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Janus Capital Group Inc. (NYSE:JNS)

Q4 2010 Earnings Call Transcript

January 27, 2011 10:00 am ET

Executives

Dick Weil – CEO & Director

Greg Frost – EVP & CFO

Analysts

Craig Siegenthaler – Credit Suisse

Cynthia Mayer – Bank of America

Roger Freeman – Barclays Capital

Ken Worthington – JP Morgan

Michael Kim – Sandler O’Neill

Jeff Hopson – Stifel

Bill Katz – Citigroup

Jonathan Casteleyn – Susquehanna

Michael Carrier – Deutsche Bank

Roger Smith – Macquarie

Operator

Good morning. My name is Carlando your conference facilitator today. I would like to welcome everyone to the Janus Capital Group’s Fourth Quarter and Full Year 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 begin, I would like to reference their standard legal disclaimer which also accompanies the full slide presentation located in the Investor Relations area at 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 proceeding” 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 expectation 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 speak only as for the date on which they are made. Janus does not undertake to update such statements to reflect the impacted circumstances or events that arise after the date these statements were made. Investors should however consult any further disclosures Janus may make in its report 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. Good morning, everyone. Welcome to the fourth quarter and full year call for Janus Capital Group. In particular, welcome to those of you who have braved the storm in the northeast, we hope you are safe and well, and we thank you for your interest in our company.

In the fourth quarter of 2010, we generated earnings per share of $0.36 which is up from $0.18 in the third quarter. Importantly, about $0.12 per share of that operating and non-operating items that Greg will talk to you about in some more detail, a little later in the presentation.

Our operating margin in the fourth quarter of 2010 increased to 34.7%, up from 23.4% in the third quarter with assets under management rising to 169.5 billion at 12/31, which is up over 5% from September 30.

The long-term net flows in the fourth quarter were minus 4.7 billion versus minus 2.9 billion in the third quarter. An important part of this net outflow was a very surprising $2.6 billion redemption in fundamental equity by one large non-US institutional client. We were notified in December that this client was redeeming their assets, which was a surprise to us because we had done our job, both in terms of excellent performance and in terms of building a good relationship with the operating folks on the ground level.

This client had serious concerns about fee structures. It’s been long time negotiating a performance fee structure and it turned out when our performance was really great. They made the decision to pull those assets in-house. And that was obviously, a deep disappointment to us.

On a run rate basis, projected sort of more normal levels of performance, this would not have been a very significant asset flow, but Greg will talk to you about the effects on our performance fees for this quarter, where we did have exceptional performance in this year later in the presentation.

So full year, adding this quarter with prior, long-term net flows were minus 10.8 billion primarily driven by minus 10.5 billion inflows in our mathematical strategies.

We took important steps forward in our balance sheet during the fourth quarter. We called $121 million of debt in subsequent to the fourth quarter, where we gained our investment grade rating.

Turning to the next page, Page 3, I made some statements in my first year about what our 2010 priorities were on prior calls, and I’d like to review how we’re doing against those targets. First, we emphasize we wanted to act with financial discipline. We told you we expected that in time we could deliver margins in excess of 30%. We’re pleased to have achieved that level in the fourth quarter.

We also told you it was important for us to strengthen our balance sheet and regain our investment grade rating. And when that happen that is an important message for our clients and our employees, and we’re pleased that we’ve accomplished that important goal.

The next item is superior long-term investment. With 64% and 92% and complex-wide mutual funds assets in top two Lipper quartiles on a three-year and a five-year return basis, we think we’re still delivering good performance for our clients, but we must acknowledge that with 33% of our mutual fund assets in the top two Lipper quartiles on a one-year basis, we’ve some shorter-term challenges that we must effectively address.

We were very proud that Brent Lynn, Manager of our Overseas Fund was named Morningstar’s 2010’s International Stock Fund Manager of the Year. I think you all know that, that is simply one of the most prestigious honors in our business. Congratulations to Brent on that.

Our mathematical equity performance has markedly improved. That’s a very important step in returning health of that business. It is fair to say that that improvement hasn’t yet translated into positive net flows in the fourth quarter and that’s the next step in that process.

We committed that we wanted to expand our fixed-income franchise. With $4.0 billion of inflows in 2010, we think that’s excellent progress. AUM in that business is up to $15.3 billion, which is almost a 50% increase. It’s still a small business for us, but that diversification is important, and that growth is essential to our future.

Strategically expanding our global business is another priority I’ve discussed with you. We launched our Global High-Yield Fund or Global Investment Grade, our Global Bond Fund, and an Emerging Markets Equity strategy to further develop our offerings and make sure that we’ve the right products of interest for non-U.S. clients.

We also, very importantly, hired Augustus Cheh as President of Janus Capital International. And that means the leader of all of our businesses outside the United States, and Hiroshi Yoh as Portfolio Manager of Asian equity products, an important leader helping us develop our business in Asia. Hiroshi has a terrific record of performance. We’re very pleased that we’re able to attract both these excellent leaders.

We also said it was important to us, as a strategic 2010 priority to increase institutional acceptance of our fundamental equity and our fixed income products. We are seeing increased consultant buy recommendations on our fixed-income products and on select equity products.

We did see $1.1 billion in fixed income net flows. I think you folks on this call understand that’s a slow moving marketplace, but we view that as a very good progress for 2010, and it’s important we continue that sort of progress going forward.

With that, I will turn it over to Greg to give you some more detailed information.

Greg Frost

Thank you, Dick. Good morning, everybody. Turning to Page #5, I will cover flows performance and obviously the financials on which Dick noted earlier. I had a few items in it that is worth obviously for the discussion.

On Page #5 for flows, for the quarter, as Dick mentioned, net outflows totaled $4.7 billion, and full year 2010 was obviously disappointing with $10.8 billion in net outflows. The clear driver of this was the 50% increase in firm wide redemptions, led by several significant mandate losses in our fundamental equity franchise that we’ve talked about throughout the year, and including this last quarter, and continued attrition at INTECH.

On the fundamental equity side, net outflows were $4.3 billion. Perkins value strategies had net inflows of $2.3 billion, which represents a 15% organic growth rate for that firm versus negative 1% for the industry, which was more than offset by Janus equity outflows of $6.6 billion.

Although these outflows are frustrating to us, two important points should be made

One, of the total, over $4 billion of these redemptions arose from two specific mandate losses in the second quarter and in the fourth quarter, as Dick just mentioned. Two, it was not a good year for the actively managed U.S. equity fund industry, with industry data showing a 2% organic decay for the year.

The positive side in the story I believe is that, sales increased 19% year-over-year, demonstrating good momentum on the sales side. In addition to value, we saw positive flows in a number of growth products, where we had strong risk adjusted returns.

At INTECH the story continues to be a lack of activity on the sales side. The improvement in performance has not yet led to meaningful flows, as the environment continues to be extremely difficult with decision makers continuing to move from active to passive, and away from U.S. long-only large cap equity funds.

On the fixed income side, we continue to grow at an accelerated pace in 2010 with $4 billion of positive flows, demonstrating that our bottoms up credit driven franchise is a complement to those macro-driven fixed income investing houses.

On Page #6, the performance story is clearly mixed, as Dick mentioned. We’re certainly proud of our long-term track record as it speaks to the quality of our investment teams that we’ve inside our firm.

Despite some shorter-term underperformance in some of our key fundamental strategies, we’re thrilled to see extremely strong performance across our global international products, where we certainly see strong client demand now and in the future.

And in our fixed income business, where we can believe or we believe, we can continue delivering positive growth. In addition, INTECH’s short-term performance has clearly rebounded from 0% of strategies within a respective benchmark a year ago to 75% today.

With respect to the longer term numbers, the three-year numbers and five-year numbers, their performance is right about in line with its benchmark.

Page #7, on the financial story; fourth quarter earnings totaled $0.36 versus $0.18 in the third quarter and $0.20 a year ago. As I mentioned before, and as Dick mentioned, there is about $0.12 of items that are worth talking about in the current quarter.

Within operations, we recorded a credit of $6.5 million or roughly $0.02 per share. This is with the insurance recover related to the fund administrative errors that we had last quarter and no further recoveries are expected on this item.

We also had several non-operating items that totaled $0.10 benefit. First, we sold our SIV that we purchased out of the Institutional Money Fund business roughly three years ago, and this transaction yielded a gain of roughly $6 million or $0.02 per share. Second, similar to last quarter, we had a $0.03 reversal of previously recorded income tax reserves.

Finally, we recorded a $0.05 benefit through investment gains from the cumulative effect of correcting the accounting relating to the hedging of our mutual fund awards, which is part of our annual long-term incentive program.

During the quarter we evaluated this technical accounting for this hedge and determine that a different model is more appropriate. We corrected this in the quarter. And I’d expect that we’ll have some level of mark-to-market volatility in our non-operating investment line going forward.

On the revenue side, outside of the increase, one would expect with higher average assets, we’ve recorded $15.0 million of performance fees related to the large institutional non-U.S. account that Dick mentioned earlier. This account was structured to pay performance fees once a year in the fourth quarter, and obviously, will not repeat in ‘11 as we lost the account.

With the 13% increase in revenue and moderate expense growth, primarily in variable cost, margins exceeded 30% in the quarter. At our current level of assets and including the full-year impact of prior year spending and our moderate level of 2011 planned investments, I’d expect to see margins at or above 30% in 2011.

On the capital side, with the call of our 2012 senior notes, which closed on January 14, remember that we’ll take a first quarter charge of approximately $10.0 million, which represents the accelerated interest that we paid. Also with the upgrade from Standard & Poor’s, our annual interest expense will step down by approximately $1.0 million per year.

We have clearly worked very hard at strengthening our balance sheet over the past 18 months, and have clearly deployed our excess cash to achieve a structure that we believe can withstand inevitable market volatility and still remain investment-grade.

With that, I will pass the call back to Dick

Dick Weil

Looking forward for how we’re going to move ahead in 2011 and beyond, it’s an extension of the themes that we’ve identified for you in 2010. The foundation of our business is investment excellence and that’s the most important thing.

Job one around here has to be, to make sure that we attract and retain the best talent on the investment side to deliver for our clients. Effective and efficient operational excellence is another clear plank of the foundation of this business.

We, particularly, with the addition of our new leader in Technology and Operations, George Batejan, are taking important steps to raise the quality level there.

We need to keep a clear focus on our client relationships, because after all, that is the reason for our existence as a business to help our clients. Those are the continuing foundations for our business.

Striving for growth, we need to continue to expand the Janus brand beyond U.S. equities. If you talk to a lot of people, who are clients and prospects in our business, the word ‘Janus’ tends to mean U.S. growth equities, but in fact, our skills and scope are much larger than that.

Our expertise is much more diverse and much stronger than that. So, we’ll be working with some experts to communicate the reality of our company and the direction forward, a bit better in connection with our brand.

We need to continue to defend and increase market share in U.S. equities. We need to continue to grow our fixed-income franchise. We must expand globally. We need to increase our market share in the retirement channel, specifically, in the D.C. market.

I think it’s probably not as well appreciated as it could be that we’ve a very strong platform foundation presence in the D.C. market. Janus has a very strong presence in that marketplace. We need to continue to grow that, because that’s crucial for our future.

Finally, we need to expand our alterative product and distribution capabilities. We’ll be working on that as we go forward. This line-up obviously raises a question in some of your minds around, how big are all these investments.

Investments in 2011 are going to focus on brand, fixed income and Asian expansion, and in terms of size will be roughly in-line with what we’ve done in 2010.

With that, we’ll turn it over to any questions you might have.

Question-and-Answer Session

Operator

Your first question comes from Craig Siegenthaler with Credit Suisse.

Craig Siegenthaler - Credit Suisse

Thanks, good morning, everyone. Just wanted to kind of walk through the INTECH business and kind of dissect both new sales activity and also redemptions? And kind of how do you feel about RFP activity, new sales activity in terms of INTECH business, given the better near-term performance? And also, how do you feel about the redemption trends given that more of the performance sensitive money likely has exited and now your performance is better?

Dick Weil

Logic [ph] tells me that improved performance is going to translate into better flows in terms of reduced outflows and some increased inflows. And the question is when. I think INTECH faces the challenge that they have to continue to strengthen their performance recovery, that’s job one.

Number two, I think they have to continue to reach out and explain their process to a marketplace where the investing community has become disenchanted with quantitative and mathematical strategies over the last year or so. And that simply has to heal. And that’s taking some time. But I think INTECH is taking excellence steps to communicate the strength in their process and that should bear fruit. I think they are doing the right things.

The question is when do we see that translate into positive flows? We didn’t see that in the fourth quarter. And I’ve said previously on the calls like this that it’s very hard to predict when that actually occurs, and we’re not going to give guidance on that point I apologize looking forward.

Craig Siegenthaler - Credit Suisse

And then just one follow-up in terms of distribution. When you think of the number of financial supermarkets and broker-dealer relationship and independent relationships you have, really when you talk about Janus fundamental distribution, how does your size compare today versus 2005 and 2006?

And also, how the amount of, not just funds on the platforms, but in terms of funds on select lists? I’m just trying to kind of read how well you’re positioned for a recovery in retail flows?

Greg Frost

Craig, this is Greg. I’d say a couple of things. One, from a size perspective, we clearly concentrated our distribution spending and investments over the past several years and building out the intermediary business internally from almost the standing start to where we’re today, which is obviously a very big part of our business.

From a number of relationships, I think that has also grown. I’m not sure if we’re going disclose the numbers and where we’ve relationships, but I can tell you that there are deep and pretty robust, and we’re working hard to increase those relationships as we go forward.

Dick Weil

The advisor distributed business has become the center of what we do here at Janus. In the old days, obviously, it was direct. And over the last four years to five years Janus has built a very strong presence in these advisor distribution channels. And that remains absolutely at the center of what we do. We’re making very good progress in that business by my estimation.

We continue to see that sales per sales professional are increasing. And as we measure the quality of those relationships, we think they’re good and improving and expanding, but I don’t think we’re going to, as Greg said, be able to give you the specifics that you requested.

Craig Siegenthaler - Credit Suisse

Got it, fine. Thank you very much for the qualitative color.

Operator

Our next question comes from Cynthia Mayer with Bank of America.

Cynthia Mayer - Bank of America

Hi, good morning. Just on INTECH, I’m just wondering if you think there was any seasonality in terms of the number of clients who review their asset allocations and managers for that kind of strategy either in 4Q or 1Q or do you just view the uptick in redemptions as lumpy or trend?

Dick Weil

I think you do have an increased number of reviews at the start of the year and through the first quarter of a year, but the decision-making process in terms of inflows and outflow decisions tend to be much more distributed throughout the year. So I can’t really identify strong seasonal flow trends that I’d underline as important for you to understand.

Cynthia Mayer - Bank of America

You were talking a little about your presence on DC platforms, so I am wondering if you could may be give us a sense of the trend there and also since its 401(k) season would you expect an uptick in equity contributions based just on DC in the first quarter?

Dick Weil

I’m not sure I can give you a perfectly specific answer. I think that a lot of the DC market and frankly, a lot of the investment market is trend following and pro-momentum to a degree. And I think the improved results in equity markets will really bring increased equity investment in this cycle. As a consequence, the challenge for us is to make sure we get a good representation of that increased flow. So we do think that retail and institutional investors, both generally would be putting more money to work in equity markets, and in particular, U.S. equity markets.

We like the relative valuation of large caps versus small and mids to a degree. I think that small and mids have outperformed large caps in the U.S. by such a wide margin that there’s going to be some reversal there. I suspect you’ll see some more interest in large-cap investing in the U.S. going forward. So, we do anticipate that trend. For us, the challenge is to make sure that we get more than our fair share of that trend. I can’t quantify it for you.

Cynthia Mayer - Bank of America

Okay. Maybe one more question if I can. On the performance, really the longer-term performance records are great, it’s just really the one year. I’m wondering, as you emphasize more institutional sales, how much of a problem is that? Are you finding still that three-year accounts for the most, or is the one-year an impediment, say, for fixed income or the fundamental equity? How does that compare to what you’re seeing in the retail channel? Does one year matter more in one channel than the other?

Dick Weil

I think it’s fair to say that one year probably matters more in retail, but the truth is those markets are converging in terms of standards and the differences are decreasing directionally. Our performance challenges are largely in U.S. large-cap space and in terms of the true institutional separate account progress that we’re trying to make that’s not the center of our institutional push.

We’re focusing with institutional consultants and institutional separate account clients on our fixed income business, and on some global opportunities, and on small mid opportunities. And those products are not at the focus of our one-year performance challenge, so, there is a little bit of a separation there.

I think we continue to have very strong track records available in those products for institutions, and the challenge around some of our U.S. large cap products is going to be more focused on the retail side.

Cynthia Mayer - Bank of America

Great, thanks a lot.

Operator

Your next question comes from Roger Freeman with Barclays Capital.

Roger Freeman - Barclays Capital

Hi, good morning. I guess just in terms of your investment performance, I was looking at the Lipper returns on your top equity funds, they really had a remarkable improvement almost across the board in December.

I guess listening to your answer I think for a prior question, sounds like that’s probably trying to see the impact of more normalized markets, lower evolve [ph], less correlation and maybe sort of your bread and butter in terms of the large cap outperforming, has that continued into January for you?

Dick Weil

I am afraid we don’t comment on anything past, the end of the quarter, but I can tell you that I think you’re astute in your analysis, we did have some funds that delivered some pretty good returns in December.

If you take a look at our 20 and our 40 funds, it’s a concentrated fund, and it’s very important to us, but it can move around a fair amount, because of the level of its concentration, and it has bias towards the large cap end, where Ron Sachs, the Portfolio Manager feel strongly that the valuations are more attractive.

We like what we own. We have tremendous confidence in Ron and in tee analyst team that supports his work. And we are optimistic that that will be coming back soon, but you’re right, December was a nice recovery.

Roger Freeman - Barclays Capital

Okay. And then I guess my second question will be just around the slide on the 2011 priorities. I notice the institutional is not specifically broken out there. I mean, are you capturing it sort of in your retirement sort of the DC space comments, or is there a change in focus around institutional?

Dick Weil

I think institutional means a number of different things. I think if you look long-term success in DC space is a big part of where institutional is going. The DB world is shrinking and the opportunities there are shrinking to a degree because of LDI type thinking and a refocus on getting closer to liability benchmarks.

So, an increasing portion of the opportunity set in the institutional over the long period of time is going to be DC and rollover kind of relationships, and we need to do well in that space, and we’ve a good start.

In the more traditional institutional separate account business, I think we’ve opportunities in the U.S., but also, very importantly, outside the U.S., that’s a big part of the business.

As I said, our focus for institutional separate account is continue to defend and hopefully, begin to grow again the INTECH business which is terrifically importantly. And add to that our fixed income and some global and some smaller mid are the highlights in that market for us.

Roger Freeman - Barclays Capital

Great, thanks.

Operator

Your next question comes from Ken Worthington with JP Morgan.

Ken Worthington – JP Morgan

Hi, good morning. In terms of capital management, you paid down debt, I think at the balance sheet I think there is some more debt due this year, but I think you’ve got a treasury note against it. Do you think Janus is in a position and maybe do you feel some comfort that at some point in 2011, you may start to buy back stock? Or is that something that maybe just out of the question?

Dick Weil

I think we’ve been clear that our first priority restoring the strength of the balance sheet, so that we could be a good strong partner for our clients and for our employees through the full market cycle. And I think we’re happy that we’ve accomplished that. Now that’s done, it allows us to turn our obligation to our shareholder to make sure that we put cash flow to use in a most effective and profitable way toward shareholders. That involves an analysis of what should our dividend policy be, and what we should we do with excess cash in excess of that, so, we’re undertaking those discussions in a serious way with our Board.

And I can just underline that we’re committed to doing the right thing with our cash for generating value for our shareholders. We’ll look to invest in the business, where we’re confident we can generate above cost of capital returns and we’ve a real disciple around that and we’re trying very hard to be efficient with our shareholder money and after that we’ve to take a look at dividend policy, buy back of equity, buy back of debt and such other uses of capital and again we’re now in a good position to have those serious conversations with our Board and we’ll do so.

Ken Worthington – JP Morgan

Maybe for Greg, on performance fees, the $15 million was that 100% margin or did some of that get paid out in terms of comp or other expenses?

Greg Frost

Some of that, Ken, would have been paid out in terms of competition, yes.

Ken Worthington – JP Morgan

Is it possible to maybe just estimate it, since it’s kind of a one-time revenue line item just so you can get kind of like normalized comp?

Greg Frost

I think a lot of our compensation is revenue-based as you know, and so there is some of that that we go to pay for that. I’m not sure I’m comfortable going through and figure out how much of that would fall at the bottom-line, but it’s fair to say that a fair amount there

Ken Worthington – JP Morgan

Okay, great, that’s good enough. Thank you.

Operator

Your next question comes from Michael Kim with Sandler O’Neill.

Michael Kim - Sandler O’Neill

Hey, guys, good morning. First, you laid out some broad initiatives looking forward, but just in terms of building out your distribution capabilities either here in the U.S. on DC platforms or overseas, what are some of the things that you’re doing specifically to just expand your distribution footprint?

Dick Weil

We have been investing in additional people to help move our U.S. retail distribution forward including in the DC market and we’ll continue to do that, but it’s not going to be a big financial investment that’s the key to success in this area. We’re also driving forward efforts in improving thought leadership in making sure that we’re building the right kinds of relationships with clients we’ll be investing some on that, but again, these are very modest numbers.

The point is not the size of the investment. It’s the orientation and the focus getting the folks here aligned behind moving those businesses forward. There will be some modest investments associated with that, but I’d sight people in some thought leadership as key parts to that effort. It will also be underpinned, of course, by our work in branding.

Michael Kim - Sandler O’Neill

I didn’t see a slide on the LTI amortization schedule this quarter, any guidance on that line item going forward?

Greg Frost

Frankly, we looked at slide and realized now that the performance schedules have all bit rolled off that with our upcoming 10-K. We’ll disclose how much LTI would be granted this year and it’ll all be on a four-year ratable investment and you can take the schedule we had in our last quarter, add to it the new grant over a four-year period and get close, so kind of we assumed at this point you didn’t need that further.

Michael Kim - Sandler O’Neill

Okay, thanks for taking my questions.

Operator

Your next question is from Jeff Hopson with Stifel.

Jeff Hopson - Stifel

Okay, thank you. A couple of questions. In terms of the short-term performance issues, I’m just curious if you think that investors, gatekeepers etc., will focus too much on short-term versus the longer-term track record. And then, are you motivating your wholesalers to concentrate their attention on any particular product, say, beyond the most visible products, I guess as we move forward here?

Dick Weil

I think it’s hard to predict the behavior of the gatekeepers. And clearly, we’ll be working hard to focus them on the long-term value that we bring, and clearly, the short-term underperformance will be an issue that we’ve to address.

That said, I think our performance record has been strong enough for long enough and I think the respect build for our investors, analysts and portfolio managers will stand us in good step across those relationships and should stand us in good sense.

In terms of how we direct our sales forces in terms of which products to focus on, etc., we don’t do a lot of central planning here. In the different channels, we rely on the professionals leading those distribution efforts to communicate with the client and to understand where the client focus and interest is.

So, we’re not the sort of shop where we run big sales campaign focusing on these products X, Y, or Z. We try and be much more client-driven. And therefore, I don’t think I can tell you that product A or B is the highlight focus going forward.

Jeff Hopson - Stifel

I guess my point is, as I look at your product suite, it is becoming more diversified and if you look at some of the smaller products in size, you have some excellent performance in some of those areas. So, beyond the desire to get a greater attention on some of these additional areas, what type of specific focus can you have or deliver to those people in sales and marketing to try to focus and get greater attention on those other products?

Dick Weil

I think we’ve very strong folks in our distribution who recognize that they have a job where a lot of their relationships are focused on the Janus 20 and the Janus 40 in the Perkins Mid Cap Value. They need to defend the turf through the short-term, our performance challenges in those products and they get that. But they’re also strongly incented to raise new assets.

And in raising new assets, they’re clearly going to continue to think about those funds and they’re also going to think about some of the other ones, where the track records are exceptionally strong.

Clearly, Brent Lynn’s Overseas Fund will have highlighted role given the nature of their exceptional performance and the award, so it again won’t be centrally planned and directed. These folks have a proper incentive structure, which they will follow and they will protect and defend their relationship and then they’ll grow the asset base as best they can, and it isn’t going to be a centrally directed by me.

Operator

Your next question comes from Bill Katz with Citigroup.

Bill Katz - Citigroup

Thank you. Good morning, everyone. Dick, I just want to come back to age old dilemma between volumes and margins. You ticked off like six or seven different strategic initiatives, plus three to four core principles underneath that. And you overlay your commentary that targeted investments against these strategies, yet, if you look at your strategic positioning, you’re lagging many of your peers in terms of just your footprint in the United States, in institutional channel, etc., is it really at a point here where you think that the spending may need to accelerate beyond your initial plans here to meaningfully move the sales opportunity for the company?

Dick Weil

I think that’s a possibility, but it’s not a plan that we’ve now. I think the addition of Augie Cheh will be very important to the planning cycle. One of the precursors to making big investments offshore is having confidence that those investments will deliver substantial returns above the cost of capital

I think having strength in leadership in our offshore business and additional resource and experience with Augie’s addition, will give us a good partner to have increased confidence in our planning in that area. That could result in an increased level of investment, but those plans haven’t been laid at this point.

I think it’s very important that you maintain a strong discipline around how you invest. And that we shouldn’t be doing that sort of overseas investment unless we can see the clear path to returns substantially in excess of the cost of capital.

Bill Katz - Citigroup

You mentioned before the choppiness of performance could be a little bit of an issue, or at least that’s what sort of I think take away from the discussion. When you talk with institutional consultants, opportunity or gateway to what’s going on outside United States, are they mentioning sort of manufacturing footprint of being more of U.S. centric manufacturer?

It seems like, when you talk to some of your more global peers, what they point to is having this very robust on the ground presence around the world. I’m just so wondering, really more of an eventuality, given you want to become a much more global entity that even with one or two people added at the leadership level, you might need to still broaden out to really get a solid return on that investments?

Dick Weil

I think that’s a fair comment. We’re behind the folks who successfully developed their non-U.S. businesses a decade ago, and that’s just the truth, so, we start where we start. The markets over there are large and developing. The formation of capital pools outside of the United States is a powerful global force. We’re late, but we’re not too late.

So, we’ll continue to invest and grow our efforts in that business. I don’t think the right analysis is, somebody else is 10 years ahead of you with a big global footprint. I think the right analysis is, can we take our exceptional investment performance and extend it effectively into those markets and earn money for our shareholders. So, that’s what we’re focused on.

Some of these other big players, the market is big enough for more than just them and we see really good opportunities for our self to grow substantial business outside the United States. We think that some of our very strong products in global and in fixed income and INTECH are really well suited to be sold over there and that’s much more our focus than the sort of to the focus of the question you asked.

Bill Katz - Citigroup

Some of your competitors also sort of talked about little bit of a shift from fixed income toward equity. I know when you first joined the firm you thought it maybe a little bit longer tail for that shift to occur. Just sort of curious, as you think about incremental spend here; you mentioned fixed income a couple of times. Would it be more prudent at this point? Or are you seeing more decisive shift back to equities? So that maybe some of the marketing and investment spending should be back toward the equity footprint to try and maybe take advantage of some of the momentum, or is it still more strategic in your mind in terms of positioning the company?

Dick Weil

I think our brand spend in a lot of what we do in marketing and on the client facing side is inherently most supportive of our equity business, so, I don’t think we’re disproportionably investing in fixed income, but when you have a business that’s growing as fast as our fixed income business is. And when you continue to see very good prospects for continuing that growth, it’s foolish not to invest and support that business. And for me, it’s not a question of or, it’s a question of, and I think we’re doing both intelligently.

Bill Katz - Citigroup

Okay. Thanks for taking my question.

Operator

Your next question comes from Jonathan Casteleyn with Susquehanna.

Jonathan Casteleyn - Susquehanna

Yes, good morning. Could you expound upon the lost mandate in the quarter? I am just wondering if performance was good, but it was a cost issue from the client side, is that more broadly reflective of potential pricing loss across the franchise, can you just give me some detail there?

Dick Weil

I think that’s a smart question. I don’t believe it is because this is such a unique circumstance that I don’t see it that way, but I can’t guarantee it for you. Obviously, in this general category, cost sensitivity was playing a role here and it’s playing an important role in our industry.

So, I think your question is a good one, but specifically, this was such an unusual circumstance. We had done just a fabulous job with the client. We had a terrific relationship with the operating level folks, and we’re very proud of what we’d accomplished it, and it’s quite a rare thing in our business to get fired in that combination of circumstances, so, I don’t see that happening again.

Jonathan Casteleyn - Susquehanna

Just broadly, as you look across the macro environment is there anything that makes you more incrementally positive on the current environment, meaning lower volatility, correlation is breaking down for the quant business or do you think that’s really a non-event for the quant landscape?

Dick Weil

I don’t think I can speak to the whole quant landscape, but I think what our mathematical strategies focus on in terms of volatility, I think they’re confident that they have good opportunities and improving opportunities to offer good performance going forward.

It’s not really around the same correlations that we describe in the fundamental business, it’s around the relationship of the volatility to performance and the diversity in the index. I’m not enough of a mathematician who speaks for Dr. Fernholz and the Princeton folks, but I think it’s fair to say that they see improving opportunities in the marketplace going forward.

Jonathan Casteleyn - Susquehanna

Great, thank you.

Operator

Your next question comes from Michael Carrier with Deutsche Bank.

Michael Carrier - Deutsche Bank

Thanks, guys. In some of the newer areas that you’ve been investing in and gaining some good traction particularly on the fixed income side and then on the international, when you look at the landscape, one is where you spending the money to gain the traction, and then two is, where do you see the opportunities worth a demand by certain types of clients that product or that relationships not already out there in the market, so you find your niche and you’re able to take advantage of those opportunities?

Dick Weil

On the first part of your question, where are we spending the money, I think we said in the presentation, the current investments are focusing on brand, fixed income and Asian expansion. The Asian expansions are obviously around a new portfolio manager in Singapore and some of the other efforts to build out credit analysts and equity analysts strengths in that region overtime, the biggest number there is probably the brands.

When you think of brand, it’s not television advertising on a Super Bowl for certain. Our thought leadership plays a significant particularly. And it’s not all by any means, it’s not all about advertising.

And then in fixed income, we’ll continue to add strength to that team as the opportunity set grows in order to properly support of the new products we’ve added and the new clients that are coming on board. So, that’s where we’re adding and maybe you want to repeat the second half of your question.

Michael Carrier - Deutsche Bank

Yes, when you look at those two opportunities, both fixed income and international, you look across the landscape, obviously, performance-wise, you guys are doing well, but it’s still a fairly competitive landscape. So, when you’re talking to clients, and you’re talking to the distribution platforms, where do you see being Janus get the most opportunity given your positioning in the marketplace?

Dick Weil

I think our Asian equity product enters a crowded field. We’ve hired a gentleman with an outstanding track record in his prior employment, and we expect him to duplicate that. We think globally, there’ll be an increased investment demand for Asian products, so, we think that the best offerings in that space we’ll do well, so it a little bit depends on your timeframe.

Obviously, starting with a brand new product, it’s not going to impact our sales in the first-year or two-year in a material way, but once you get beyond the three-year track record, a lot more becomes possible.

In fixed income, sure, it’s a crowded field, but it’s a crowded field filled with opportunity. People are looking for diversification from the giants. Sometimes, the giants underperform and you get large flows of money out, and that creates opportunity for new friends to enter the competitive fray. I think we’re seeing that now. I think there’s great opportunity. I think those clients would like more diversity in terms of their managers on the fixed income side.

I think what we do is a bottom-up credit effort, is a nice complement to some of the macro efforts out there. So, we see that opportunity set as being pretty wide open. I think the red-hot nature of the fixed-income market is cooling off to a degree, and we’ll probably see some higher rates, so, that will continue.

I don’t think it will remain as red hot as it was over the last 12 months, but the opportunity set for us is a complement to some of the big players as an occasional replacement to some of the big players, given our focus on risk adjusted returns, I think that’s a great opportunity.

More generally, our global investing, our international investing is just exceptionally strong with great track record. We have very strong opportunities in that area as well.

Michael Carrier - Deutsche Bank

Okay, thanks for the color.

Operator

Your final question comes from Roger Smith with Macquarie.

Roger Smith - Macquarie

Yes, thank you very much. I’ve three questions for you, first one on the fixed income. Do you expect that fixed income business will gain traction as it gets bigger and is there some size that it needs to become to really attract some of the larger institutional mandates?

And then my second question is on the separate accounts on the $15 million of performance fees. What style was the AUM invested in and can you tell us how much separate account AUM has performance fees?

And then the last third question is on the accounting change that you talked about with the mutual fund hedging. Could you tell us how much assets in the deferred comp guess are in mutual funds and will we see both a non-operating income and also increases in compensation and are those assets fully vested now?

Dick Weil

The first one was fixed income, it was scale?

Roger Smith - Macquarie

Yes.

Dick Weil

The answer is obviously margins go up significantly as that business grows to scale. And it’s at $15 billion plus now. When it gets to $25 billion, the margins get significantly better.

In terms of attractiveness to clients and relationships, there is no doubt that as you get a bigger installed base via the consultants in the institutional market domestically and abroad, it’s quite possible and predictable to develop momentum and we’re at a bit of a tipping point there. I think we’ve improved relations with consultants and the opportunities set is expanding, but there is room to get more momentum as those relationships grow, so, yes, I think somewhere around where we’re to $25 billion in that zone.

You can get to a tipping point with institutional consultants, where you can see positive momentum and accelerated flows. On the style that this client led the performance fees and unfortunately, terminated us, their style was unique I think to them, they had a mix of very focused sector investing, they had a unique approach to how they used our services, so it wasn’t all akin to a single style.

In terms of the amount of assets that we’ve that are subject to performance fees, I think we’ve made good disclosure on the fact that our mutual fund complex has recently implemented performance fees across a number of those funds. And I guess I’d direct you to that disclosure for the detail and you can contact us separately and we can walk you through that disclosure and talk to you in detail. But that’s really the bulk of the assets here that are subject to performance fees. Finally, on the accounting change, Mr. Frost.

Greg Frost

I’d follow up on that last question. INTECH does have a handful of accounts of performance fees, but they’re not near the magnitude that this one was. So, I agree that that plus the Janus mutual funds will cover the performance fees here.

On the hedge issue, think about it, in terms of around $75 million to $80 million of assets that are currently out there that will now be mark-to-market, you will see the majority of the impact below the line as I mentioned. There maybe a smaller impact above running through LTI expense, but I’d view that to be much less significant, as that’s just the portion of investing versus the entire assets that sitting down in below the line.

Roger Smith - Macquarie

Excellent. Thanks very much for the answer and the questions.

Operator

There are no further questions at this time. I’d now like to turn the call back over to management for any closing remarks.

Dick Weil

Thank you very much, everybody for your time, especially those friends in the Northeast for enduring the hard weather and getting with us. We appreciate your interest in our company and we look forward to talking to you next quarter.

Operator

This does conclude today’s Janus Capital Group Fourth Quarter and Full Year 2010 Earnings Conference Call. Thank you for participating. You may now disconnect.

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