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Janus Capital Group (NYSE:JNS)

Q3 2011 Earnings Call

October 20, 2011 10:00 am ET

Executives

Richard Mac Coy Weil - Chief Executive Officer, Director and Chairman of the Executive Committee

Brennan A. Hughes - Principal Accounting Officer, Vice President and Controller

Bruce Lewis Koepfgen - Principal Financial Officer and Executive Vice President

Analysts

Michael Carrier - Deutsche Bank AG, Research Division

Jonathan E. Casteleyn - Susquehanna Financial Group, LLLP, Research Division

William R. Katz - Citigroup Inc, Research Division

Cynthia Mayer - BofA Merrill Lynch, Research Division

Kenneth B. Worthington - JP Morgan Chase & Co, Research Division

Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division

Daniel Thomas Fannon - Jefferies & Company, Inc., Research Division

Marc S. Irizarry - Goldman Sachs Group Inc., Research Division

J. Jeffrey Hopson - Stifel, Nicolaus & Co., Inc., Research Division

Michael S. Kim - Sandler O'Neill + Partners, L.P., Research Division

Roger A. Freeman - Barclays Capital, Research Division

Operator

Good morning. My name is Michael, and I will be your conference facilitator today. I would like to welcome everyone to the Janus Capital Group Third Quarter 2011 Earnings Conference Call. [Operator Instructions]

Before the company begins, I would like to reference their standard legal disclaimer, which also accompanies the full slide presentation located in the Investor Relations area of janus.com. Statements made in the presentation today may contain forward-looking information about management's plans, projections, expectations, strategic objectives, business prospects, anticipated financial results, anticipated results of litigation, and regulatory proceedings and other similar matters.

A variety of factors, many of which are beyond the company's control, affect the operations, performance, business strategy and results of Janus, and could cause actual results and experiences to differ materially from the expectations and objectives expressed in their statements. These factors include, but are not limited to, the factors described in Janus' reports filed with the SEC, which are available on their website, www.janus.com, and on the SEC's website, www.sec.gov.

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

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

Richard Mac Coy Weil

Good morning, everybody. Thank you for joining us for the third quarter 2011 earnings presentation of the Janus Capital Group.

Starting with the headlines. In the third quarter of 2011, EPS was $0.15 compared to a $0.18 in the third quarter and $0.23 in the second quarter. Third quarter EPS included importantly $0.06 per share of investment losses, nonoperating investment losses, primarily related to awards of mutual funds we make to our employees as part of their LTI compensation packages. Bruce Koepfgen will tell you some more about that a little later in the call.

Assets under management at September 30 were $141 billion, a decline of 17% versus June 30. Most of that, substantial -- the vast majority of that was a $26.5 billion negative market impact.

Janus' total company long-term flows were down $2.4 billion in the third quarter, which compares to $3.1 billion out in the second quarter.

And finally, operating margin in the third quarter was 31.3%, a little better than the 31% in the second quarter and obviously significantly better than 23.4% in the third quarter a year ago.

Turning the page in the presentation to Page 3. The obvious truth is the underperformance of some of our largest mutual funds continues to be our #1 challenge. As a result of that performance and also very difficult market conditions, especially for active equity managers and particularly for growth managers, we continue to experience net outflows. Fundamental equity net outflows were $3.8 billion in the third quarter as compared to $4.6 billion in the second quarter.

Based on current performance, we're facing headwinds in performance fees, as our mutual funds have significant performance fee structures. In the third quarter, we had $4.2 million of mutual fund performance fees negative versus negative $1.8 million in the second quarter.

Flipping the page to Page 4. While we face up to that central challenge of investment performance in some of our larger funds, some things are also going very well for us. Performance and flows in our fixed-income franchise are very strong, and we're seeing increasing momentum in the institutional channel. 100% of our fixed-income assets are outperforming in 3 and 5 years at September 30, and on a risk adjusted basis, this franchise really continues to keep the promise to our clients. In the third quarter of 2011, we had positive net flows of $2.1 billion in our fixed-income franchise compared to net flows of $1 billion in the second quarter, and we're seeing our pipeline and consultant momentum continue to build.

The majority of our mathematical strategies managed by our subsidiary INTECH have delivered positive relative performance in the last year. As a result, we're seeing a moderation in redemptions, increased interest from consultants and clients, albeit moderate increase still at this point. Primarily, I think Europe is leading a little bit in front in terms of the return of interest; non-US markets, in terms of return of interest to mathematical strategies compared to the U.S.

Our Perkins subsidiary is continuing to deliver on its promises to its clients. They are a conservative value manager, which tends to outperform in difficult markets and underperform in red-hot markets. They've kept that promise with their clients, and they continue to have a very strong successful franchise.

With that, I'll turn it over to Bruce Koepfgen, our CFO, for some more detailed comments on the results.

Bruce Lewis Koepfgen

Thanks, Dick. Good morning, everyone, and thank you, all, for attending. We made a few modest changes to the presentation to provide as much clarity as possible around the factors that most impacted this quarter's results. I hope you find them helpful. Also, I'm joined this morning by Jennifer McPeek, our Treasurer; and Brennan Hughes, Controller, who will participate during the Q&A as necessary to completely address your questions.

Going forward, we, of course, welcome any comments you may have to improve the content or quality of these quarterly discussions.

This morning, we'd like to focus on 4 items that'll help to explain our quarterly results. I believe these are the items that most likely caught your attention as you reviewed the materials. Those 4 items are: first, the change in the assets under management and the resulting change in revenue; second, the response of the expense structure and the drivers behind those changes; third, nonoperating items; and then lastly, the balance sheet.

I'll generally follow the order in the deck starting on Page 6. So let's start with the punchline, some of which Dick has already touched upon, and then I'll walk through the details.

Earnings for the quarter were $0.15 compared to $0.23 in the second quarter and $0.18 a year ago. Third quarter earnings included a nonoperating loss of $0.06 a share, primarily as a result of mark-to-market impacts on our pre-funded mutual fund award portfolio and seed capital investments.

Average AUM of $156 billion declined 9%, primarily as a result of Beta [ph]. The market impact alone this quarter was $26.5 billion.

Revenue of $237 million declined 10%, mainly due to this decline in AUM. Operating expenses declined 11% as a result of the variable expense response and other cost reductions. Operating margins improved slightly to 31.3% versus 31%.

As a result of negative markets during the third quarter, net investment losses of $23.4 million were significantly up quarter-over-quarter, primarily as a result of these mark-to-market losses on our prepaid mutual fund awards and the seed portfolio.

So let's take a look at each of these factors in order. Recent underperformance in several of our larger fundamental equity products continues to weigh on our short-term performance numbers. And as you can see, on Page 7, long-term performance continues to be strong across all strategies. In addition, on a complex-wide basis, 55% of our funds had 4 or 5-star overall Morningstar ratings on September 30, compared to the industry average of 32.5%.

Total company net outflows of $2.4 billion improved quarter-over-quarter, primarily as a result of an increase in net flows in our fixed income strategies and a relative improvement in outflows in our fundamental equity business. During the third quarter, we had a $1.3 billion mandate win in our balanced fund, which is a tremendous win for both of our fixed-income and equity business and, of course, our distribution team. However, it is important to keep in mind that large wins like these are by their nature unpredictable.

Because of the manner in which we book AUM, the flows for our balanced fund, this win is split 50-50 between fundamental equity and fixed income. Inclusive of 50% of the balanced fund win, fundamental equity posted third quarter net outflows of $3.8 billion versus net outflows of $4.6 billion in the second quarter. The relative improvement was driven by a 9% decrease in redemptions and a relatively flat gross sales number.

INTECH's net outflows of $700 million in the third quarter, down from a $500 million inflow in the second quarter. But it's important to note that this swing is primarily the result of a $1.3 billion mandate win that took place in the second quarter. With the continued strength performance, we are seeing a moderation in outflows. INTECH's annualized redemption rate declined to 15% compared to 29% a year ago. INTECH's strategies are delivering strong investment results, and we are seeing increased interest among clients, prospects and consultants, particularly in non-US regions.

In our fixed income business, net sales were up over 100% quarter-over-quarter, driven by the large mandate win in our balance fund, as well as continued momentum in the institutional channel. We entered the fourth quarter with strong performance, a healthy pipeline, and we remain optimistic around opportunities going forward.

Average AUM during the third quarter was down 9%, primarily as a result of significant market depreciation, and to a lesser but still meaningful extent, net outflows. We saw our revenue decline by 10% quarter-over-quarter as a result of market declines and negative performance fees. As you will recall, we have performance fees on both our mutual funds and separate accounts. In the third quarter, we saw the negative performance fees on our mutual funds increased to $4.2 million from $1.8 million last quarter.

Third quarter private account performance fees were positive $1.1 million versus $1.6 million in the second quarter. As previously discussed, during the fourth quarter, we will be bringing a number of our larger funds under this performance fees structure, which amounts to an additional $20 billion in AUM.

To assist you in modeling these fees, we have updated our Appendix slide to reflect the third quarter pro forma impact to performance fees. You will see on the schedule that based on current performance, if we were recording performance fees on all mutual funds during the third quarter, the pro forma impact would have been an additional $11.8 million, or $16 million in total.

Partially offsetting the decline in revenue, third quarter operating expenses decreased 11% as the result of a decline in variable expenses and other explicit cost reductions. Dissecting operating expenses a bit further, our variable expense items, compensation and distribution, both declined 11% in line with revenue as we would expect.

Marketing expense declined 24% and G&A declined 11%, primarily as a result of management decisions that constrained discretionary spend in light of current market conditions. As you know, in July we began implementing a new compensation plan that ties aggregate variable compensation to profitability, which we believe creates better alignment between our employees and our shareholders. In the third quarter, we saw the impact of this plan as market declines and negative performance fees pressure profits.

Before I move on, a comment on expense management is probably in order. As we respond to the current difficult operating environment, our leadership team is committed to balancing the need to control expenses while prudently investing for the long-term growth of the firm. As market conditions and conditions at Janus evolve, we will continue to reduce expenses where we can. But it is not our intention to reduce spend to the point where it will jeopardize our global strategy.

Turning now to nonoperating income items. During the third quarter, we incurred a $23.4 million mark-to-market loss on investment securities, which primarily included a pre-funded mutual fund awards and seed capital. The mark-to-market impact on the mutual fund awards drove the majority of this increase.

So to summarize the impact of all these items on earnings per share, the top line impact that we experienced as a result of declining markets, outflows, and to a lesser extent, negative performance fees represented about $0.10 a share. The decline in operating expense as a result of the expected variable response from our compensation and distribution, as well as other cost reductions, offset about 70% of the revenue decline.

Finally, the nonoperating items, which were driven primarily by mark-to-market impact on our mutual fund awards, accounted for the rest of the quarterly change.

Lastly, a look at Slide 12 highlights the continued improvement in the credit quality of the company. Over the last 2 years, we have significantly reduced our leverage, further strengthening our balance sheet. A strong balance sheet, as we have mentioned before, continues to be important to management and our clients. A few weeks ago, we retired the remainder of our 2011 senior notes, and following the retirement, our leverage ratio declined below 2x for the first time since the second quarter of 2006. In addition, our balance sheet is now net cash positive. Our cash position continues to be strong with approximately $600 million of cash and marketable securities.

Finally, last Friday, we announced we had replaced our previous $100 million, one-year credit facility with a new $250 million 3-year unsecured credit facility, which provides the firm with greater financial flexibility going forward.

That's all I have, and I'll turn it back to Dick for closing comments. Thank you.

Richard Mac Coy Weil

Thank you, Bruce. I'll make a couple of closing comments and then we'll take your questions.

In closing, Janus continues to advance our strategy. As I have said before, it's our intention to strengthen and diversify the company across fixed income, better institutional results, international, and we're taking important steps forward in each of those areas. We are continuing to focus on our #1 challenge and taking steps to improve our investment performance. And despite underperformance in our large cap growth funds, we're still delivering some very strong results across an array of other fronts. Notably, our Triton fund recently won an S&P award for mutual fund excellence for the second year in a row.

INTECH is delivering positive relative performance across the majority of its strategies and is applying its process to new areas to develop important new products that we think will be significant positive contributors in the medium term.

Perkins is delivering strong long-term performance. It's keeping its promises and remains a very important and strong franchise as part of our family.

As Bruce said, we're continuing to balance the needs for costs control in difficult market circumstances with our desire to continue to build out our strategy. In that regard, we've recently hired Susan Oh from JPMorgan to oversee our centralized U.S. institutional sales and marketing teams. We've added about 8 new heads, important heads, to our sales muscles outside the United States. We've taken significant steps to strengthen our balance sheet over the last 2 years, and we remain committed, as I think you see in the margin line this quarter, to strong cost controls while still investing to the extent necessary to build a bright future for our company.

With that, I'll close. And operator, we're ready to take questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question today comes from Michael Carrier from Deutsche Bank.

Michael Carrier - Deutsche Bank AG, Research Division

First question, maybe on expenses. So in the quarter, if, like you guys mentioned, good cost control, I think the question or the concern is that if we look at those pro forma, negative performance fees, and just assuming that nothing changes going forward on the performance side, then can we assume that same type of flexibility on the expense side, meaning in terms of the comp line? So if we do ramp up to that, it's $16 million in quarterly [ph] performance fees, can we see the same type of a reduction like we saw this quarter in comp, or was there something special this quarter that could potentially not continue going forward?

Bruce Lewis Koepfgen

Fair enough. Good question, Michael. I think the answer is that these performance fees, as we've modeled them out for you, are a meaningful consideration for us. We can offset that to a certain extent by the types of cost control efforts that we've implemented in this quarter, but I think that it's safe to say that we cannot respond completely from compensation response fairly significantly to changes in profits. But if the current market conditions continue, then I think the expectation should be that we'll see some kind of market or some margin compression.

Michael Carrier - Deutsche Bank AG, Research Division

Okay. That's helpful. And then just as a follow-up. It seems like relative to the industry, your sales held up relatively well during the quarter. And even in some of the core equity [indiscernible] and fixed income. And then the redemptions, also you saw -- more of a decline there. So I guess when you're looking through the channels, and maybe if you -- I know you guys mentioned on the fixed income side, it's mostly on the institutional part of the business, but even in equities, like, where are you seeing some of that improvement versus what we saw over like the past 2 quarters? And it could be either products or channels.

Richard Mac Coy Weil

That's a good question. It's a complicated answer. Fixed income is clearly strong, and that's a big part of the counterbalancing positive flows. And then we also have some very strong individual products -- I mentioned Triton earlier, and some others that are driving positive flows. We have seen this year an increase in the number of platform placements across the firm, and so that gives us some opportunities in new places to have some counterbalancing flows. But it's fair to say that our underperforming large cap growth and international products continue to weigh on us and those assets, and relationships are strained, given the current challenging performance. And so, it's a balance of those 2 forces that's giving us our net.

Operator

And our next question comes from Ken Worthington from JPMorgan.

Kenneth B. Worthington - JP Morgan Chase & Co, Research Division

In terms of compensation, was any of the drop due to reversal of accruals from the first half of the year, given the new compensation structure? Or is this like really a new true run rate, given the level of profitability for the firm?

Bruce Lewis Koepfgen

Yes, Ken. As the year progresses and the market conditions change, we monitor these accruals. And in the third quarter, we did have some insignificant adjustments. But future adjustments would depend largely on market conditions.

Kenneth B. Worthington - JP Morgan Chase & Co, Research Division

Okay. So this is the good run rate, then?

Bruce Lewis Koepfgen

Yes.

Kenneth B. Worthington - JP Morgan Chase & Co, Research Division

Okay. And then on G&A, it fell a fair amount during the quarter as well. Can you just discuss what the components were for the decline? There's some, I guess, some legal factors as well that probably impacted it. And then to what extent is this a good run rate for G&A?

Bruce Lewis Koepfgen

Let me take it in reverse order. And the most importantly, is this at a good run rate number? And the answer there is I think it is if these market conditions continue. I mean, if you look down the G&A line, there was a reduction almost in every category. I don't want to say all of that was explicit to expense management, but to a great extent, when it comes to discretionary spend, we have worked hard to constrain that while we work through these markets.

Kenneth B. Worthington - JP Morgan Chase & Co, Research Division

Is legal an issue there, like given lawsuits?

Bruce Lewis Koepfgen

No.

Operator

And our next question comes from Dan Fannon from Jefferies.

Daniel Thomas Fannon - Jefferies & Company, Inc., Research Division

I guess, looking at the balance sheet now and as well as the cash regeneration even in a more kind of negative performance fee environment, is there a point where we can start thinking about you redeploying capital potentially back into maybe share repurchases?

Bruce Lewis Koepfgen

A good and obvious question. I think I'll probably tackle this the same way we did at the end of last quarter. We look first to internal opportunities to invest and to advance our business that we think will provide outstanding returns for our shareholders. Dick has articulated those. Our fixed income business, our international platform, seeding new products and, of course, investing in human resources, which is our first step. After that, of course, we're always looking for ways to return cash to our shareholders. You're familiar with debt repurchases we've made this year, the dividend increase, and we will continue to look for opportunities to do just that. At this particular point, we think flexibility is key, and so we're remaining in a conservative posture. We have no plans to repurchase stock at this time, but it is certainly not off the table.

Daniel Thomas Fannon - Jefferies & Company, Inc., Research Division

Okay. And then maybe secondly here, just in terms of the institutional business you have -- you've hired a new head of sales obviously, recently, and then thinking about potentially what's the backlog kind of potentially seeps [ph]. I know it's small, but maybe even splitting up the INTECH and potentially fixed income business, in a kind of how you can give us maybe some numbers around our key activity or final presentation. Things that maybe could be a little bit more helpful?

Richard Mac Coy Weil

I'm sorry. Could you repeat that question? I apologize.

Daniel Thomas Fannon - Jefferies & Company, Inc., Research Division

Yes. I just want to get a little bit more color around the institutional business. You have a new head of sales. And then think about, talk about potentially what's happening within INTECH as well as in the fixed income side. Maybe if there's a way to put some numbers around RFP activity or final presentations or kind of the roadmap that we should be kind of looking at to gauge your success within that channel.

Richard Mac Coy Weil

Yes. I'm sorry, I don't have numbers of final presentations for you today. I can tell you that clearly, the fixed income strength is the most important factor in driving forward in positive institutional momentum. I mentioned that we're seeing a modest increase in interest on the INTECH side. INTECH is doing a good job, and their industry is coming out of, I think, some challenging conditions, where quantitative and mathematical strategies had a pretty low level of interest. More of that rebound is happening outside the United States. We also have some research, Janus research funds, particularly our global research fund, which is generating an increasing amount of interest with consultants. And I think we're optimistic about its near and medium-term future going forward. So those are the key product areas. And of course, our Triton fund and our Smith team there has continued to develop some modest institutional business. Those are really the key ingredients for us going forward on the institutional side, and it's a domestic and an international story.

Operator

And our next question comes from Roger Freeman from Barclays Capital.

Roger A. Freeman - Barclays Capital, Research Division

Dick, maybe -- hoping you can kind of help us think about what types of things you can do on the performance front, and the fundamental product to improve at them. How do you attack that problem? And is it an issue of -- that a lot of your fundamental product in the U.S. is large cap oriented, and part of it is growth oriented, and that's been a tough part of the market. Do we just need to wait for that to change? And also, like, do the concentrated portfolios, I mean, like the Janus Twenty, make sense in this kind of market environment now, where correlations have just been so high?

Richard Mac Coy Weil

Improving our investment performance is clearly our highest priority. And we're looking at all the possible options on a constant basis to make sure that we're delivering the best for our clients. It's true that we are facing some very difficult environmental elements that are affecting all active managers and, in particular, affecting growth managers. And it's true that we've had some challenges that are Janus-specific in our portfolios that we're dealing with. We're refocusing some of our key employees on a more narrow set of duties to make sure that we're getting the best possible results. We've made some sort of internal team changes and things on our analyst and PM team that we believe help us address and improve performance. But it's also worth noting that today, 2011 has been just an extremely difficult environment. Correlation across stocks has been extremely high, driven by large macro and political factors. That creates real challenges for stock pickers like us. A couple of times this year, you've seen correlations fall and the diversity go up. And when individual stocks are differentiated in those kinds of environments, we've seen pretty significant performance upticks in our funds. And that gives us confidence that our process is working and our people are working. We don't expect this environment a very high correlation, just sort of macro risk on, risk off bets to continue forever. Obviously, we haven't had a return to real diversity yet. But we think that's coming, and we think we're well positioned. A lot of folks have sold a lot of good stocks on the basis of a risk-off trade. And if we're doing our job picking amongst that group right now, we're laying a foundation for future good performance going forward. And so that's really where we're focused. And we're looking at all the different elements of our process and making sure that we have it as tight as we can. But as you know, these things don't turn on a dime, and that's going to take some work going forward.

Operator

And our next question comes from Bill Katz from Citigroup.

William R. Katz - Citigroup Inc, Research Division

Just going back to the performance fee, deleveraging a little bit, just trying to reconcile between your comments that the third quarter expense base might be that right run rate, all else being equal, and so the potential erosion. You said there are some things you can do. But should we be thinking about the incremental margin on the foregone revenues in the 75%, 80% range? Or any way to sort of frame out the risk to the downside?

Bruce Lewis Koepfgen

It's hard for me to answer that question. I mean, we really don't get into that kind of specific response, so I apologize.

William R. Katz - Citigroup Inc, Research Division

Okay. When you look at the -- maybe a two-part question. I just want that officially [ph], on the share reservicing, I'm surprised that it didn't weaken a little bit more, given the drop in the assets. How at best to think about that? And then as a corollary, on the marketing side, there's a sharp drop absolute-dollars-wise, at least, in percentages. Does that have any impact on the ability to grow the business at all? Or where are you saving on the spending, I guess?

Brennan A. Hughes

I'm sorry, Bill. This is Brennan. Can you repeat the last part of that question? I can speak at least the beginning of shareholder servicing. Not all of those amounts are directly asset related. But can you repeat the last part of your question?

William R. Katz - Citigroup Inc, Research Division

Sure. Just on the marketing down $0.25 sequentially, I know it's a small dollar amount, but nonetheless, where are you curbing the expenses and how should we think about it in terms of incremental penetration of growth?

Bruce Lewis Koepfgen

I think that the answer to the second part of the question is that we have to take a pretty disciplined look at all the discretionary spend. And so we're making a very conscious effort to make sure that we stay on plan and stay within our strategy, but when we find areas where we can hold back on that spend, we are doing it. So I wouldn't read a lot into it, but it is our expectation that we will continue to do that going forward. So that with the current run rates on those expenses, and I mentioned before, in this environment, will probably maintain themselves

Operator

And our next question comes from Cynthia Mayer from Bank of America.

Cynthia Mayer - BofA Merrill Lynch, Research Division

It seems like you're getting more institutional traction. And I'm just wondering if you can talk about any fee differential for institutional versus retail, for instance, the large balance mandate you got or in fixed income this quarter. And also, when you look at the fixed income inflows this quarter, can you maybe break out how much of that was institutional and what types of institutional?

Richard Mac Coy Weil

First, I think we should note that the balance win in this quarter, the significant one that we referenced earlier, was in DC space. In more separate account or DB institutional space, clearly fees tend to be lower, and as size goes up, that is more true. And the biggest difference is probably between different kinds of products. Fixed income tends to be lower than equities, and short-term fixed income, lower than full discretion AG [ph] portfolio. So the mix of channels and the mix of products has a lot to do with the revenue mix that we achieve. Clearly, some of the products that are growing fastest are not our highest revenue, highest fee products. So there's a little bit of negative substitution effect there, as we make more progress in the institutional business. That said, we can drive a very good margin off good institutional businesses as well. So we're quite pleased to have it, and I think we look forward to growing a much more substantial institutional business.

Bruce Lewis Koepfgen

Cynthia, I might just add one other thing, and that is if you think of this in terms of management fee yield, I wouldn't expect there to be much change. I mean, as Dick points out, to the extent that there's a shift between our equity business or the fixed income business or from retail, the institutional, there can be some modest impact there. The same time, in our international channels, those are a little larger fee environments. So when we look at it, at least at this point, I don't see much reason to think there'll be much of a change.

Cynthia Mayer - BofA Merrill Lynch, Research Division

Okay. And then maybe just one more follow-up on the expenses. You mentioned you don't want to cut spending to the point of constraining future growth. And I'm just wondering if you could be a little more specific on that. Are you saying you don't want to cut certain items further or that you want to restore some items like marketing or continue to hire? And when you say that, are you thinking sort of broadly of next year or looking much further out?

Richard Mac Coy Weil

I think you have some pretty good examples of it in this quarter. In the sense that I mentioned earlier, we hired Susan Oh, and we hired 8 important sales heads outside the United States. Actually not all of those 8 are hired, 6 of those 8, I think had been hired. But we continue to make investments like that, and we will continue to do so where it's important to our strategy. That said, we're going to drive hard on discretionary spend, given the difficult environment that we face. And keeping that balance is management's job, and that's what we're going to do. I think Bruce was straightforward in his earlier comment that if the negative performance fees going forward are significantly bad, we will see some margin deterioration as a result because we'll continue to make the necessary investments to grow the firm for the future.

Operator

And our next question comes from Jeff Hobson from Stifel, Nicolaus.

J. Jeffrey Hopson - Stifel, Nicolaus & Co., Inc., Research Division

Okay. Can you give us that -- how much that balanced fund mandate was? Again, I missed that. And then any reason to think that with that product, you have some momentum, say, in the time contribution channel? And then finally, those types of products have been more popular in the retail business. Any sense of any pick up of interest on the retail side with that product?

Bruce Lewis Koepfgen

What is the first part of the question?

Richard Mac Coy Weil

It's a $1.3 billion win for us. I think there is reason to be optimistic that there's increasing demand for balanced products in the DC space, I think some of the folks in that channel have been disappointed by the performance of their target date funds, and they're coming back around to take a look at the prior generation kind of balanced products, and finding that maybe those compete very well against some of these target date funds. So yes, we're optimistic about the future of our balance products. I don't have as good insider information in the retail channel and the future balance in that channel, so I can't give you any very smart comment in that area.

Operator

And our next question comes from Michael Kim from Sandler O'Neill LLP.

Michael S. Kim - Sandler O'Neill + Partners, L.P., Research Division

Just not to beat a dead horse, but in terms of the comp. Yes, I know the plan is now more tied to profitability, but on the other hand, there's only so much that is truly variable, like you talked about. So how should we be thinking about the comp ratio going forward, assuming market conditions remain challenging and kind of the performance fee losses step up going forward?

Bruce Lewis Koepfgen

Michael, from the presentation, you'll see that we had a pretty healthy response to the declining profit situation. I think we've talked 70% roughly. I think those ratios are going to maintain themselves because we very explicitly tied compensation to our bottom line performance. Other types of expenses, as we mentioned, don't respond quite as quickly. We can't manage them down as quickly and as effectively. And so to the extent that, that continues, we will get the variable cost response, but there will be pressure on margins as we try to respond to them, I think, with the other costs.

Michael S. Kim - Sandler O'Neill + Partners, L.P., Research Division

Okay, that's helpful. And then just in terms of performance fees. If I look at the slide in the appendix, it looks like the total pro forma AUM was about $53 billion as of the end of the third quarter. That was down more than 20% relative to a quarter ago, and yet the pro forma kind of quarterly P&L impact basically stayed flat at around $16 million of foregone revenues. So can you just kind of talk a little bit about that dynamic? Is that just really a function of kind of the relative performance continuing to weaken for some of those funds?

Bruce Lewis Koepfgen

It's a combination of the performance and the assets in each of the funds, and obviously, some of the funds are just coming out in this quarter. So I think it's just really the math embedded in the performance fees. Some of those funds, as you know, have longer performance patterns that are being affected by the performance fees than others. So they'll be slightly more volatile, but basically you'd have it.

Operator

And our next question from Robert Lee from KBW.

Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division

It's probably hard to believe it's not a question on comp, but some of your peers have similar kind of mutual fund awards. Typically, when there's a mark-to-market adjustment on the balances, there's some offset for better or worse in comp. Do you account for this the same way? And I'm just trying to get a feel for -- because it obviously affects how we think about the margin too. So was there -- to the extent you've marked down, had the large negative mark-to-market on the mutual fund awards, was there some offsetting compensation decrease as a result, and kind of if you could quantify that?

Brennan A. Hughes

This is Brennan. Yes, the mutual fund share awards do flex with market, but they are somewhat delayed due to vesting schedules. The impact to Q3 was approximately $1 million.

Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division

All right, great. And can you maybe talk a little bit about -- I think you mentioned, I guess maybe it's over the past year, I forget the timeframe where, I think you said you hired about 8 people for your international distribution. I know you've kind of built out some investment capabilities. Could you maybe update us? I mean, is that kind of built out for the time being? What are your kind of plans there? And if you can -- any color you can give us on what you're starting to see from those efforts in terms of sales or pipelines or anything like that?

Richard Mac Coy Weil

Yes. We hired Augie Cheh recently to run that business. In his steps, what he tried to do was realign the expense base in that business with less sort of management positions and much more of the percentage of the pie dedicated to field sales and client relationship folks. In that effort, he's hired a significant number of new sales people that are only now just arriving or will be arriving soon and will hopefully start to make contributions going forward. So I can't point you to big sales numbers coming out of those efforts yet, but we're optimistic going forward. What has happened is, I think, we've got a better aligned team outside of the United States under Augie that is well positioned to deliver improved results. We've also had some recent good wins. We've had important new fund launches in Tokyo for our fixed income team. We've had some institutional wins in Asia and in Europe. And so that business continues to -- it's doing well, but we look forward to the day when Augie's reorganization is at full force in effect. And at that point, we think we'll see significantly better results out of the international team.

Operator

And our next question comes from Jonathan Casteleyn and from Susquehanna.

Jonathan E. Casteleyn - Susquehanna Financial Group, LLLP, Research Division

I'm wondering if you can update us on search activity on the Quant [ph] Arena. At this point, you haven't seen a lot of new RFPs, although your one-year performance has turned up. So I'm just wondering what you saw in the third as far as search activity in Quant [ph].

Richard Mac Coy Weil

Search activity in U.S. active management has been down on an institutional basis. And INTECH is getting -- I think it's fair share of a tiny amount of that, that is dedicated towards mathematical or quantitative efforts in the U.S., but it's a very small number. Outside the U.S., you know that in the last quarter, we had a significant win in Australia, and we continue to feel increased interest from clients and consultants outside the United States. And we're optimistic that we can put -- win some additional significant business outside the United States on a go-forward basis. But with lumpy institutional wins, the timing of that is unpredictable and uneven. And so I'm afraid I can't give you a good look forward for -- on a quarter-to-quarter basis how that's going to look. The feel of it is there's increasing interest outside the United States and a little bit inside the United States. But inside the United States, it's still at a very modest level.

Jonathan E. Casteleyn - Susquehanna Financial Group, LLLP, Research Division

Okay, great. Understood. And then just to Bruce, on the upside of the upsize of the credit facility to $250 million, can you just prioritize what you think the strategic options of the company are as you now have a larger credit facility?

Bruce Lewis Koepfgen

Great question. I don't think I'd read too much into it. I think we saw an opportunity in the market to extend the maturity and gather more sides at the right price. It gives us a lot of financial flexibility going forward. It's not targeted at this point. It's meant to give us the kind of flexibility that we think we might need or want to draw on in the future.

Operator

And ladies and gentlemen, we have time for one additional question. And that does come from Mark Irizzary from Goldman Sachs.

Marc S. Irizarry - Goldman Sachs Group Inc., Research Division

Dick, can you just talk about the fixed income channel? It's like if you look on a quarterly basis the redemption rate, there is maybe a little bit higher then bounces around a little bit. Is that -- do you expect that as you build out the institutional business that the redemption rate will sort of, that it'll become a little more normalized, if you will, as that business grows? And then also, where do you think the big forward share gains are for you, from a fixed income, where are they coming from?

Richard Mac Coy Weil

I think in fixed income, there's always a challenge in the short-term bond area, especially that people use it a little bit as a checkbook. And that's not our first choice, but it's a risk in this business. It's a liquid pool that people can use and that will drive -- we have an excellent, excellent short-term product, and the redemption rate on that side will always be higher. In terms of opportunities, I think you're seeing some of the major fixed income players have real performance challenges in some of their key product lines. And I think for our flexible bond fund in the intermediate bond area, our high yield fund and our short-term fund, I think there are big opportunities in each of those areas for us going forward. I think Janus is the new kid on the block in fixed income space; we're still not nearly as well-known in fixed income as we are in equities. But we're seeing a significant increase in interest and support from institutional consultants, and that -- if we continue to do our jobs well, that should drive a very steady flow of increasing business going forward. So we don't see -- we see opportunity on the horizon and continuing, gathering momentum. But we recognized that the fixed income markets, particularly in rates, have been very volatile, and future success depends on our ability to continue to deliver the excellent risk-adjusted returns. That's the heart of that business. And so far, we have a terrific team that's done just a great job.

Operator

And at this time, I'll turn the floor back over to Dick Weil.

Richard Mac Coy Weil

Thank you, everybody, for your time today. We hope the new format of the presentation is effective and useful for you. And we look forward to speaking with you next quarter.

Bruce Lewis Koepfgen

Thank you.

Operator

Thank you, gentlemen. And ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation. You may disconnect your phone lines at this time and have a great day.

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