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Janus Capital Group Inc. (NYSE:JNS)

Q2 2014 Earnings Conference Call

July 23, 2014 10:00 AM ET

Executives

Richard Weil – CEO

Jennifer McPeek – EVP and CFO

Analysts

Ken Worthington – JPMorgan

Cynthia Meyer – Bank of America Merrill Lynch

Robert Lee – Keefe, Bruyette & Woods

Michael Kim – Sandler O’Neill

Daniel Fannon – Jefferies

Marc Irizarry – Goldman Sachs

Bill Katz – Citigroup

Craig Seigenthaler – Credit Suisse AG

Operator

Good morning. My name is Levi and I will be your conference facilitator today. I would like to welcome everyone to the Janus Capital Group’s Second 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 is my pleasure to introduce Dick Weil, Chief Executive Officer of Janus Capital Group. Mr. Weil, you may begin your conference.

Richard Weil

Good morning everybody. Welcome to the second quarter 2014 earnings presentation of the Janus Capital Group. I am Dick Weil, Chief Executive Officer. I am joined this morning by Jennifer McPeek, our Chief Financial Officer and as usual, I will give you an executive summary of the quarter. Jennifer will take you through the results in some more detail and then we will turn towards some topics for discussion that we have picked up from you all during the course of the quarter, and lastly we’ll be very pleased to take your questions as always.

Turning to the executive summary for the second quarter of 2014. At this point I try in most quarters to give you the overarching story from my perspective. Candidly this quarter, I don’t think there is a huge overarching story. Second quarter 2014 was marked by some deterioration of our net flows to 3.3 billion out which is a worsening compared to the first quarter.

I think that is primarily a reflection of market conditions although it also serves as a reminder to us that the job of healing the investment performance track records and getting ourselves firmly on a path to zero and then growing positive flows. Its work in progress and we’re not yet there.

With that said, turning to investment performance. Our one and three year investment track records have improved somewhat from a year ago. The investment results during the quarter were mixed and Jennifer will give you some more details but mutual fund performance fees for the fund side were essentially flat.

Our operating margins increased to 30.6% from a little better than 29% in the prior quarter and substantially up from a year ago this reflects our continuing effort to balance financial discipline with the pursuit of our strategic agenda and we continue to feel good about that piece.

We have also strengthened our balance sheet further with the repayment of $39 million of outstanding debt in the second quarter and there another piece of 60 million that we’ve returned after the end of the second quarter which will be reported in third quarter, but we’re making it aware of today.

So we are consistent in following through with our multi-year effort to strengthen our balance sheet and Jennifer again will touch that in some more detail.

Finally, and most fun and exciting on the list of things is we were encouraged by our recruitment of two class talents. Myron Scholes and Ashwin Alankar are terrific investment talent that we were very pleased to recruit during the quarter.

They will help us by taking on existing products. They will help us in some other ways advancing our strategic agenda that we will touch on in a later section of this presentation. But it’s also important to note that they represent a strengthening and a continuation of the trend of talent inflow into our firm which we’ve established over the last several years which we find very exciting and confirming for us that we’re on the right path to a better future.

With that said, let me please turn it over to Jennifer McPeek.

Jennifer McPeek

Thank you, Dick. Good morning again everyone. So, I will begin on page five, the slide presentation with a quick overview of our operating results for the quarter.

With the help of some strong markets, our second quarter average AUM improved to $174.4 billion from $173.0 billion in the first quarter of 2014. Total revenue increased slightly quarter-over-quarter to $231.2 million.

Operating income was $70.7 million in the first quarter of 2014. Total revenue increased slightly quarter-over-quarter to $231.2 million. Operating income was $70.7 million, which is up nearly 6% quarter-over-quarter and that was mainly due to lower operating expenses. Compared to the prior year, operating income improved 21%.

Second quarter operating margin was 30.6%, which is an improvement of 150 basis points quarter-over-quarter. Earnings per share was $0.19 for the second quarter, and that compares to $0.16 in the first quarter and $0.08 a year ago. The increase in earnings per share over the prior quarter was primarily due to the improvement in operating income, a lower effective tax rate and our seed capital mark-to-market.

Turning now to slide six. We’ll summarize our investment performance as of June 30th. We do not see a lot of change in the complex-wide or fundamental equity three and five year performance statistics, compared to last quarter’s presentation. However, we have seen some market improvement in the one year metrics. Fundamental equity performance improved quarter-over-quarter from 44% to 63% of assets in the top two Morningstar quartiles on a one year basis. Our fixed income performance continues to be very excellent and strong.

INTECH’s performance which is here on the pages mathematical equity strategies. Their performance showed moderate improvement in the one and five year numbers. We did however see a decline in the three year number quarter-over-quarter and that was due to a slight under performance in some of the lower risk strategies. I will note that the magnitude of under performance in the majority of strategies at INTECH that are not meeting their benchmarks remains quite moderate.

Slide seven, this is our flows presentation. During the second quarter, we had outflows of $3.3 billion which compares unfavorably to first quarter which had $1.5 billion of outflows. However, if you look at the five quarter trend you’ll see that it is an improvement over all of 2013.

Fundamental equity flows which again represent both our Janus’ equity and Perkins’ value franchises had second quarter net outflows of $3 billion which compares to the first quarter net outflows of $2.3 billion. Later in today’s discussion, I am going to discuss some of the quarterly changes in this fundamental equity discipline in more detail.

Moving down the page, mathematical equity or INTECH saw an increase in net outflows quarter-over-quarter.

Turning to fixed income. We’re pleased that we continue to grow our market share. According to some data from strategic insight, our second quarter annualized organic growth rate was 18% for fixed income and retail mutual fund flows and that compares extremely favorably to the active taxable bond growth rate for the industry overall which was only 3% so market share gain there. Also of note, our second quarter fixed income flows do include a $400 million redemption from a single insurance general account.

Flipping to slide eight. This is our standard revenue and average asset slide. Revenue increased marginally as management fee gains were partially offset by lower separate account performance fees. The mutual fund performance fees were flat quarter-over-quarter so, the decline you see was due to separate account performance fees in INTECH. The weighted average management fee for the quarter was 48.4 basis points which compares to 48.8 basis points in the first quarter.

Now let’s move on to slide nine, which is our operating expense breakdown. Operating expenses declined $2.8 million or 1.7% compared to last quarter, with the largest driver being the $2.7 million decline in compensation expenses. This was primarily due to a seasonality in retirement contribution and payroll taxes that happens in the first quarter of every year.

Now, let’s look at LTI, our long-term incentive category of expenses. We are now giving you an estimate for the full year LTI expense in each of our quarterly presentations and our current estimates for 2014 LTI is approximately 55 million, this projections assumes that we have flat assets going forward so, the actual results may vary. Our total compensation to revenue ratio which includes that LTI line, it was 39.1%. As I stated before this metric include some non-cash items and we expect quarterly variation. Looking forward, we continue to expect this ratio to average in the low 40’s over the near to the medium-term.

Now, let’s turn to slide 10 and look at our balance sheet. Total cash and cash equivalents increased by 16% compared to the prior quarter, this was driven by strong cash flow generation partially offset by the repayment of our 2014 senior notes as planned. This quarter we returned approximately $15 million to shareholders by way of our quarterly dividend and additionally we spent $25 million on share buybacks in the quarter which was a substantial increase versus the prior quarter share repurchases of $11 million.

Of note and which was not depicted in these charts, last week on July 15th, we retired $60 million of our convertible senior notes that they mature, they were retired with cash on hand. Our credit strength is the highest it’s been since before the financial crisis.

Now as we’ve done on prior calls, we would like to address a few of the frequently asked questions and discuss topics that have come up in conversations over the course of the quarter with our shareholders and our analyst. I’m going to turn it over to Dick to discuss our strategy first.

Richard Weil

Thank you, Jennifer. As you all know as we discussed on prior calls, we continue to execute our strategy of intelligent diversification. First and foremost, we are committed to delivering excellent investment performance for our clients is our first and highest goal. Second, of course, we need to deliver excellence in client relationships. Following those sustained commitments through time, we look at what do we need to change in order to become stronger and we have referred to that change agenda as intelligent diversification.

Here on slide 12, we outline its basic components growing our fixed income business expanding outside the United States increasing our U.S. institutional market presence and solutions based product development. The terrific exciting new hires we had during this quarter Myron Scholes and Ashwin Alankar. These gentlemen’s are taking over our asset allocation efforts on the Janus platform. This involves taking leadership of some existing products, but very importantly, we expect overtime that they will be able to develop some additional leading ideas to offer some better cuts at asset allocation for our clients and this of course fits into the solutions based product development bucket.

So, I thought it would useful for us to have a quick review of that intelligent diversification strategy to reconfirm our commitment towards that path both because it leads to better client relationships and because it should help overtime to moderate volatility in our business results delivering long-term benefits to our owners as well as to our employees and clients.

And so, with that let me turn it back over to Jennifer.

Jennifer McPeek

Thank you, Dick. So on the page that Dick just discussed, the top circle in our little graph, and the continued focus on our fundamental equity franchise. Given the quarter-over-quarter change in flows and fundamental equity, we thought we’d focus in a little bit on it in the special topics of intersection.

So, on page 13, we’ve broken out fundamental equity flows over the last five quarters into two pieces in Janus equity, our growth in core and global international sub-disciplines and also Perkins. This is information that we put out in our press release each quarter but I think it’s helpful to look at this over a longer time horizon that would capture all of its data for you here.

So, first looking at Janus equity. The $1.4 billion decline in growth sales in fundamental equity was primarily coming from the Janus products this quarter, and growth and core we had $700 million decrease and that resulted largely from our small and mid-cap growth strategies. The industry overall experienced a slowdown in net sales in these products in the second quarter based on some data again from strategic insight.

The annualized net sales rate for active equities in the mid-cap growth Morningstar category in the second quarter was 6% out compared to 1% in the first quarter. For active equities in the small growth Morningstar category the net sale rate decreased to 11% out versus 1% in the prior quarter. So our flows change was very consistent with the overall industry move in those sub-categories.

Moving down the page, our global international strategies had a $600 million quarter-over-quarter decline. This was really largely concentrated in one strategy which is global life sciences and frankly the story is really just one of very successful first quarter. This strategy has been performing extremely well for quite is really largely concentrated in one strategy which is global life sciences and frankly the story is really just one of a very successful first quarter. This strategy has been performing extremely well for quite some time and that long-term positive performance track record translated into really positive flow story in the first quarter. Second quarter was also positive but had cooled off a bit.

So turning to page 14, the last page of our presentation today. We’ve put quite a bit of information here about our seed capital program. How we think about it and how it’s been changing overtime. We typically don’t provide this level of detail on our seed capital portfolio but we always get questions and so thought it would be helpful this quarter to give you a little bit more context.

I am going to process this by saying that this should be interesting to our shareholders for three reasons. First and probably least importantly every quarter we have this below the line earnings fluctuation due to marking the portfolio to market and portfolio and the hedge. So obviously that flows through our P&L, but I’d say that’s probably the least important reason you should care about seed.

Second reason, over the last few year’s seed has clearly been the largest internal use of incremental cash flow that we’ve generated. And as you are looking forward and trying to anticipate how much capital we will have in excess, how much we’ll be able to return to our shareholders in future period it’s helpful to get some view into how we think about that strategy for funding internal growth.

And thirdly and probably most importantly understanding our philosophy on how willing we are out to put our capital to use in implementing our strategy of intelligent diversification will hopefully give a greater comfort and confidence in our strategic success going forward. So that’s the purpose for this slide and I’ll just walk you through it in some detail.

The table on the left hand side describes how we internally breakdown situations that we consider investing capital in our investment strategies during our funds. First on the left hand side is you’re really typically early stage or and what we call here launch capital, we see the strategy at its inception, we usually put the minimum amount necessary to effectively manage the strategy in whatever vehicles and share classes we want to launch it in and then we give it time, we allow that seed to germinate if you will over the next three to five years establishing a track record that’s saleable prior to really actively marketing that strategy or fund.

The second type of candidate for capital injection falls into a bucket that we call ramp capital. Ramp capital is intended for season strategies that already have a proven track record and also have some investor demand but they may need a larger co-investment from Janus in order to increase their marketability. This ramp capital is typically larger in size than launch capital for a given strategy, but it stays outstanding for a shorter time period.

I will note that our strategic shareholder Dai-ichi has been very helpful in supporting us through ramp capital funding.

The third column on the right of this grid is different than launch capital and ramp capital mainly and that it has an in-determinant time horizon. So we will put seed capital into these strategies we call maintenance capital without a ticking clock on when we need to take it out. Typically this is used for referenced track records in institutional strategies where we may be looking to do customized separate accounts for clients, but we keep the maintenance capital in the reference account even as we bring in more clients. I will note that maintenance capital is actually less than 10% of our portfolio today.

So back to the page and the graph on the right hand side. You can see that seed has diversified as we are executing our diversification strategy over the last five years. The two pie charts show our seed book in December of 2009 and June of 2014. Obviously it’s both grown and has diversified. So we often get the question are you going to continue growing the seed book, well the answer is yes but definitely not at the pace that we have been growing it.

And one of the benchmarks that we look at internally in our treasury group and in the strategy group is, what is the seed capital required for a certain size of company? And we look at seed capital per AUM to determine whether we’re putting enough money into new strategies to fuel growth.

The peers that we look at, so it’s really just the public peers to disclose this recently calculated an average of 11 basis points of seed to total AUM. Five years ago, we were pretty small relative to that average, we were only at 4 basis points. Now we are still within the group but above average and at the higher end of the group at 15 basis points. That’s where we want to stay, we want to continue fueling growth through funding internal strategies and that’s we’re diversifying our offerings to clients we’re going to continue to seed.

So really I’d expect to see our seed book grow but really not at the pace that we’ve seen before. I expect to see our seed book as the company grows.

One final note again this is questions we often get for those of you are modeling our P&L going forward. We do hedge the seed book against volatility in the larger markets, larger data exposures and equity interest rates and foreign currency. So looking at how the seed book is split into equity fixed income and alternatives is really not going to be that useful to you in modeling what the mark-to-market is. When you see the fluctuations below the line that’s largely either unhedgable strategies that don’t have data embedded in them or are alpha that we’ve generated.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). And we will go to our first question from Ken Worthington with JP Morgan.

Ken Worthington – JPMorgan

Hi. Good morning and thank you for taking my question. In terms of capital management, the buyback increased this question. What is the philosophy going forward on the buyback, I guess is this a good run rate given that you have paid out a bunch of debt should it increase – should it increase with cash flow. What’s the outlook here for the buyback or the philosophy more generally?

Jennifer McPeek

Thanks. That’s a great question Ken. We do have a philosophy and I think that’s the best way to think about it as you build your model. The philosophy is that we’re going to be trained to return somewhere in the 70% to 80% of cash flow from operations over the long run to shareholders and that’s going to vary from quarter-to-quarter. We are actively managing it but if you look at our rate this past quarter, we returned in both dividends and share repurchases about $40 million and that’s about an 80% payout ratio of the last 12 months cash flow from operations.

So it’s going to vary from quarter-to-quarter it’s not something you’ll necessarily get on the nose in your modeling but as a long-term objective that’s our philosophy.

Ken Worthington – JPMorgan

Okay. Great. And then I am sorry there is three parts to this one but in terms of LTI the $55 million you are referencing what is that, is that the annual grant or is that the expected amortization, that’s number one. Number two, the amortization is running well below the annual rate of $55 million, should we expect it to ramp. And then three, you guys had expectations for $65 million at the end of ‘13 in 1Q it fell to $60 million, this quarter it’s falling to $55 million, why the big decline in estimates given that AUM is up, earnings are up and EPS is up?

Jennifer McPeek

Again I guess that question is to me. The answer to the first part of your question is that it is the expected amortization, so we’re trying to give you guidance on what you can put in your models for the actual line item of LTI not future grant. What was the second part of the question Ken?

Ken Worthington – JPMorgan

It’s $55 million you have been running at $12 million or $12.5 million so well below the $55 million rate, I assume this means that it should ramp in the second half of the year?

Jennifer McPeek

Sure. So a key part of our guidance is that we’re not projecting flows or market in any of our guidance, so we have to make an overlying assumption that we have flat assets and assets drive some part of our LTI expense, the biggest chunk that you’ve seen in the last couple of quarters that’s driven by asset movement is the Perkins SPI amortization. So that was $3.8 million this last quarter if you add that to the 55. So we don’t forecast movement in assets at any of the subs but in, in some of the subs if assets move our accounting charges change.

Ken Worthington – JPMorgan

Okay. And the decline from 65% to 55% over the last two quarters.

Jennifer McPeek

That’s explained by the same thing, so at the beginning of the year we had a flat asset assumption and at Perkins we’ve seen decline in assets and that results in an SPI charge or an SPI reversal, so it’s a negative expense contra expense in both the first quarter and the second quarter.

Ken Worthington – JPMorgan

Got it. Thank you.

Operator

And we’ll go to our next question from Cynthia Meyer with Bank of America Merrill Lynch.

Cynthia Meyer – Bank of America Merrill Lynch

Hi. Good morning and thanks. I think last quarter you supplied a slide on flows by channel including international. I just wondered if you could give a little color on that and in terms of international how DIAM sales are going. I was talking on the fund global [symphony] data and suggest that the overseas flows revert to outflow this quarter. So just what the outlook is there? Thanks.

Richard Weil

Thanks Cynthia. Thanks very much for that question. We’re not going to break out that flows by channel every quarter going forward but you’re correct we saw some significant slowdown in the international business from quarter-to-quarter, first quarter to second quarter. I think we recognized it and discussed a bit on the first quarter call that some of that international business is lumpy and we saw some good lumpiness in the first quarter. It’s still a positive flow for us because of channel it’s not an outflows, but it definitely there was a period-to-period slowdown that said we continue to be optimistic about the prospects for non-US business but again as we’ve talked about now for several quarters in a row, because a significant part of those flows are particularly institutional flows, there is a fair amount of variation and expected lumpiness in the path forward.

Jennifer McPeek

And I’ll go onto Cynthia that as I broke out the sub-disciplines and the fundamental equity flows in the presentation, a big chunk of that global international slowdown which I highlighted in a particular strategy is overseas and you probably saw that in the [symphony] data.

Cynthia Meyer – Bank of America Merrill Lynch

Great. Thanks. And then more generally INTECH is now actually growing a little bit faster than the legacy Janus assets. You know I’m wondering is that still a higher margin business if that were to continue with this give you potentially more operating leverage?

Jennifer McPeek

The INTECH business model is one that has a lot of leverage in it so you don’t have the concentration of personal expense and security coverage, research coverage that we have in fundamental strategies. So yes it’s highly scalable and you start to see increasing margins as that grows so that’s very positive in terms of their operating model.

Cynthia Meyer – Bank of America Merrill Lynch

Okay. Thank you.

Operator

And we’ll go to our next question with Robert Lee with KBW.

Robert Lee – Keefe, Bruyette & Woods

Thank you. Good morning and thanks for taking my questions. You know maybe the new initiatives whether it’s liquid ulcer or asset allocation products I mean it’s, it’s something I guess in a few years back. Can you maybe give us some color on do you think you have some of the strategy than for example I think few years back. Any color on what you are seeing on some of those in a newer product in terms of the sales initiative or sales momentum that would be my first question?

Richard Weil

Yes. There have been a range of new products over the last several years probably most successfully at INTECH with the development of volatility focused and volatility managed line up strategies that have accounted for a very significant part of their new flows over the last year or two. Their ability to customize and to offer these new strategies is relatively new and it’s work that and Adrian team have put in over the last several years that greatly strengthened the firm.

Liquid [inaudible] is still coming out of the blocks their early returns in terms of investment performance was sort of unremarkable not particularly bad or not particularly good that sort of return from file doesn’t lead it to fly off the shelves so we don’t have the significant sales result for that one yet. We continue to be optimistic that it’s the right product at the right time but in addition to the right product at the right time one needs to put up the return profile to gather the assets and that’s still work in progress.

On the bond side we’ve added global bonds recently that is a success story doing well both in terms of asset gathering and in terms of investment performance most recently the bond side added an unconstrained effort which is far too new to really comment on at this point but, but our fixed income team continues to do a good job and we’re optimistic about the prospects for the opportunities and those things.

All that said this kind of change that the margin has to be looked at as a sort of a five year kind of plan, none of these things are likely to make material differences in the one, two potentially even three year timeframe. These sort of R&D development takes 5-ish years even when you get out right. There are examples in the industry and you will probably know them better than I do around hitting the hard dart at a lucky time, but that’s certainly not the reasonable expectation and not the plan.

And the build out and development of these things takes significant time. So we’re work in progress not everything we’ve done has worked perfectly but we continue to believe strongly passionately that this is the right path for us to diversify the margins down these road, this helps us serve more client needs which is the best reason to do it, it builds a broader and more stable relationship with clients and it also helps with our business model. So we’re committed to this kind of development and we are, we understand although it’s not our favorite thing but it takes a good long while to get it right.

Robert Lee – Keefe, Bruyette & Woods

Okay. Thanks. And maybe a follow-up focused a lot on the new product side and seed capital but one of the things you’ve seen the industry is a lot of firms changed their distribution strategy or feel like they had to invest excuse me structural their distribution particularly on the retail side of the business. Could you talk a little about what changes you have made there or respective changes you think you know you are in the process of undertaking possibly to adjust that the changes are on the distribution side of the business?

Richard Weil

Sure. Thanks very much that’s a great question. And it’s a proper focus, we’ve invested a lot in developing our distribution side, on the U.S retail side, we in recent years built out the data management underlying the business to do a better job of focusing and targeting our activities and candidly measuring our success as well and that kind of systems development was multi-year and reasonably significant expense for us on that side.

We moved to a much heavier mix of internal sales support people as measured as a percentage of our wholesales team are sort of almost a 1:1 ratio of internals to externals, we’ve moved in recent years and that was a significant investment in change for us as well.

And then we’ve talked a lot about the international distribution build out but that’s been very significant for us and we’re excited about the prospects and finally we’ve talked about the fact that we’ve invested and we will need to continue to invest in building out our U.S institutional efforts and that remains work in progress and a continuing focus for us. So building out the distribution client relationship efforts has been a high priority for us, we’ve invested significantly in it and we will continue to treat it as extremely important on our agenda.

Robert Lee – Keefe, Bruyette & Woods

Great. Thanks for taking my questions.

Operator

And we’ll go to our next question from Michael Kim with Sandler O’Neill.

Michael Kim – Sandler O’Neill

Hi guys. Good morning. First question I think there is generally a lag between fund investment performance track record, starts to really improve and when that ultimately translates into a pickup in new sales. So just wondering how you see that timeline potentially playing out for your fundamental equities business just given what seems like lingering uncertainty around asset allocation trends across the industry maybe a brand in a more secular move toward more flexible or unconstrained solutions?

Jennifer McPeek

Thanks Michael. I’ll do my best to address the more specular move toward more flexible or unconstrained solutions.

Richard Weil

Well, thanks Michael. I’ll do my best to address. There were lot of things mentioned in that question. I think I lost the thread of the question candidly thinking about all the parts. I apologize. Would you remind me that the essential question there?

Michael Kim – Sandler O’Neill

Yeah. Just trying to understand the timeline or sort of your expectation in terms of flows ramping up for the lag between when the performances there but ultimately translating into a pick up and flow just given kind of some of these headwinds across the industry as you will.

Richard Weil

Sure. Thanks again. I apologize for making you repeat that. But that was helpful to give me the chance to organize my thoughts. I want to say a few things. The first thing is the specific question around the timeline it varies circumstance to circumstance. It varies with the length of time that the PM has been on it varies with sort of the prior track record. It varies with market interest around the segment you’re talking about. It’s really an individual case by case timeline that one can focus on.

If you look at success stories for us, in recent years our contrary and fund has turned around the record and delivered really exceptionally good performance now for three uses plus. And that’s really starting to be a very important asset gathering both fact and opportunity for us on a go forward basis.

That record was in pretty rush shape three years ago and it took most of the three years to get that to where it’s really moving forward so that kind of timeline can apply in that circumstance and has but that’s in good shape.

I think the broader message looking across our funds is if we can put together a pretty strong three year track record as we have in bonds as we have in some of the products mentioned here, our distribution has proven it can sell at the front of the pack and that Janus remains a brand and a distribution that can be very successful in terms of relative peer rankings of distribution where we have that pretty good three year track record in an area that folks care about.

The other thread you mentioned was sort of asset allocation trends and other things. Look, everybody is aware of that equity haven’t been the biggest gatherer of assets in all periods especially institutionally, everybody is aware that there is a great interest in passive compared to active but active done well, continues to have a very important place in people’s asset allocation. And we believe that will continue as far out as we can see and project. And we are active managers first and foremost and that’s where we’re going to play most of the time. That’s most of our focus.

We also do see a rising focus from the client side on asset allocation and candidly we think that is proper and well thought by the client base. They should be focusing more attention on asset allocation and that explains why we’re so excited to add Myron Scholes and Ashwin Alankar to help us improve in that area.

So, I hope that’s not too jumble to response. There were lot of things in your question but thank you Michael.

Michael Kim – Sandler O’Neill

No, that’s helpful. Thank you. And then maybe just a question for Jennifer, you talked about balancing spending with growth in the past so just wondering where you are in that cycle are you still sort of in a bit of wait and see mode or might there be an opportunity to maybe more fully leverage AUM growth to ramp up infrastructure or advertising initiative a bit ahead of a pickup and float.

Jennifer McPeek

That’s such a loading question. Thank you, Michael. There is a lot of inputs into the decision about when to ramp up our marketing spend. I think we have given indication not direct guidance on past calls that we’re prepared to invest and then when performance and market demand come together, we’re going to take advantage of that and we’re not going to hold too tight on the pocket book when there is a real opportunity to grow.

I think your question is how much are we going to front run that and it really depends on those two factors. That depends on the performance of our funds and the demand in the market. So, I can’t give you very specific guidance but if you start to see our performance numbers get very attracted, we will spend appropriately to monetize that performance.

Michael Kim – Sandler O’Neill

Okay, fair enough. Thanks for taking my questions.

Operator

And we’ll go to our next from Dan Fannon with Jefferies.

Daniel Fannon – Jefferies

Good morning. Historically you guys have outlined some scenario analysis around performance for use going forward. And I just want to make sure is the reason we assume some decline in negative performance fees in the back half of this year given just the roll off of previously under performance?

Jennifer McPeek

Sure. I’ll take that question, Jennifer. Yes, in the latter half of 2011, we had some largely negative performance in our funds that had performance fees and so those performance track records will be rolling off in the latter half of 2014. How much that translates into or whether that translates into of course completely depends on what performance we put on during the next two quarters. But, yes, you’re correct. There is …

Richard Weil

There is an opportunity.

Jennifer McPeek

There is an opportunity.

Daniel Fannon – Jefferies

Got it. And then with regards to the buyback this quarter, did you buyback from Dai-ichi I mean last quarter you talked about some piping and the agreements I think between the two to make it easier for you but just given their limitations and ownerships are you buying stock.

Jennifer McPeek

Sorry about the feedback there Dan. Our share repurchases in the second quarter were in the open market.

Daniel Fannon – Jefferies

And from here realistic to the reason going forward that would have to come from there?

Jennifer McPeek

It all depends on the rate at which we buy them back so the real restrictions in the agreement are around how high their ownership can get on a percentage basis so when we get to that point we will execute as we’ve called in the past the plumbing that allows us to keep them at their appropriate level of ownership they are not there now, just depends on how fast we continue repurchase when we get there.

Daniel Fannon – Jefferies

Got it. Thanks.

Operator

And we’ll go to our next question from Marc Irizarry with Goldman Sachs.

Marc Irizarry – Goldman Sachs

Great, thanks. Just one more follow up on the seed capital portfolio. I just want to clarify another 275 million are you at a point now where most of that capital is fungible i.e. maybe start to pull some of the seed out and we deploy that. Should we continue to expect that to grow? And then just Jennifer in terms of any financial criteria you can share with us in terms how you’re thinking about allocating capital can buyback in other usage? Thanks.

Jennifer McPeek

Thanks Mark. So, the first question was around seed capital and its growth. Thank you for asking the question because we spend a lot of time talking about it in the prepared remarks.

On the slide that we showed, there was one chart which I didn’t walk through which was the weighted average time outstanding in the portfolio. And the takeaway there is just as you’ve articulated in your question which is, yes, the portfolio is maturing. We’re starting to see some of the funds there and strategies that we seeded in growth of the portfolio getting to their three year track record. Some of them are successful and will pull the capital out as flows come in. Some of them are not successful and those will pull the capital out as we look at potentially shutting down the strategies.

So, yes, we’ll start recycling more of that capital. That said, we recycle it constantly so we’re always looking at where is the best place for seed capital. It’s very actively managed that middle piece so which we call the ramp capital only stays out for one to two years. And so we’re always looking how to best allocate that and that’s driven by really distribution opportunities. What was your second question, again? Sorry.

Marc Irizarry – Goldman Sachs

Just in terms of any financial criteria that you can share with us what you’re thinking about allocating capital I guess just trying to get a better sense on the buyback are you going to be more opportunistic or how should we think about sort of maybe financial benchmarks?

Jennifer McPeek

The main financial benchmark that we’re looking at Mark is how much we’re returning to shareholders total in dividend and share repurchases in a payout ratio. So that will the absolute dollar amount of that will be driven by our cash flow so if we saw a market correction we would scale that back so we would rate that against the opportunity of repurchase shares at an attractive price, so that guidance I can give you is that we’re rally managing that program actively and trying to be opportunistic and do the right things for the shareholders.

Marc Irizarry – Goldman Sachs

Okay great thanks and Dick I guess just a big picture industry question there’s a lot of talk about fundamental factor base investing in the equity world called smart beta or enhanced beta strategy so I’m curious to know when you look across your fundamental equity business and quantitative businesses do you see a sort of big sort of opportunity in the future for you and this is a little bit more maybe a competitive threat right now to the core equity business?

Richard Weil

Thanks Mark. I guess we see this both I think your question is accurately describing both elements of it, we see both the opportunity and the competitive pressure of it. We think it is likely to be here to stay we think smart beta or rules based products are probably going to have a growing market share on a go forward basis, in an ETF format you’re challenged by transparency which raises issues of market effectiveness in terms of being able to execute the strategy and if that strategy is also one year offering and other client say on the mutual fund side, you got to make sure you’re maintaining your fiduciary duty to the first client as you make public your strategy. So it’s complicated to execute for say INTECH to make public all of their execution, that’s a challenge and a constraint on what we might do in that space.

Obviously easier for us as to offer rules based strategies in a format that’s different than what we’re offering in our say our mutual fund or a separate account strategies and avoiding that conflict. So it’s a little complicated for us. We see the opportunity we’re focused on it. And there maybe chances for us to push forward in that space in the days ahead and who knows maybe Myron and Ash can contribute in that format as well. We’ll have to see in the future here.

Marc Irizarry – Goldman Sachs

Okay great. Thanks.

Operator

And we’ll go to our next question from Bill Katz with Citi.

Bill Katz – Citigroup

Okay thanks for taking my questions, I appreciate it. First question I have is you mentioned you sort of ramp up the asset allocation business that it does seem to be impacting ahead sort of curious in terms of how quickly you might see a growth in this business and what strategy you try differentiate the business?

Richard Weil

Bill I think I’m not going to be able to satisfy your question very effectively Myron & Ash have not even started on their first day here, and we have not gone through the necessary steps of working with them to develop any ideas and offer any products so I’m not in a position to sort of outline that path forward and then project success or failure so with apologies it’s just, it’s too early days to make that kind of forward-looking projection.

Bill Katz – Citigroup

Okay my second question is if you look at the previous settlements performance is a bit of mixed when you look on both percentage of assets and percentage of funds and you know that you had some improvement which is fair but it seems like it’s mostly within the second quarter bucket rather than the first quarter bucket. Second, its two part question is the movement in just in the second quarter grill up to lose gross sales and we think about the whole gross sales a platform what strategies are you doing right now to build up the gross sales?

Richard Weil

I think the performance as we said during the quarter was mixed isn’t strong enough to know, I mean will I ever really admit it strong enough, no we always need to make it better. But clearly we’re not add any form of destination in terms of strengthening the track records with very much in work progress.

We have pockets of tremendously strong track records which I think you’re probably aware of, our fixed income and some of our equity products are terrific and we have other products where we need to do a lot of work. And the mix of that is what we’ve talked about now for many quarters but no we’re nowhere near declaring the victory on that front. In terms of influencing of forward flows I feel like you’re drawing me to dangerously close to trying to forecast flows on a go forward basis which of course we don’t do, so I’m not sure Jennifer is there more to say to try and respond to this question I’m a little bit.

Jennifer McPeek

Bill, was your question focused more strategically on what we’re doing about gross sales, because I don’t think we can give you a forecast on gross sales.

Bill Katz – Citigroup

Exactly Jennifer, I’m more interested in you’re doing to trying to grow sales right, specific number yes so would be helpful to understand what you’re trying to grow and how?

Richard Weil

The core strength of our distribution is and has been advisor sales group here in the U.S. retail market and earlier in the call I alluded to big investments we’ve made in technology and in people to better support that marketplace and we continue to look to invest in and develop distribution relationship management side of our US retail business it’s our highest priority, it’s our biggest business. I also mentioned that we have probably more opportunity in some ways outside of the United States where the markets are a little less mature and there is chance for change at a more rapid pace, we’ve been investing in our non-US business including building our retail in Taiwan and many other efforts and that has been an important part of our distribution strategy.

And then third, and sort of more slow and cautious to develop is working with the consultant community on the institutional marketplace and that remains the focus and a priority but we also acknowledge that’s going to be a slower thing to bring around.

Jennifer McPeek

I’ll just add on to that Bill that we’re focused on trying to get to a consistency of gross sales overtime now you saw this quarter-over-quarter change that was entirely consistent with the specific strategies and movements of inflows out of favor across the industry so we’re diversifying as we’re adding asset allocation, as we’re building more capabilities for clients, we’re really focused on getting on a consistency of gross sales even a specific products has volatility in those numbers.

Operator

Due to time constraint this will be our final question from Craig Seigenthaler. Please go ahead.

Craig Seigenthaler – Credit Suisse AG

Thanks guys for taking my questions. First on share repurchases, I’m just wondering, why don’t you simply restructure the Dai-ichi stands still now removing the roadblock for future buyback?

Jennifer McPeek

Craig it’s not something I would characterize as a roadblock at all, so I just wanted to be really clear that there is no impediment here us to doing future buyback, we have a structure where we will repurchase from Dai-ichi and would be able to keep their proportionate ownership the same. It’s definitely not a roadblock to future buybacks.

Richard Weil

Yeah please let me underline that because this is something that’s come up now several calls in a row, when we are making decisions around buybacks our relationship with Dai-ichi as good partners, has facilitated the necessary plumbing so that’s not a constraint or an issue for us. When we make the decision about when and how much to buyback it’s not a constraint decision or even seriously influenced by Dai-ichi’s ownership, that’s not an impediment in any way it’s not a factor on the board, we have the necessary arrangements with them to allow us to execute what we think the right answer is for our shareholders and it’s really that part that drives us what is the right answer for our shareholders and so I hope we’ve been clear about that we’re certainly trying real hard.

Craig Seigenthaler – Credit Suisse AG

All right, and then just one really follow up how do you view the attractiveness of the buybacks here given the maturity of this whole market versus special dividends?

Jennifer McPeek

Well we’re constantly looking at all opportunities to return capital to shareholders as I stated in the past. You can comment on the overall market softness but then you can also look at our relative multiple and where we come out on that, and intent on you be on our stock so it’s not a clear conclusion around what the right way to return capital what we try to do is strike a balance and we also talk to our shareholders, we talk to some of our large holders about their peripheral – and that’s an ongoing dialogue.

Richard Weil

We don’t use just to be bought we don’t use a forward macro forecast for equities as a big input factor in our business decision making, for the most part around here are motive business decision making is to assume flat markets on a go forward basis and most of the business decision making is driven by that core assumption and it would be pretty unusual for us to have such a high conviction around our forward forecast for the direction of equity markets that we change behaviors as a result of that macro.

Craig Seigenthaler – Credit Suisse AG

All right, great. Thanks for taking my questions.

Jennifer McPeek

Thanks

Richard Weil

Everybody I guess we’re done for today. Thank you so much for your time and attention. John Groneman and our Investor Relations team is available for any follow-ups and if we haven’t adequately addressed to your questions we’d be happy to talk to you separately on the phone but thanks for your time and attention today and we look forward to talking to you next quarter.

Operator

This concludes today’s conference call. Thank you for attending.

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