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Executives

Bruce Lewis Koepfgen - Executive Vice President, Chief Financial Officer, and Member of Executive Committee

Unknown Executive -

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

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

Analysts

Craig Siegenthaler - Crédit Suisse AG, Research Division

Matthew Kelley - Morgan Stanley, Research Division

Michael Carrier - Deutsche Bank AG, 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

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

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

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

Roger A. Freeman - Barclays Capital, Research Division

Janus Capital Group (JNS) Q4 2011 Earnings Call January 26, 2012 10:00 AM ET

Operator

Good morning. My name is Michael, and I'll be your conference facilitator today. I would like to welcome everyone to the Janus Capital Fourth Quarter and Full-Year 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's my pleasure to introduce Dick Weil, Chief Executive Officer of Janus Capital Group. Mr. Weil, you may begin your conference.

Richard Mac Coy Weil

Thank you, operator. Welcome, everybody, to the fourth quarter and full-year 2011 earnings call for Janus Capital Group. Thank you for your time and attention.

Looking back at the last year, I think it's clear that Janus is becoming a stronger and more diverse company. But we currently face some challenges in our fundamental equity performance, particularly in our Janus managed funds.

During the year, we maintained strong financial discipline. Our operating income increased 11% versus prior year and margins improved to 31.8% compared to 20.7% -- 27.7% in the prior year. We're particularly proud of that discipline.

As you know, as we've talked about before, it's important to us to maintain a strong balance sheet so that we can remain a good and stable partner for our clients and for our employees through the full and volatile market cycles.

In this past year, we generated $225 million of cash flow from operations and we had $672 million of cash and marketable securities at December 31. We also made significant headway against our strategic priorities. We further diversified our business through successfully building out our fixed income and we made important strides in institutional and our international businesses, all while maintaining a focus on operational excellence and as I mentioned also, cost control.

Our mathematical equity performance and net flows improved substantially in 2011. Perkins maintained its record of very strong long-term performance. Its global value strategy is top decile for the past year and its very important small and mid-cap strategies were top decile for the last 5 years. So Perkins remains an exceptionally strong and leading value manager.

We recruited new talent and I'm most proud probably of that. We recruited new talent both inside the investment team and elsewhere around the firm and coupled with the very strong folks who were already here, I think we have an excellent team.

Fourth quarter 2011 EPS was $0.19 compared to $0.15 in the quarter, bringing our full year to $0.78 compared to $0.88 in the prior year. Assets under management at December were $148.2 billion, which is a 5.1% increase from September. Our total long-term net flows were still negative at $4 billion in the fourth quarter compared to $2.4 billion in the third quarter, bringing full-year net negative $12.2 billion.

Again, we make the point on the bottom of Page 3 of the presentation around the operating margin and the full-year margin at 31.8% fulfills a target that we set in discussions with you a year ago for low 30% margin. So we're proud of that.

On Page 4 of the presentation, I outline a little bit about the progress we made against our long-term strategic vision. As you know, it's been very important for our strategy to build out our fixed income franchise, that's been an exceptionally strong success story for us. We finished the year with more than $20 billion in fixed income AUM for the first time in the firm's history.

We have a strong growth rate and in 2011, net flows were positive $4.9 billion in this business. We also strategically expanded our global distribution and product capabilities, realigned our sales and really restructured our non-U.S. sales force. We've earned buy recommendations from a number of non-U.S. consultants and we believe that our non-U.S. business is well positioned to move forward in the future.

We're also working hard to improve our Institutional business and market share. We hired Susan Oh as the Head of our U.S. Institutional Distribution in October, and that was a very important step in moving this team and business forward. We've added a substantial number of buy recommendations around our fixed income and some fundamental equity products, and the improved performance in our mathematical equity strategies managed by INTECH will help substantially also. We used $120 million of shareholder funds to seed new products across equity and fixed income and alternatives, and we're excited about the long-term prospects for those efforts.

And lastly, as you all know, a year ago, we had some real operational challenges. We have focused with some new people and some excellent effort on operational excellence in the intervening time period. And I think the changes that have been implemented have had dramatic positive results in the level of our operational reliability and strength of our controls. So we're very proud of the progress there as well.

At this point, I'll turn it over Bruce Koepfgen to talk more about the results.

Bruce Lewis Koepfgen

Good morning, everyone. Thank you for calling in. I'm joined again this quarter by Jennifer McPeek, our Treasurer; and Brennan Hughes, Chief Accounting Officer, who will be available to participate in Q&A as necessary.

As we go through the results, I'll focus on 4 key items that I think explain our quarterly outcome: first, net flows; secondly, performance fees; the decline in operating expenses; and then the improvement in our balance sheet year-over-year.

I will generally follow the order of the deck starting on Page 6. So let's just quickly review the data. As Dick mentioned, earnings per share for the fourth quarter, $0.19, compared to $0.15 in the third quarter. Earnings per share for 2011, $0.78, compared to $0.88 a year ago. For your convenience, we've added a table in the appendix, which outlines the key drivers behind the year-over-year change.

Average AUM of $149.2 billion declined 4%. Revenue of $215 million declined 9% due to the decline in average AUM and an increase in negative performance fees.

Fourth quarter operating expenses were $145 million, which was $18 million or 11% lower than the prior quarter. Operating income of $70.6 million declined 5% quarter-over-quarter, as the 9% revenue decline was off by -- offset by an 11% decline in operating expenses. Operating margins for the quarter of 32.7%.

Slide 7 summarizes our investment performance. As you can see, underperformance in several of our larger fundamental equity products continues to weigh on our short- and medium-term performance numbers. However, long-term performance continues to be strong across fundamental equity, fixed income and our mathematical strategies. On a complex-wide basis, 56% of our funds had 4- or 5-star overall Morningstar ratings compared with the industry average of 32.5%.

Slide 8 looks at the component parts of our company net flows. Total company net outflows of $4 billion increased quarter-over-quarter. Fundamental equity posted fourth quarter net outflows of $3.2 billion versus $3.8 billion in the third quarter. The relative improvement was driven by a decrease in redemptions partially offset by lower sales.

INTECH saw net outflows of $2.2 billion in the quarter, down from approximately $700 million outflows in the third quarter as redemptions increased. As we have mentioned in the past, as an institutional manager, INTECH's flow vary significantly period to period. And the increase in redemptions during the fourth quarter was primarily the result of partial redemptions from existing clients as opposed to terminations.

In our fixed income business, net sales remain positive at $1.4 billion and continued momentum in the institutional channel. We should also note that our fixed income business surpassed $20 billion in assets for the first time in our history. We enter 2012 with a very healthy pipeline and we remain optimistic around the opportunities for this business.

Turning to Slide 9. Our total revenue declined by 9% as a result of lower average assets and $9.2 million of negative performance fees. As you may recall, we have performance fees on both our mutual funds and separate accounts. In the fourth quarter, we saw negative performance fees on our mutual funds increase to $13.8 million from $4.2 million last quarter.

On the other hand, positive performance fees on separate accounts increased to $4.6 million versus $1.1 million last quarter. During the third quarter, a number of our larger funds became subject to this performance fee structure, which amounted to an additional $20 billion in assets. You will see in the schedule in the appendix based on year-end performance, if we were recording performance fees on all mutual funds during the quarter, the pro forma impact would have been an additional $4 million or a total of $17.8 million for the quarter. With respect to separate account performance fees, the increase reflects earned annual fees of $3.4 million that hit in the fourth quarter.

Slide 10 provides a comparison of operating expenses quarter-over-quarter. Offsetting a significant amount of decline in revenue, fourth quarter operating expenses decreased 11% as a result of the year-end compensation adjustments. Compensation declined 13% as we aligned the compensation with annual operating performance.

Long-term incentive compensation declined 35% as a result of lower senior profits interest at Perkins. As you may remember from previous earnings calls, the SPI calculation is dependent on revenue levels and relative investment performance, which produced a $4.2 million reduction in this expense.

The small increase in marketing and advertising expense is largely due to international marketing and other seasonal expenses. Finally, our distribution cost declined 14% due to a decrease in assets subject to such distribution fees.

So on Slide 11, we attempt to reconcile the quarter-over-quarter earnings per share change. The top line impact that we experienced as a result of lower average assets and negative performance fees represented about $0.07 a share. The decline in operating expense, as a result of the variable response from compensation and distribution, offset about 85% of the revenue decline or $0.06 a share.

Finally, last quarter's results included $0.06 of non-operating losses related to mark-to-market losses on our mutual fund awards and seed capital. The absence of this significant non-operating loss accounted for the rest of the quarterly change.

Lastly, a look at Slide 12 highlights the continued improvement of the balance sheet. Over the last 2 years, we have significantly reduced our leverage, further strengthening our balance sheet. As we have mentioned before, a strong balance sheet continues to be important to management and our clients. Our cash position continues to be strong with approximately $672 million in cash and marketable securities.

During 2011, we generated $225 million in cash flow from operations and were able to repay $213 million in debt, institute a regular quarterly dividend of $0.05 a share and seed approximately $120 million in new products. We continue to believe, given current headwinds in the business and uncertainty in the market, that preserving liquidity and financial flexibility is prudent.

In 2012, we plan to continue investing in our strategic initiatives, which we believe will provide outstanding returns for our shareholders over the long term. And we will look for other ways to create return for our shareholders as appropriate.

That's all I have and I'll turn it back to Dick.

Richard Mac Coy Weil

Thank, Bruce. Looking forward, given the impact that we expect performance fees will have on our results in 2012, our leadership team will be very focused on maintaining strong expense control. But also -- or only up until the point where we make sure we're taking care of our strategic priorities. So we'll be as disciplined as we can but we won't sacrifice the company's strategy and that could challenge margins on a go-forward basis.

In 2012, we expect strategic investments to focus on the same themes that we began in '11. We're going to continue to invest and build in our fixed income theme, we're going to expand and continue to grow our non-U.S. business, we're going to continue to develop our U.S. institutional business, we will focus on broadening product capabilities in order to meet the future needs of our clients and we'll continue to focus on maintaining and further developing operational excellence. So as you can see, the initiatives begun in '11 will continue in '12.

We also have announced that Steve Scheid, Chairman of our Board of Directors, is retiring from the board at the end of his term in April of 2012. Glenn Schafer, who’s served as a Director of our company since 2007, has been appointed as Chairman Elect. Steve Scheid has been the Chairman for more than 9 years and has served also as Janus' CEO in 2004 and 2005.

We've been very fortunate to have someone of Steve's integrity and experience at our helm. Personally, Steve recruited me to this company and he's been an excellent partner for me during my 2 years as a CEO, and I very much appreciate his help and his guidance. I personally and we all here at Janus wish Steve great success and happiness as he transitions to a new chapter in his life.

Before we turn to questions, let me just mention. I think as you think about our company, it's important to understand that we have the opportunity to be one of the very best leading growth franchises with our Janus equity team. We have one of the very best value franchises with our Perkins team. We have one of the best mathematical equities franchises with our INTECH team. And our fixed income business is growing into one of the best fixed income businesses as well. And so we are succeeding in developing a broader and more diverse team and set of products for our clients, and that's really our vision. We think that, globally, investors need to invest more in saving for their retirement, and more wisely in saving for their retirement. And we look forward to playing a very important role through each of these businesses in the future.

With that, we'll stop. And operator, we'll 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

Maybe a first question, you guys launched quite a few new products over the past couple months and you're obviously gaining traction on the fixed income side and there's a lot of demand for that in the industry. So when I look away from the equity performance headwinds that you're facing right now, in terms of those new areas, where are the opportunities that you're seeing? Which distribution channels do you see the demand, particularly for some those risk managed products that you guys launched?

Richard Mac Coy Weil

That's a very good question. We have identified some key areas for product development that we believe have really substantial opportunities going forward not only in one channel but essentially in all channels. I think the needs of investors institutionally and on the retail side are becoming increasingly similar. The buckets that we've identified for our focus are, the first one, as you mentioned, our risk-managed bucket and we have excellent start with our protective growth strategy here at Janus and INTECH is coming out with some excellent new approaches to deliver risk-managed outcomes and that is, of course, the very foundation of what Perkins has to offer. We also believe that income is increasingly important. And you'll see us work hard to develop improved income opportunities for our clients. We believe that absolute return will play an increasingly important role in the world, particularly when rates start going back up and some of the bond anchors that people have built in their portfolios around long duration and such may begin to sway a bit more than they would like. And we believe folks will be very interested in absolute return, which is risk controlled and which has relatively less interest rate risk factor and also fixed income -- less fixed income risk factor -- sorry, I think I misspoke, less equity risk factor and less interest rate risk factor in a controlled risk foundation. And lastly, we also believe that we'll get through this economic cycle and get to the point of rising rates and real return will be increasingly important to investors. So our new product efforts will be primarily focused around those buckets. And we believe that in terms of the distribution channels that we'll be interested, those themes will be very important in retail and institutional channels domestically and globally. We think that they're strong and fairly universal.

Michael Carrier - Deutsche Bank AG, Research Division

Okay. And then, Bruce, maybe for the follow-up, expenses in this quarter well managed, very flexible. When you think about 2012 and given that you provide that pro forma performance fee, nothing else changes, which some of the performance has picked up year to date. But when we think about that and some of the new investment areas and when we think about the full year, because anything can happen in any given quarter, but for the full year and into 2013 still trying to target that 30% margin over time?

Bruce Lewis Koepfgen

Well, of course, our new compensation program, it really is a profits-based program. So there's not direct alignment here. But I think the direct answer to your question is yes. I mean, for your purposes and your models, I think the 30% of revenue number kind of the annualized rate for this year is the right one to use.

Michael Carrier - Deutsche Bank AG, Research Division

Okay. And just nothing unusual in the expense lines, particularly on comp in terms of -- I mean, obviously, like you said, it's changing in terms of income versus revenues but nothing like on a fourth quarter, any new launches there that we shouldn't expect going forward?

Bruce Lewis Koepfgen

I'm sorry, Mike, we need to back up on the prior question. I think I misunderstood your prior piece. Could you repeat your first part of the question? I think I misinterpreted the question to be the comp line, not the margin line.

Michael Carrier - Deutsche Bank AG, Research Division

Okay. I was just saying, when we look at the outlook on overall expenses, you've got what the expense base came in this quarter. But we look forward, we know, if nothing changes, the pro forma negative performance fees would pick up. And I was saying, in the year to date, the performance has picked up so we'll see. But when I look at what you're investing in and then how much flexibility you had there, when you look for 2012, in 2013, are you still targeting that 30% or so margin? And then I was saying anything unusual...

Bruce Lewis Koepfgen

I apologize for misspeaking before. I think our expectation is given the conditions in the marketplace that there's -- in the performance fee situation that we're in, there is some likelihood we'll experience margin compression in the coming year but clearly, hard to predict. I mean, there's much that we don't know. But as Dick pointed out in his comments, we're staying very focused on our strategic agenda. We will continue to invest in that. Performance fees provide a headwind for us on the revenue line obviously, and that could well produce a decline in our margins if we can't have the same kind of response on the fixed income line that we did this year -- I'm sorry, on the fixed cost line.

Operator

And the next question comes from Daniel Fannon from Jefferies.

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

I guess starting off with the comp again. The long-term incentive comp stepped down. You highlighted the change at Perkins. I guess, is that sustainable? Or is that -- and kind of walk me through some of the factors there specifically and then I believe, you guys have stated before that 2012, there will be a step-up in that line and I'm wondering if that's versus the 4Q run rate or versus 2011 as a whole.

Bruce Lewis Koepfgen

Yes, I don't think we want to comment on the specific Perkins comp lines. But the reference that I made in my comments was to the SPI calculation, which is both revenue and performance based. We did have a $4.2 million reduction there in this quarter.

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

And so all else equal, if their asset levels and performance stay the same, that number would be the same in the first quarter?

Brennan A. Hughes

Hi, this is Brennan. No, I think we would expect it to turn back up similar to our comp line. When we're accruing for this, the valuation on these instruments as we move to the vesting period and we have a valuation adjustment, you are going to reverse some amounts that you've taken in prior periods. So we would expect it to come up slightly.

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

Okay. And then, I guess if you could give some color around INTECH. The performance continues to get better, outflows picked up. I guess, maybe thoughts around the backlog or kind of what drove some of the redemption pick-up in the quarter? And maybe, as you think about the year, how conversations are going with clients?

Richard Mac Coy Weil

This is Dick Weil. I don't think I can speak directly to the conversations going on with clients because I haven't been in so many. But let me tell you what we think is going on. INTECH, as a major player in institutional equity management, is susceptible to some of the broader trends that affect how institutions allocate their money. And as Bruce mentioned earlier, most of the redemptions that we saw in the fourth quarter INTECH reports are redemptions from existing clients but not relationship terminations. And they probably, therefore, reflect institutional asset reallocation trends as much as anything. It's -- we view it -- we would view it as much more serious if those were driven by relationship terminations. And so we're encouraged that the relationships remain good, but we are obviously susceptible to changes in asset allocation away from large-cap equities in some of the institutional client base. And I think that thematically is the largest trend ongoing.

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

Okay. And then, I guess, just thinking about it next year, I mean, is that something you -- the trend that you expect to continue or is there other things offsetting on the positive side?

Richard Mac Coy Weil

I don't think I have a good crystal ball on that one. I think people have been afraid of equity markets and equity allocation. Institutions have found themselves with falling rates in dramatically more underfunded situations. And you can imagine that some of those institutions react by reducing their risk and increasing their duration to match liabilities more closely. And others are reacting by taking additional risk to try and maintain their policy rates of return. It's a real spread out there in the institutional market. I think if equity markets remain strong through the first part of the year, there's a good likelihood that institutions will return some asset allocation back into the equity market as their confidence grows. But I think that those decisions have yet to be made and they're very hard to predict.

Operator

And our next question comes from Ken Worthington from JPMorgan.

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

Performance in the research funds has been substantially better than some of your other bigger funds, particularly over the 3-year time horizon. And it seems indicative that the research department is coming up with some good ideas but they're not getting into the portfolios of some of the bigger funds. So first, is my hypothesis right? And if so, why aren't the ideas getting into the bigger funds?

Richard Mac Coy Weil

No, I don't think your hypothesis is right. I think that the good ideas of our research analysts are indeed finding their way into the larger portfolios. But the larger portfolios are substantially different in structure than the research funds. They're not sector neutral and certainly some of them are much higher active share, much more highly concentrated. And as a consequence, there are substantial differences. There are market cap differences between them. And so without getting into the weeds, in too much detail for a call like this, I don't think I can adequately explain each of the differences. And of course, the stories are different for different funds. But overall, I don't think that the ideal linkage between the research team and the portfolio management team is broken at all. But neither is it perfect. And we, like most folks, continuously work on ensuring that we have good communication. I don't think that is the site of the challenge of underperformance for us in some of our larger funds. So, no, I think the hypothesis is a little bit off.

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

Okay. Well, not the first time I've been wrong. And then just on comp and I apologize if I blinked and missed it. In the fourth quarter, the kind of the falling comp to the $62 million level, how much of that was kind of reversal of previous accruals? I guess that's the question because we're trying to figure out just where to start the run rate in 1Q.

Bruce Lewis Koepfgen

Sure, Ken, a fair question. There was about $9 million in reversals in the fourth quarter. I think the important point here is that there are reversals in the fourth quarter every year. This was the basic true-up to a new compensation plan. It's profits based and so it just happened to hit in the fourth quarter. I think if you're -- if for a looking-forward basis, I think the annual rates are probably the best to use.

Operator

And we'll go ahead and take our next question from Roger Freeman from Barclays Capital.

Roger A. Freeman - Barclays Capital, Research Division

Actually, just a follow-up on Ken's question. I just -- the broader performance challenges in the bigger funds, is it still the highly correlated markets that we’ve see? And as you've talked about making some changes to improve performance. But if you had to rank the sort of market dynamic headwinds versus sort of structural changes that you have or can make internally, what's the relationship of the 2? Is it 80, 20?

Richard Mac Coy Weil

Good question. As we think about it, I think the first thing is having done a really careful review of the performance and what drove it, we remain really confident in our people and our process. I think the next layer is all active managers struggled in a market where correlations were very high. And therefore, definitionally, the opportunities and rewards in the short term for stock picking were reduced. We saw 3 months recently, where correlations have fallen dramatically, April, October and this January of this current year. In each of those months, our performance has been really good and in January, exceptionally strong. And so I think we, like other active managers, face a market environment that when there's a crisis driving risk-on/risk-off decisions and correlations go to historic highs, the short-term potential rewards for stock picking are really challenged. And I think that explains why a huge majority, a vast -- a supermajority of active managers have a tough time in that environment. But we also had some idiosyncratic things around how we were doing our business that created challenges. And so the next layer down is we had to take a look at our behavior in some of our funds and assess where, perhaps, we'd held on too long to some stocks and allowed some thesis creep or some other more technical elements of how we're doing our business. And those -- that later is the layer where we're really focusing our response and some internal steps to address those and learn from those challenges. I guess, the last thing that drove some of our underperformance is we consistently are very focused on non-U.S. markets. We have, as part of our active share, we have a substantial part of our investing that occurs outside the United States, even for some of our U.S. benchmarked, our large-cap funds. That didn't work out very well in the past year but were not shrinking from that. We think that we're finding terrific growth companies outside the United States at good prices and we think that’ll pay in a long and in the medium term. So that's not something we're going to change and if you look just mathematically at the drivers and the underperformance, that's certainly one of the biggest elements. Emerging markets and non-U.S. markets dramatically underperform the U.S. markets in the past year. And that's not something we plan to change. We think those judgments will prove out over time. I hope that answer’s helpful. But it's a multi-layered cake that we're dealing with.

Roger A. Freeman - Barclays Capital, Research Division

Yes. No, definitely helpful color. And then my follow-up would be, just as you look at your strategy priorities, specifically, fixed income, international, institutional, all very big ones and then managing the costs and understand that, that can lead to some margin headwinds. But if you have to prioritize those 3, how do you look at those strategically? Are they all of equal importance or is there a prioritization scheme?

Richard Mac Coy Weil

I don't think I'm able to give you a perfect answer, but let me tell you the process by which we make our investment decisions. We require proposals for new investments to be evaluated on a 3- to 5-year P&L framework. And we take a look at those things that we can produce with differentiated excellence based on who we are as a largely investment professionals and then those things that we believe our clients will want in substantial size on a go-forward basis. And in that intersection, we then look at those ideas and apply this profit methodology to ensure that we have business discipline around the ideas. In each of these cases, we believe that there are significant opportunities for us that are at the intersection of what we can do with differentiated excellence and what our clients will continue to want in a substantial way going forward. And then they're supported by business plans that support the notion that they're good business decisions that will generate good substantial profit in the medium term going forward. And so we prioritize based on that process and we sit down as a leadership team and review everybody's ideas and proposals for how to invest and where to focus our attention as a business and put all those ideas through that screen. And then the survivors from that screen are where we put our attention and our investment dollars and that's the list as you see it.

Operator

We'll go ahead and take our next question from William Katz from Citigroup.

William R. Katz - Citigroup Inc, Research Division

Just trying to get to also the ebbs and flows around the P&L this quarter and I was writing as quickly as I could just to make sure I qualify this right. So you had $9 million reversal on the employee comp line, $4 million round number adjustment to Perkins and then the $3 million annual win performance fee. Are those sort of the moving parts? So as I look to the next quarter, I'm still a little confused on the incentive compensation discussion. Is it a plus-4-type number as we look to a new quarter? Is it something between the 11 and the 16 last quarter? Just trying to just get a little more guidance around sort of the run rate into Q1?

Bruce Lewis Koepfgen

Okay. Let me try a couple of these pieces. I may turn it to Brennan for the incentive comp piece. The $9 million true-up was just as I mentioned, the fourth quarter look at the comparison of our compensation pools relative to our bottom-line results. And on the LTI piece, that was just the Perkins SPI adjustment. Brennan, do you want to comment on?

Brennan A. Hughes

Yes, I think, Bill, if you take a look at what we show for the fourth quarter and thinking about a $4.2 million adjustment to the Perkins comp that gets you below where we are at for third quarter, roughly the $14 million, $15 million is what the total would look like in December or for the fourth quarter had we not taken that adjustment. So I think when you factor in that $4.2 million adjustment, you can kind of see what the quarter would have looked like.

Bruce Lewis Koepfgen

The last piece I think was the $13 million of the performance fee; that of course is just a result of both the performance on the funds that were previously under the performance fee structure, as well as the additional $20 billion that were added in the fourth quarter. The comment on the pro forma piece was that had all of those funds been on a performance fee structure for the entire month, it would have been $17.8 million or a $4 million delta versus what was reported.

William R. Katz - Citigroup Inc, Research Division

I understand that part. Second question just with be change in the chairmanship, I’m guessing it’s probably not, just curious, any strategic change in the direction of the firm including the possibility of sale or combination with larger organization?

Richard Mac Coy Weil

No, I don't think you should read into the Chairman change, any change in our strategy. Glenn Schafer, the new Chairman Elect, is someone I've known a long time. He was the President of Pacific Life, now it's Pacific Mutual Insurance Company, back in the days when they owned PIMCO, where I worked. And so Glenn and I have known each other for a substantial length of time and have an excellent relationship. Glenn has been on this board for a while and has been fully supportive of our strategy and fully aware of it. And so I don't think you should read any real change in strategy or business associated with the change in the Chairman's role.

William R. Katz - Citigroup Inc, Research Division

Just a follow-up and thanks for taking all my questions. And I sort of -- I missed what you said on your prepared remarks around INTECH. You mentioned at the fixed income side, you saw the pipeline building a little bit into the New Year. What's your view on the pipeline for INTECH? I apologize, you may have already said it.

Richard Mac Coy Weil

We didn't actually make a comment on the pipeline for INTECH, and I don't think we have anything material to share with you on that subject today.

Operator

We'll take our next question from Matt Kelley from Morgan Stanley.

Matthew Kelley - Morgan Stanley, Research Division

Just one quick modeling-type question. As we think about the performance fees and knowing the noise that we see this quarter, on a go-forward basis, can you -- with all the moving pieces, can you kind walk us through on the type of the run rate given 2009 performance rolling off, where you were at the end of the quarter, what a good run rate for the year is?

Bruce Lewis Koepfgen

We're going to have to ask you to repeat the question. We're getting some kind of background noise here. So we couldn't really hear the question.

Matthew Kelley - Morgan Stanley, Research Division

Yes, sure. So the question is just around the performance fees for 2012. Obviously, there are few moving pieces here and with 2009 performance rolling off as we go forward into 2012, if you could give us a sense for what the run rate is this quarter and going forward? And I guess, I would add, if nothing changes. Obviously, if performance changed and you come back versus benchmarks more, then that would change; but just on a static basis.

Bruce Lewis Koepfgen

So we only heard every other word or so but I think I got the spirit of the question. Let me give it a try and hopefully it’ll be adequate. We really aren't in a position to forecast performance fees going forward. We've tried to provide everybody with the calculator, if you will, for performance fees so that you can input your own thoughts on performance. You understand how the calculation is done. We want to make sure that you understand how it hit fourth quarter. These are 3-year averaging and so in the models you have, I think you can interpret it. You'll have to input what you think the performance fees are. We can’t really predict that for you.

Matthew Kelley - Morgan Stanley, Research Division

Okay. I apologize, I think I have a bad line here. But if I could -- can you guys hear me okay now?

Richard Mac Coy Weil

No, I'm sorry. I don't think we're going to be able to respond to questions because it's too hard to understand when we're only getting every other word. I apologize for cutting you off. But we'll turn to another questioner.

Operator

We'll take our next question from Craig Siegenthaler from Credit Suisse.

Craig Siegenthaler - Crédit Suisse AG, Research Division

So just looking at the performance fee slide in the Slide Deck 21. I'm just wondering if we roll this forward 12 months, so we're sitting here looking at 4Q '12 results and every fund performed at benchmark in terms of the mutual fund performance fee, do you have an estimate of kind of a range of where this performance fee would sit at that point in time?

Unknown Executive

This is Jennifer. Just to reiterate what Bruce said and maybe put a little bit of a different color on it. The performance fee calculation going forward is dependent on the 3-year average performance of all the funds that are subject to the performance fee. So if you want to model it, go back and get all the historical performance and then put in the future performance and you can put your own numbers in that way.

Craig Siegenthaler - Crédit Suisse AG, Research Division

Got it. But you're not going to help us out at all?

Unknown Executive

We can't predict the future performance of the funds and the rest is out there.

Bruce Lewis Koepfgen

And maybe helping you understand how the calculation works, but we don't want to get into the business of forecasting performance.

Craig Siegenthaler - Crédit Suisse AG, Research Division

Got it. And then I just have a follow-up question for Bruce. I was a little confused on some of your comments in terms of compensation expense because I heard a few things. But it sounds like, when I look at the run rate in the fourth quarter, $62 million of comp, long-term comp of $11 million, both are stepping up. I heard 2 different kind of areas of guidance but it sounds like the step-up could be fairly significant with $9 million of reversals in comp and it sounds like several million, maybe $1 million or $2 million in long-term incentive comp. But then I also heard you say, use the annualized run rate for 2011, which would be even higher than level. So can you help me think about what to step up and also considering in the first quarter, there's generally FICA and unusual kind of comp-related items too?

Bruce Lewis Koepfgen

Yes, I’ll just -- I was trying to make the distinction between the fourth quarter run rate and the annual run rate. But let me kick this to Brennan to see if we can clarify.

Brennan A. Hughes

I think if you think about our run rate going forward, I think it's better to look at that on an annualized basis because we have reversals in the fourth quarter in both the comp line and the long-term incentive lines. Those are probably lower than what would we expect to see in the first quarter. Does that help?

Craig Siegenthaler - Crédit Suisse AG, Research Division

Well, I understood that part but it sounds like the step-up could be fairly significant and that -- the magnitude of the step-up, I think, is what we have a question with.

Unknown Executive

I'll add some color to that as well. In the first half of the year, we were not fully on our new compensation plans. So as you look at the historical 4 quarters in 2011, the latter half of the year is more indicative of a run rate going forward. The fourth quarter, however, is not what you should run rate.

Operator

And we'll go ahead and we'll take our next question. And we'll go ahead and take that from Michael Kim from Sandler O'Neill.

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

Just a follow-up on your comments around sort of remaining discipline on expenses but not at the expense of sort of sacrificing your long-term growth prospects. Assuming revenues remain under some pressure just related to the performance fees, aside from comp, what are some areas where you think you could maybe rein in some costs a bit more?

Bruce Lewis Koepfgen

Well, if you think back to the third quarter in some of our comments, I think the management team here this year was very disciplined in looking at the fixed cost line as well. We clearly get a lot of flex from our compensation line. This year we feel like we made progress in the fixed cost line as well. I think the question that's on the table is how much farther can we go if conditions remain challenging. And so that is not clear at this point. We continue to remain very disciplined in this approach. But we just wanted to make sure that people realize that if it starts to bump up against the investments that we feel we need to make in our strategic agenda, that margins will suffer.

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

Okay. And then moving on to capital management. Any kind of change in thinking in terms of potentially looking at share repurchases or focusing a bit more on M&A opportunities to kind of step up the diversification of the franchise just given -- in the context of a stronger balance sheet? And maybe just to follow up, are you seeing more opportunities out there as you look at potential M&A?

Bruce Lewis Koepfgen

Let me -- I'll answer the first part of that and then Dick may want to weigh in on it. I think our answer to this question is the same. The diversification agenda and our strategic agenda are one in the same. We believe that at the margin, we want to continue on our path to invest in our strategy. We think that's the best way to create long-term returns for our shareholders. During the course of the year, we've deployed $360 million versus debt redemptions, some seeding products and dividend payments. But at this time, there’s no decision to repurchase shares.

Richard Mac Coy Weil

I'll just add. I think Bruce, just to underline and I agree with what he said, I think our thought process is the same. We look at strategic uses in the business and the needs of the business for our cash first and we have, obviously, a notion of a working capital safety margin that we make sure we maintain. And then we look at ways to efficiently use the cash and return it to our shareholders. We take that obligation very seriously. One of the ways to do that is repurchase debt. Another way to do that would potentially be to purchase equity. We look at the dividend rate also. In a world of pretty dramatic volatility and uncertainty, we've been cautious in our thinking and we remain in a pretty cautious mind frame. But all the things you mentioned are clearly things we look at. And yes, there are increasing M&A opportunities out there. There are a lot more banks and financial institutions that probably will sell parts of their asset management businesses as they go under additional regulatory scrutiny and balance sheet pressure. And so there are opportunities out there but some comments we've made in the past remain true, which is this is a talent-based business where culture is really critical. And so the hurdle for M&A is properly quite high. It's hard to meld cultures and make these things work well. They’re easy financial models to build but they're hard to execute. And so we approach M&A opportunities with interest but with real caution. And our main focus is building organically from our base and that remains consistent with where we've been in the past. So we are interested. We’ll look. We're aware of it. We do see an increased flow of ideas out there in the marketplace. But you could fairly characterize us as cautious.

Operator

We'll take our next question from Cynthia Mayer from Bank of America.

Cynthia Mayer - BofA Merrill Lynch, Research Division

Back to the comp issues, sorry to beat a dead horse. But I appreciate you guys mentioning look at second half. I'm just wondering if you could talk a little bit about what you would see us looking at? Are you thinking about comp to revenues? Making about comp to operating profit? Because I thought you mentioned a 30% comp to revenues ratio but in fact, it looks more like 35%.

Bruce Lewis Koepfgen

I think the number that's probably safest for use is the 30% number.

Cynthia Mayer - BofA Merrill Lynch, Research Division

Okay. And I guess looking forward too, if performance continues to improve, would that impact comp at all? And what role does that play at this point?

Bruce Lewis Koepfgen

Well, to the extent that performance ultimately increases flows and increases revenues then ultimately, it will translate into bottom line results. But I think the important thing to remember in our compensation practice is that this is a results-oriented, profits-based business calculation. So until that performance finds its way to the bottom line, it would not be reflected in the comp pools. I mean, it goes back to the description of this comp plan as creating the type of alignment that we want between our internal environment and our shareholders.

Richard Mac Coy Weil

Cynthia, this is Dick. The way I think about it is, there’s a lag between the performance and the business results on the way down or on the way up. But we've made the choice that we prefer the tighter alignment with the business results and with our shareholders. And so that's how we structured our compensation programs in our thinking.

Cynthia Mayer - BofA Merrill Lynch, Research Division

Got it. Okay. And then if I could just ask one more I guess on the fixed income flows. It looks like those backed off a bit in the fourth quarter but a lot of the industry was actually rotating toward fixed income. Do you have any thoughts on why that was?

Richard Mac Coy Weil

I think some of the fixed income flows are lumpy and hard to predict. We don't perceive any reduction in our momentum. In fact, we think that we're seeing increased momentum in our fixed income business and increase opportunities. These things won't move on a quarter-to-quarter straight line. I guess, I would also note that we had a significant win in our balance fund product in the third quarter, which created a positive lump, if you will, in the third quarter. And so the quarter-to-quarter comparisons will always be, I think, affected by those sorts of major wins.

Cynthia Mayer - BofA Merrill Lynch, Research Division

Got it. Okay. I don't know if I can ask one more but do you have any capacity constraints on Triton because it's becoming one of the bigger small-cap growth funds in industry? And if you add the separate accounts, it looks like it's edging up.

Richard Mac Coy Weil

As part of our fiduciary duty, we of course look at the relationship of size and performance and yes, in smid products, there will be capacity limits but we're not close to those right now. We can handle substantially more new assets and we think that the exceptional track record that those managers have put together will lead to substantial inflows over the next few years in those products and we're looking forward to that.

Operator

And we do have time for one final question and it comes from Marc Irizarry from Goldman Sachs.

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

Just on the comp-to-revenue ratio, can you just give a little color, when you say -- I think, I just heard 30%. Maybe you could just clarify that, number one. And then number two, can you just kind of walk through what role the performance fee reversals, if you will, play in thinking about the profitability and how you determine comp?

Bruce Lewis Koepfgen

I'm going to answer your first piece. I think the question was, how you should think about it as a percentage of revenue going forward. I tried to handicap in that obviously this is not how we do it internally but the annualized 30% rate is probably what we would suggest you use. And take the second piece.

Unknown Executive

Can you repeat the second piece of the question?

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

Yes, the second piece is as you guys do think about comp, to what extent do those performance fee reversals play in and how should we think about the impact of those on the comp and sort of the -- as we think about what the incremental margins can be?

Unknown Executive

Sure. The performance fees flow through to the bottom line, as you know, similar to a fixed cost, they flow all the way through to the bottom line. And so they would impact our operating income, which impacts the incentive portion of our compensation. Did that explain it?

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

Yes, that makes sense. And then, are you -- can you give us sort of if you mark-to-market today, your performance fee, what are some of your -- if you think about the outlook to where we stand today and think about the first quarter comp. Can you give a sense of the mark-to-market for those performance fee reversals today?

Richard Mac Coy Weil

I think we've given you -- all the parts of the puzzle are public and I think we've tried to help you, as much as we can, develop your calculator so that you can run whatever scenarios you like. And we're just not comfortable going beyond that point. So I think we've probably exhausted that topic in terms of what we're able to help you with.

Operator

And that are all the questions that we are able to take for today. I'd just like to invite the speakers to make any concluding remarks.

Richard Mac Coy Weil

We'd like to thank everybody for their time and attention today and for those of you who are owners, for you ownership support, and I hope you found the presentation that we've given transparent and helpful to you. If you have constructive comments or suggestions, we'd be pleased to follow up with you and learn how to better serve your information needs and your interests and have a great day.

Operator

Thank you. 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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