have lost some mandates not just performance but partially because it’s very difficult for some life insurance companies to hedge given their own guaranties out there, the exposure on funds that have – particularly on funds that may have high tracking error, which I believe is something you guys kind of pride yourselves on to some degree.

Does that mean it's going to be – you see that being a challenge for growing – for reentering or growing that part of your business over time that historically has been a pretty good market segment for you guys, and do you see that as being a challenge going forward?

Dick Weil

I think very plainly, the variable annuity business has been seriously challenged its foundation by the market volatility. And the insurance companies that are driving that business have discovered that they weren’t satisfied with the amount of hedging that they had in place through that volatility and a number of them made a decision after reflecting on the cost of a better hedging strategy or a more complete hedging strategy, they made a decision to step away from the business.

So I think the variable annuity business is in transition and that certainly affects the scope of opportunity for us and for all managers who have been serving that industry. And you are right, the more volatile the funds in many ways the greater the challenge on hedging side. So we offer a range of funds with different volatility characteristics, but we are not crossing indexers, this is a true investment shop. So I think you fairly put your finger on a challenge going forward in that market segment.

Robert Lee – Keefe, Bruyette & Woods

Great. Thank you very much.

Operator

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

Marc Irizarry – Goldman Sachs

Great, thanks. Dick, can you just talk about the vision for Janus in the future relative to the 30% operating margin target you’ve outlined in detail the spending for 2010. But as you think out a little bit more longer term when do you think that right time to hit that 30% margin as relative to some of the longer term goals to grow the credit business?

Dick Weil

Well, as you now we operate in a context of a capital markets and a great deal of what we do is not in our control. And therefore, we have been a little bit vague about precise data on which we could arrive at that margin. It’s not from a lack of discipline or a lack of analysis, but a major variable is of course what’s happening in the marketplace, both in terms of where is the equity stock value data going and also in terms of flows and other characteristics of our industry.

So I wouldn’t want to give you a false sense of confidence in a specific date. We view the medium term as our best representation of that. You should note that we are committed to getting there, but the exact timing is subject to a lot of factors outside of our control.

Marc Irizarry – Goldman Sachs

And if you think about the buckets of where you're most likely to reinvest in the business over, say, the next 12 months to 18 months? Where would that be, would that be outside the US or is it retail securing more space in the US on retail side? What are the priorities?

Dick Weil

I think I described in our first quarter call, I hope I did. We went through a process where we looked at what are the initiatives we thought that were most important to drive this firm over a medium term horizon, what were the most important initiatives to fund. Then we went through our plan to make sure that all of our investment dollars were aligned with those initiatives.

That’s a process that will repeat, and as I get to know this company better and get more deeply involved in its activities I think I can do an even better job at help us identify those opportunities, but I wouldn’t want to front run the process in a casual conversation with you. There is a real focus on doing research and analysis that goes into these things and then we have to have promises from our team leaders for which they are prepared to be accountable, and that’s the system that generate the list that we’ve been describing for the last couple quarters and that’s the system we will use going forward.

At a very high level, it’s obvious that the composition of global savings is changing. It’s obvious that over the long term we have to grow our business offshore. We are looking for opportunities to do that and we will do that over time. And so you are right, that’s clearly something that would be likely to be on the list.

Operator

Your next question comes from the line of Mike Carrier with Deutsche Bank.

Mike Carrier – Deutsche Bank Securities

Thanks, guys. Just on the institutional side, I think last just given some of the issues in INTECH, can you give a little bit of color on the pipeline or the outlook in terms of gross sales picking up? On the institutional side, the activity has declined and there hasn’t been a lot of activities just given the markets and some of the issues out there. But I guess any color there and then also on the fixed income side with that $600 million win in the quarter, just what you are seeing, talking to clients and, any clarity you can give there?

Dick Weil

Good questions, but a little hard to answer. I think I’ve given you my best answer on the INTECH situation. Their process I think is strong, they are generating better results, which is encouraging. But they face very difficult market conditions and there are not a lot of institutional searches right now for mathematic or quantitative managers of which we are aware. And as a consequence, it may take some time to generate a positive trend based on their investment performance. It’s very hard to predict.

On the fixed income side, we continue to see increasing interest from consultants, entrant clients and it is not limited to the insurance industry or financial institutions, it’s spread across a number of our channels. And we think we have – so long as this current environment maintain and people continue to aggressively seek out fixed income option, we think we offer some of the best choices for those people and we expect that this business can continue to grow at these sorts of rates for a long time subject to if there were a grand change in the market condition.

Operator

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

Michael Kim – Sandler O'Neill & Partners

Thanks good morning. First, Dick, it seems like you painted somewhat of a lackluster environment for actively managed equities at least in the near term. So just wondering how you are thinking about organic growth prospects for legacy Janus equities business maybe through the second half of this year.

Dick Weil

I think we are continuing to see positive signs in our advisory channel and I think – so long as we deliver better investment performance and better servicing than our peers, the stock of assets in this area is so great that we still have significant opportunities to capture not only new money but to take money from those folks who aren’t doing it as well. And we are focused on that. So it’s hard to predict exactly how that will turn out but that’s our focus and we are cautiously optimistic.

Michael Kim – Sandler O'Neill & Partners

Okay, and then just maybe a technical question for Greg. Can you just talk about the drivers behind the step up in the long-term incentive comp this quarter and how we should be thinking about that line going forward?

Greg Frost

Sure. The main driver there, and I think we spoke a little about this last quarter, is the senior profits interest that we put in place for our Perkins subsidiary when we acquired the other 50% of the firm in late of 2008. I think we’ve said before that we expect to see – in Q1 we saw $4 million roughly booked, and we said we would expect to see another $8 million to $10 million for the remainder of the year. We saw roughly $5 million booked off for that equity instrument in the second quarter. I would expect given current conditions that we would see anywhere between another $5 million to $8 million over the second half of the year.

Operator

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

Craig Siegenthaler – Credit Suisse

Hi, good morning.

Dick Weil

Good morning.

Craig Siegenthaler – Credit Suisse

First, just on the INTECH sales, it was $2 billion up a lot from last quarter. I am just wondering given what you are seeing in relative fund performance and RFP activity and also given the fact that second quarter was a pretty tough quarter from the macro environment. Do you think sales have really stabilized on this level and we'll get some improvement here? Or is there any large one lumpy mandates in that number?

Greg Frost

I talked about in my comments that there was $1 billion mandate from an existing client in the public fund space that funded in April. We talked about that on last. The other was kind of run rate business from existing clients.

Craig Siegenthaler – Credit Suisse

Okay, got it. Then just real quickly on the marketing expense, we expect it to step up in the second quarter, can you help us a little bit on the third quarter run rate? Given you expense announcements you made earlier, it sounds like the bulk of that actually will be in comp, the part that isn't capitalized.

Greg Frost

Yes, I still as I said, we are focused on our brand and we are focused on taking advantage of some opportunities this year with the 40th anniversary of the Janus Fund to take advantage of getting out there and talk about our performance over the long term. So I think you will see advertising and brand spend not tick up significant but be there. Obviously you are going to see a drop in Q3 just because the proxy cost will not be there. But, you are right, a fair amount of the reinvestment that I talked about on the noncapital side are hedges in additional resources for the firm.

Operator

Your next question comes from the line of Roger Freeman with Barclays Capital.

Roger Freeman – Barclays Capital

Hi, good morning. Just want to come back to the fixed income for a second. So I guess just listening your comment about growing the business, it sounds like for the time being it’s more of an organic growth path. So as you think about just the size of it, in your view, is this a business that needs to have significantly more scale? Is it a niche manager? And at like current AUM levels, is profitability anything near the average for the company or does it need to be a lot bigger to generate the kind of margins you want get?

Dick Weil

Profitability for our fixed income business is positive, but it is impacted by the investments we are making in growing the business. And so more scale would definitely increase margins on that side of the business and would be very helpful. It’s a good business as it stands and I wouldn’t overstate that but clearly if we can double the size of the business it will positively affect the margins significantly.

Roger Freeman – Barclays Capital

Okay, thanks. And then I guess my follow up is –

Dick Weil

I am sorry, I just want to be extra clear. When I say it will positively affect the margins significantly, I mean the fixed income margin. Fixed income remains a pretty small piece of the overall company. And so it’s going to take some time for it to have really material driving effect across the whole group.

Roger Freeman – Barclays Capital

That’s fine, that’s was I was getting at anyway. So thanks. And then separately on the seed portfolio markup during the quarter, I know you hedge out your portfolio investments there. Is that just function of your hedges outperforming like making sure the S&P, while your funds outperform the S&P?

Greg Frost

That gain was specifically of a sale of seed capital that we do not consolidate. So it was – we had marked the seed capital down a year ago or in the first quarter of ’09 for market conditions, sold it in the second quarter of 2010 for a gain.

Operator

Your next question comes from the line of Roger Smith with Macquarie.

Roger Smith – Macquarie Research Equities

Hi, thanks. I just want to, I guess, focus back on the fixed income growth, and I guess the institutional growth at the same time. You did keep pointing to the good performance in Gibson Smith’s actual results. But is there anything that you’ve specifically done or changed on the distribution side that’s helping those relationships move along and what specifically can we look at to understand how that’s improving or what milestones can we look at to see changes on that distribution side? And then with the people that are being hired, the $15 million to $20 million in that fixed income business, I know it’s not all of the $15 million to $20 million, but is that really on investment professionals or really is that to some extent on the distribution side there as well.

Greg Frost

I will cover the investment and then I will turn it back over to Dick for the first part. It’s some of the $15 million to $20 million, it’s certainly not all. There certainly are investment people as part of that number, there are trading folks a part of that number and there are operational folks as part of that number. And, yes, a little bit of distribution, although we feel like the investments we’ve made over the past several years on the distribution side should be adequate.

Dick Weil

In terms of what we’ve changed and what you can look at in specific as you asked, we are investing in a range of investment personnel from the investment side through to the distribution side. Some of them are fixed income dedicated people, some of them we are taking opportunities to get people that can do both equities and fixed income in a broader way, for instance, in institutional client service or in other types of roles. So there is a bit of a mix there in terms of the specifics of how we are moving forward, which includes all the different functions of our business. We are also working hard to make sure we have the right fixed income expertise in the infrastructure side of our business to properly support the business that we were in, and deliver accurate and timely numbers and insights to our clients.

So it's through a lot of the different departments of the firm are feeling some change as a result of these developments. And candidly my role in that is to lead people to understand how important this is for the future of our company over the 10, and 15 and 20 year time frame, and to help attract and retain and build the best talent in the business. And I am trying to help that team do that. And in terms of externally visible milestones that you can see, I think most of it is going to be in the numbers that we report on this quarter. I don't know how else to direct you to get a better insight into the developments.

The business like all of our business depends to a great extent on investment performance. And the optimism that we have is driven first and foremost by excellent performance. And that’s the key variable for us, if that would go away, this would change quickly. And so that would be the one thing I call your attention to in trying to understand the future path of the business.

Operator

Your next question comes from the line of Jonathan McMillan [ph] with Susquehanna.

Jonathan McMillan – Susquehanna

Greg, just wondering if you could help me understand the $80 million cash outflow in investment activities. Just want to know where that cash went during the quarter.

Greg Frost

Sure. We just went out a little bit longer and bought a longer term security from an investment perspective to get a little more yield and just move some cash out. We're clearly, from a capital perspective, we have excess cash in the balance sheet plus this longer terms investments to cover our debt maturities coming due in ’11 and ’12. So it is just purely a yield move.

Jonathan McMillan – Susquehanna

Got, it. That’s helpful. And then Dick, couple more months on the job here, just wondered if you can flush out any incremental details on your strategy and institutional equities. I know you mentioned $600 million win in the channel, but just any higher level description would be helpful, just going forward.

Dick Weil

It’s pretty clear that Janus and Perkins start from a very low base in the institutional business, both domestically and internationally. And that’s an opportunity for us. It take time to win over the consultant community which drives so much of the institutional business in consultant-driven countries around the world, US, UK, to a certain extent Tokyo and others. And so it's a long battle you fight. And you try and sell them on three levels. You try and help them understand that your products are the best and you try and help them understand that your process is robust and focuses not only on return but risk control. And then you have to try and persuade them that the company itself is strong and stable.

And we haven’t necessarily had success at all those levels in the past with the institutional consultants. So that’s a key focus for us going forward. That's true domestically and internationally. And candidly that’s just a process that takes time. That’s sort of three-year battle.

Operator

Your last question comes from the line of Mac Sykes with Gabelli & Company.

Mac Sykes – Gabelli & Company

Hi, Dick. Just to circle back on this INTECH, where do you attribute the improvement in the performance there? Was it more internally adjustments or there is certain market attributes that are making the strategy better or worse, sort of what we are seeing here in terms of market. I am just trying to understand what – as we look for – as we see the market evolve the next couple of months whether it's you're making adjustments or whether the strategy has just performed certainly in a different market?

Dick Weil

INTECH has not reengineered its investment process in anyway. It’s a continuation of its strong underlying process. The volatility structure of the market has changed over time, particularly post-crisis, which gives them better opportunities to do what they do. During periods of their underperformance their risk controls worked well, so their underperformance was modest which gives them an opportunity to come reasonable quickly with outperformance and that’s key to their success and their strategies.

I think there has been some misreporting of this that I’ve read, which suggests that the performance change as a result of a change in process, and I just want to clearly and flatly say that's not correct.

Mac Sykes – Gabelli & Company

Great. Thank you.

Operator

At this time, there are no further questions. Presenters, do you have any closing remarks?

Dick Weil

We thank everybody for your time and attention today, and we forward to talking again in another quarter.

Operator

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

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Source: Janus Capital Group Inc. Q2 2010 Earnings Call Transcript
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