Janus Capital Group (JNS) Richard Maccoy Weil on Q1 2016 Results - Earnings Call Transcript

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Janus Capital Group, Inc. (NYSE:JNS)

Q1 2016 Earnings Call

April 26, 2016 10:00 am ET

Executives

Richard Maccoy Weil - Chief Executive Officer & Director

Jennifer J. McPeek - Chief Financial Officer & Executive Vice President

Analysts

Andrew Disdier - Sandler O'Neill & Partners LP

Michael Roger Carrier - Merrill Lynch, Pierce, Fenner & Smith, Inc.

Kenneth B. Worthington - JPMorgan Securities LLC

Craig Siegenthaler - Credit Suisse Securities (NYSE:USA) LLC (Broker)

Alexander Blostein - Goldman Sachs & Co.

Michael J. Cyprys - Morgan Stanley & Co. LLC

Gerald E. O'Hara - Jefferies & Company

Christopher M. Harris - Wells Fargo Securities LLC

Operator

Good morning. My name is Katie and I will be your conference facilitator today. Thank you for standing by and welcome to Janus Capital Group First Quarter 2016 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer period.

In today's conference certain matters discussed may constitute forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements due to a number of factors including, but not limited to, those described in the forward-looking statement and risk factor section of the company's most recent Form 10-K and other most – more recent filings made with the SEC. Janus Capital Group assumes no obligation to update any forward-looking statements made during the call. Thank you.

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

Richard Maccoy Weil - Chief Executive Officer & Director

Welcome, everybody to the first quarter 2016 earnings presentation for the Janus Capital Group. Thanks again for joining us today.

As usual I'll give an executive summary; our CFO, Jennifer McPeek will go through the results of the quarter in some more detail and then we'll turn to some special topics as the final part of our presentation and then we look forward to taking your questions.

From my perspective the story of this quarter has four pieces. First, despite a really difficult start to the year across most equity indices, despite a lot of volatility and a V-shaped recovery at the end of the quarter, we're encouraged by the improvement in total company net flows, driven by ongoing strength across a number of different strategies.

We're particularly pleased that strategies designed to perform well under more difficult market conditions, under more volatile conditions, such as the defensive strategies at Perkins, such as INTECH's managed volatility strategies, Global Unconstrained Bond run by Bill Gross, our diversified alternative strategies, our recently launched adaptive allocation strategies; all did exactly as they were supposed to, and put up good numbers during these difficult market conditions.

Third, areas of strategic investment such as U.S. intermediary, our fixed income business, international distribution and new product development are continuing to generate positive traction.

And fourth, this was a very difficult quarter for all active managers. So it was difficult for us to make the progress we might have hoped for against our performance fees. Jennifer will take you through those results in some more detail in her section a little later. But having given you the four parts of my executive summary, let me just turn to some of the results in a little bit more detail.

First looking at flows; total company net flows for the quarter were $300 million out, compared to $600 million out in the last quarter. I'm encouraged that in the first quarter INTECH had positive net inflows for the first time since the third quarter of 2013. They had $700 million of positive flows for the quarter which is an organic growth rate of 6%. I will discuss this business in a bit more detail at the end of the presentation in the special topic session. But we're continuing to see very strong momentum outside the United States. We had $1.6 billion of net inflows outside the United States during the first quarter, which continues a very strong record in our non-U.S. businesses from last year.

Turning to fixed income, fixed income had net outflows of $100 million, which reflects approximately $200 million of inflows at Kapstream. First and foremost we completed a leadership change in our fundamental fixed income business during the quarter and we are relatively encouraged by the client response to this change to this point. We recognize it's still early days and we have continuing sensitivity to the investment performance, but we're pleased with the first few months of succession process.

Kapstream, as I mentioned above, has been a great addition to the organization. It feels like we're truly out of the starting blocks in our efforts towards building a world class global macro fixed income business. And of course, Bill Gross has been putting up very strong investment numbers.

Looking forward, the outlook for our fixed income business is going to be heavily dependent on performance, but I continue to believe we have an exceptionally strong team doing a good job for our clients. I'm optimistic about the outlook for both our fundamental fixed income business and our global macro fixed income businesses.

Let me turn now to our fundamental equity flows. Fundamental equity saw net flows of $900 million out in the first quarter compared to $1.5 billion out in the fourth quarter of 2015. The quarter-over-quarter improvement was driven by reduced redemptions in both Perkins and Janus strategies.

Let me turn now to investment performance. Complex-wide investment performance, 61% of our assets were ranked in the top two Morningstar quartiles relative to peers on a one year basis. On a three year basis performance continues to be very strong. 86% of our assets were ranked in the top two Morningstar quartiles, reflecting great work of our investment teams. That's a mark to be very proud of.

It is also very encouraging that the strategies I mentioned earlier, that are designed to perform well under more difficult and more volatile market conditions are doing their jobs. 100% of Perkins assets are in the top two Morningstar quartiles for the preceding one year period. Our Global Unconstrained Bond Fund run by Bill Gross is putting up very strong performance, outperforming 83% of its peers over the last year, and INTECH's managed volatility product suite has continued to post very strong performance, which I'll detail a bit later when we get to the special topics slide.

The last piece of our story is, let me comment on progress against strategic initiatives. We discussed briefly last quarter our strengthening distribution presence in U.S. intermediary channel, which is a very important factor in the success of our firm. This quarter I'll discuss that a bit more in a special topic section.

Turning to international business, we continue to see very strong growth, with $2 billion of net positive flows during the first quarter, reflecting very strong contributions from both INTECH and our fixed income business. I want to particularly highlight our business in Japan. At the end of March we celebrate AUM over $15 billion for the first time in our history. We're winning business in Japan from both institutional and retail investors. Dai-ichi continues to be just a first class owner and partner and with our other local partners like DIAM we continue to see growing success in Tokyo. We couldn't be more excited about that relationship and thank you, thank you to Dai-ichi Life for your support.

Let me turn briefly to product development. In February we launched the firm's first new ETFs, the Janus Small Cap Growth Alpha ETF and the Janus Small/Mid Cap Growth Alpha ETF, both of which draw upon the real demonstrated excellence of our fundamental small and mid-cap growth teams here at Janus. With clients increasingly using ETFs, with the majority of U.S. retail fund flows going to ETFs it's imperative that we're able to develop, launch and successfully raise ETF assets. We've been very pleased with the early reception from clients and the initial interest in our two new offerings, but it's only been two months, and we recognize that developing a new product effort like this is going to take some years of sustained effort to deliver the substantial results that we're hoping for.

Lastly, we continue to be focus on returning capital to our shareholders. As such today we have announced a 22% increase in our quarterly dividend, bringing the annual dividend to $0.44 a share. This represents for me personally an 11-fold increase from the dividend level six years ago when I arrived. And perhaps a more meaningful way of looking at it is during those six years the board and the firm leadership have been committed to, first paying down the debt and then properly returning capital to our shareholders and we make continued progress against this commitment. So very pleased with that announcement.

With all that said let me turn it back over to Jennifer for a deeper dive into this quarter's results.

Jennifer J. McPeek - Chief Financial Officer & Executive Vice President

Thank you, Dick. I'll begin on slide five, a summary of our result. Average AUM was down 6% compared to the fourth quarter, primarily due to market conditions that we experienced to start the quarter. First quarter revenue was $248.5 million. That's a 7% decline quarter-over-quarter which is in line with those decrease in average assets.

Operating income was $62.6 million, which is a 23% decrease over the fourth quarter. That's an 18% decrease compared to the first quarter of last year and reflects the embedded operating leverage in our model as well as the impact of performance fees.

Earnings per share was $0.19 for the first quarter compared to earnings per share of $0.25 in the prior quarter and $0.23 a year ago.

Turning to slide six, we have our investment performance disclosure. As Dick mentioned we continue to see good performance across most of the strategies in the time periods which are presented. Over 60% of our complex-wide mutual fund assets are in the top two Morningstar quartile on a one, three and five year basis. Our one year performance did decline from last quarter and that's due to underperformance in some of our larger strategies during first quarter.

As you may recall last year we started including some additional color around specific Morningstar rankings of our funds over these standardized time periods. I think this data is particularly helpful in contextualizing the one year performance for our fixed income business. So as of December 31, our asset-weighted Morningstar percentile ranking for fixed income was 42%. Now at March 31, it's at 54%. So you see it switched from the top two quartiles into the third quartiles but it wasn't actually a huge move. That's not as obvious when you look at these general statistics.

Fundamental equities had an asset-weighted Morningstar ranking of 37 percentile as of March 31, and as Dick mentioned, the Perkins performance is particular high note. They're doing very well in the last 12 months, 100% of their assets in the top two Morningstar quartiles.

Turning now to slide seven, our first quarter total company net outflows were $300 million. That compares to $600 million of outflows in the prior quarter. Lower gross sales offset by some lower redemptions led to the improvement quarter-over-quarter. Our fundamental equity outflows have improved to $0.9 billion or $900 million from $1.5 billion in the prior quarter, again as lower redemptions outpaced the lower sales. Our first quarter 2016 gross redemptions for fundamental equity were actually the lowest quarterly amount since the fourth quarter of 2009. So that's a great statistic underlying the trend.

The breakdown there in fundamental equity was that Janus Equity had outflows of $700 million and Perkins had outflows of $200 million. As more context, for Perkins this was the lowest organic loss rate that we've seen since the second quarter of 2012.

Now as Dick mentioned earlier and probably the biggest surprise, flow story for the quarter, our mathematical strategies at INTECH had inflows of $700 million and this compares to $1.5 billion of outflows in the fourth quarter. Dick will be speaking in more detail about what's going on at INTECH and what's happening in their portfolio of client strategies later in the presentation.

Lastly, fixed income had $100 million of outflows in the quarter, and that compares to $2.4 billion of inflows in the prior quarter which reflected some lumpy institutional flows.

A little extra color beyond our standard disclosure here, if you break that out by channel, we saw $0.1 billion or $100 million in inflows in our intermediary channel, $200 million of outflows in institutional, and the self-directed channel was roughly at breakeven.

Turning now to slide eight, we'll give a little detail on our revenue. Total revenue decreased 7% over the prior quarter, again in line with lower average AUM. Our weighted average management fee for the current quarter was 46.9 basis points, which compares to 47.0 basis points last quarter.

Performance fees on our mutual funds were negative $9.9 million for this quarter and that compares to negative $9.6 million last quarter. The calculation, as you'll recall, is based on a rolling three year investment performance period.

Unfortunately, the first quarter 2016 performance was roughly in line with the first quarter 2013 investment performance, which rolled off. So there wasn't much change quarter-over-quarter.

Private account performance fees were $7.5 million, compared to $7.7 million in the fourth quarter. Separate account assets that are subject to performance fees were $22.5 billion at the end of March and this compares to $17.5 billion a year ago. As a result of these new assets under performance fees the seasonal concentration of our separate account performance fees has shifted. We now have 48% of performance fee AUM in the first quarter and 32% by AUM weighting (14:36) in the fourth quarter. Again, that's for separate account performance fee.

I'll turn now to slide nine. Operating expenses, total operating expenses decreased $1.1 million or 1% compared to the prior quarter, as variable expenses declined due to lower average AUM, and that was partially offset by some seasonal expenses which we always see in the first quarter. We had a total comp to revenue ratio of 43.2%. This was in line with the guidance we provided on the last call of being in the low 40%s, and that ratio moves up when average assets move down. We haven't changed our guidance for the full year.

The seasonal impact from payroll taxes and 401(k) contributions in the first quarter was approximately $4 million. We still expect our 2016 LTI expense to be in the $70 million to $75 million range and that assumption has embedded a flat market for the remainder of 2016. Our G&A expense was down $1.8 million from last quarter. As you'll recall the prior quarter included several items which did not repeat in the first quarter. This reduction was partially offset by an increase in our earnout accrual for VelocityShares. Note that this VelocityShares earnout expense is not deductible for tax purposes, which is the primary reason for our elevated effective tax rate in the first quarter.

Let's flip now to slide 10 for our balance sheet review and our capital market activities. Our financial position is enabling us to continue returning more capital to shareholders. In that vein we've announced a $0.02 increase in our regular quarterly dividend. Our share repurchases last quarter totaled approximately $33 million and this was up from the prior year's first quarter repurchases of $23 million.

With that I'll turn it back over to Dick for our special topic section.

Richard Maccoy Weil - Chief Executive Officer & Director

Thank you, Jennifer. Turning to page 12, the last time we provided a more detailed update on INTECH's business was the fourth quarter of 2013. So we thought it was time to refresh some of the information previously shared and give you an update.

Slide 12 shows annualized rolling three year performance of all the INTECH composites. Each dot, each individual dot, represents a three year performance period. Dots above the line represent out performance above the relevant index during that three year period, and the red dots below the line represent underperformance. Dating back to 1987, INTECH has delivered better than benchmark performance net of fees across 68% of the rolling periods. I think this plainly demonstrates the process works. It adds value. I think also the closeness to the line of the red dots demonstrates the risk management process around what they do, also works.

To me this chart is the clearest possible statement of the power of both INTECH's process and its risk management function. I think it clearly demonstrates they are doing a good job for their clients.

Flipping to slide 13, and taking a look at INTECH's business, in the upper left section of the slide we give you a breakdown by domicile of the investor, U.S. versus non-U.S. The two circles show the change from 2013 to 2016. I think you can see that with non-U.S. growing from 27% of the firm to 41% of the firm that clearly reflects the success that we've had together outside the United States and this diversifying trend I think will continue as many of the newer strategies outside the United States are rapidly growing.

On the lower left of slide 13 we show some annualized return versus benchmark for the five largest strategies. I also want to turn our attention to their suite of new products. On this page we have highlighted very strong investment performance of the Managed Volatility Funds, middle right, on page 13. We're very encouraged by this performance and the fact that these new ideas and products are gaining traction with clients.

As you can see from the table, U.S. Managed Vol and International Managed Vol are in the top ten decile relative to peers across the one, three and five year time periods. This performance is beginning to translate into positive net flows with over $100 million of net inflows in the first quarter in these funds. So the takeaway for INTECH is that we're focusing on further diversifying their business across both client type, geography and products, by providing investors with customizable risk return objectives. Its process is delivering reasonably good performance for its clients. Its non-U.S. business is growing well and new product development is working and creating exciting new opportunities for the future.

Let me quickly turn now on page 14 to U.S. intermediary channel. As we shared last quarter, we're seeing some encouraging market share gains in our U.S. intermediary channel validating this part of our strategy in our investments. I want to provide some additional color. Looking at market share, over the last 12 months both our Janus Equity and Janus fixed income strategies have been gaining share. On an organic growth basis, our Janus equity mutual funds have outpaced the growth of active equity mutual funds across the U.S. industry by 210 basis points.

Similarly, flows into our fixed income mutual funds have outpaced active fixed income strategies across the U.S. mutual funds industry by 200 basis points, all data according to Simfont (20:45).

As Jennifer highlighted last quarter, even in the face of recent market volatility we have seen in Global Equity markets, we believe it's important to continue to invest in personnel in this business to support future growth. As of March 31, 2016 we had a total of 99 external and internal wholesalers compared to 66, two years prior. Year-to-date we've added seven members to this team and we have plans to add an additional three members through the balance of the year.

Going forward we believe we're well positioned to continue to grow our market share in multiple categories, including mid cap growth, small and mid-cap growth, small cap value, large cap growth and we're optimistic about future growth opportunities in our recently launched asset allocation in our ETF products as well as INTECH's suite of managed volatility funds. The takeaway for our U.S. intermediary business is we're gaining market share, we're expanding our presence, we're investing in the business to capitalize on this positive momentum and the new product development efforts are enhancing our ability to meet client needs and grow our business.

With that said I'd like to turn it back over to the operator and take your questions.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen at this time we will conduct the question-and-answer session. In the interest of time questions will be limited to one initial and one follow-up question. We'll take our first question from Michael Kim with Sandler O'Neill.

Andrew Disdier - Sandler O'Neill & Partners LP

Hey, Jennifer. Hi, Dick. This is Andrew Disdier sitting in for Michael. Thanks for taking our questions. So first, now that we've seen the fiduciary rules from the DOL, which generally seemed less onerous than expected, do the rules influence the way that you're thinking about the strategic direction of the firm, either from a development perspective or as it relates to distribution relationships or is it really just a kind of business as usual going forward?

Richard Maccoy Weil - Chief Executive Officer & Director

Thanks, Andrew for the question. Obviously this is a very important area of rule making. It will have, as yet, unspecified outcomes for our clients primarily. We don't see it as having a major direct effect on how we're doing our business ourselves, but we recognize that when so many of our clients will be facing a changing operating environment, when they'll be challenged by new rules that affect some of their assets related to retirement, but perhaps not other client accounts, related to sort of taxable investing, it puts them in a difficult frame and they're going to have to go through a period of really understanding the rule in detail and then implementing their internal changes.

Our commitment is to try and serve as a strong partner for those clients during the period. So we're working on education. We're working on other sorts of value add outreach to help our clients work through this situation as best we can. I think there probably will be net effects on our business down the road but they're a little hard to specify now. At this point I think the main work of the community is for our clients to assess how they're going to address the new rules, and then I think after we try and be helpful to them in that process then we'll turn to understanding the more specific effects downstream on us. But as I say, it's a complicated rule. It's brand new and I think it's not yet known, and we haven't yet begun to change any planning around here, other than trying to be a good partner for our clients.

Andrew Disdier - Sandler O'Neill & Partners LP

Okay. Great. And then maybe hitting a couple of your key discussion topics today, INTECH and the sales team, just wondering maybe you could explain or provide any outlook with any interest from potential investors down the road kind of matching up the stronger performance at INTECH with the saleable – with the internal and external wholesalers.

Richard Maccoy Weil - Chief Executive Officer & Director

Well, INTECH's suite in our mutual fund family are these managed volatility mutual funds. And as we pointed out in the breakout session, the special topics, we've started to see some positive momentum for those managed vol funds in our retail funds that are sold by those wholesalers you mentioned. So I think it's an exciting forward step. As yet it's not huge. I mean we're still talking about hundreds of millions, not billions and it's going to take some time to hopefully continue to build momentum and get to bigger numbers. But that's the way this business works. You have to earn client confidence. You have to earn platform placements. You have to do all those sorts of thing, and INTECH is – they're on the right path with this very thoughtful and excellent product lineup that's delivering top decile performance over one, three and five years.

Andrew Disdier - Sandler O'Neill & Partners LP

Great. Thanks for taking our questions.

Operator

We'll take our next question from Michael Carrier with Bank of America Merrill Lynch.

Michael Roger Carrier - Merrill Lynch, Pierce, Fenner & Smith, Inc.

Thanks, guys. Hey, Dick. Maybe first on the fixed income part of the business, you're going through the transition. It seems like things are holding up relatively well, both when we look at, like the performance and the flows. Just wanted to get a sense, like how long do you expect that process to take in terms of your going through with, whether it's a client or consultant and then you can kind of be out of that transition period. And I think, just get your sense on that. And then I think from a product standpoint, when you look at what Kapstream has and then what Bill Gross is doing, where do you see the demand in this environment?

Richard Maccoy Weil - Chief Executive Officer & Director

Sure. Thanks, Michael for those good questions. First on the transition in our fundamental fixed income business, there isn't a really clear easy answer for you and different clients will be different and some of it is obviously context of what's going on in the market and what happens with our investment performance. So it's hard to give you a really high quality answer.

I think the period is at least a year, but again I think you can see variation around how sensitive things remain based on investment performance and market environment, and also our ability to obviously continue to attract and retain the existing team. So there are a bunch of variables in there, but I would say at least a year is my best answer.

Regarding the global macro team, first off Bill Gross is putting up really excellent performance for his clients in the Global Unconstrained Bond, and I would expect that more and more people will recognize that, and will hopefully be moving in his direction. Similarly I think the strategy brought by Kumar and the team from Kapstream, which is a lower volatility, lower risk version of unconstrained bond, that absolute return strategy brought by those folks, we're looking to import that into the U.S., into Europe, and into Asia over time.

And I think there will be a lot of demand for that, particularly given upset in money funds, in money markets upcoming. We're optimistic that we'll be able to gather institutional money first, probably and ultimately retail money as well, behind both Bill Gross's unconstrained bond strategy and Kumar's absolute return lower volatility effort. So I think there's opportunity for both, honestly in the U.S., in Europe and in Asia.

Michael Roger Carrier - Merrill Lynch, Pierce, Fenner & Smith, Inc.

Okay. That's helpful and then as a follow-up. Jennifer, just when we look at the financials, I guess from a margin standpoint, maybe a bit more compression this quarter. Obviously environment had a lot to do with that, and we got a little bit of a rebound going into 2Q. But just wanted to get your sense. I think you mentioned $4 million that was more seasonal on the comp side. It sounds like the comp ratio -- you're still comfortable in that low 40%s.

And I think on the non-comp, it seems like there were some items that were in the fourth quarter, but on the G&A line, I guess this is a pretty good run rate and if we do get more volatility in the markets, just where are your levers, where you can pull back versus the investments that are being made in the business?

Jennifer J. McPeek - Chief Financial Officer & Executive Vice President

So lot of questions there. First validating your assessment, yes, our margin was depressed due to both the effects of the lower assets as well as some of those seasonal and also idiosyncratic charges that we did. In addition to having the seasonal payroll increase, we also had a increase in our accruals for the VelocityShares' acquisition earn-out. So those are things that are not part of the, what I call run rate amount and so you can look at that as being seasonal. You can also look at where assets have landed at the end of the quarter, and even into this quarter to assess that going forward. So given those things, as I said in the prepared remarks, our comp ratio ranges still stand. We haven't updated those. But they will move quarter-to-quarter. The overall ratio is sensitive to asset levels, and you'll see that.

Your part B or C of the question was around G&A and whether we have levers to pull there. Sure, if we see very tough market, we have some levers that we can pull in the G&A line, and we will absolutely look at that. That said, I think when you look at the pressures from things like increasing regulation, the DOL, other pressures on our industry, we're not going to be quick to pull back in our support areas, and we're not going to be looking for ways to kind of cut corners because I think it's very important that we come forward fully prepared and putting forth a very good face to the market in times of volatility. So a long winded way of saying yes, we have levers, but we'd only pull them if we really thought we were facing prolonged conditions.

Michael Roger Carrier - Merrill Lynch, Pierce, Fenner & Smith, Inc.

Okay. Thanks a lot.

Operator

We'll take our next question from Ken Worthington with JPMorgan.

Kenneth B. Worthington - JPMorgan Securities LLC

Hi, good morning. Maybe first, Dick, on INTECH. I had asked about INTECH in 3Q, and if I recall the response, you were very hopeful on the retail side for INTECH, but were maybe less optimistic on the institutional side despite what we were seeing as very good performance. You seem much more sanguine today. So first, am I reading you correctly in hearing more optimism for you in terms of the outlook for the institutional side of INTECH, and if that is the case may be what's changed here for you?

Richard Maccoy Weil - Chief Executive Officer & Director

Well, thanks Ken. You know, I'm not sure you are reading me correctly. I think I have been optimistic that this is a really high quality process that generally delivers well for its clients. And I have pointed out that institutional flows are volatile. They're lumpy and they move around and they're hard to draw a straight line quarter-to-quarter. And I have pointed out that they're doing particularly well in newer strategies outside the United States and have been more challenged with some of the older U.S. market-oriented strategies inside the U.S., and you can see some of that in the performance that we laid out on page 13.

So I think those things have remained pretty constant. I think we were optimistic, but in really early days on the retail distribution side, we're still in almost really early days. We've gotten another quarter behind us. It was a very good quarter for their managed vol mutual funds. The momentum that we're seeing there is positive and we hope we can continue to grow that based on their excellent performance and our really strong sales force.

So I don't think my message for INTECH has really changed a lot. I continue to believe in what they're doing. I continue to think the institutional will be lumpy and I think we are growing a success on the retail side, but it's going to take some time for that to be really meaningful in size.

Kenneth B. Worthington - JPMorgan Securities LLC

Okay, great. Thank you. And then, Jennifer, also on INTECH you mentioned the separate account performance fees. I do assume that those are still mostly INTECH. So I guess question there, and then you mentioned the transition to 1Q from what had been, fees generally being – coming in, in 4Q in the separate accounts. Is that just simply when the money is coming in or is there something else driving the fees there? Is it still one year and three year numbers driving separate account performance fees or is that transitioning too?

Jennifer J. McPeek - Chief Financial Officer & Executive Vice President

Well, let me try to give you just a broad view of where the performance fees are today. Still mostly INTECH, but we are seeing continued growth in institutional mandates, which have performance fees, particularly in fixed income. So I think you'll see that, that weighting will become more diversified across our managers and we're starting to see that, but it is still mostly INTECH.

The phenomenon of shifting more towards the first quarter really has to do with some of the larger mandates that have come on, that pay in the first quarter. I believe that for the most part that's because some of those clients have March fiscal years, but it varies from client-to-client. So we have now annual performance fees that have come on recently over the last 12 months that pay in the first quarter and you'll see that going forward. However if we get additional clients and accounts coming on that are not in the first quarter, that weighting can shift as well. We'll just try to keep you updated on it.

Kenneth B. Worthington - JPMorgan Securities LLC

Okay, and then one, three years are the ones we should focus on?

Jennifer J. McPeek - Chief Financial Officer & Executive Vice President

You know, we still have some that are paid quarterly which is why you'll see some separate account performance fees in the second and third quarter. So we have smaller amounts that pay quarterly, but predominantly in the one and three year trailing.

Kenneth B. Worthington - JPMorgan Securities LLC

Great. Thank you.

Operator

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

Craig Siegenthaler - Credit Suisse Securities (USA) LLC (Broker)

Thanks. Good morning, everyone. I have one here on Dai-ichi, and just correct me if I'm wrong. But I think the standstill agreement that you had with them expired in the fourth quarter, and I'm just wondering if we should read anything into this, meaning are the prospects higher for Dai-ichi to take a larger position in you guys now?

Richard Maccoy Weil - Chief Executive Officer & Director

Thanks, Craig. I think you're correct that the contractual provision around the standstill expired. I don't expect there to be any change in our relationship that I can foresee at this time. I think it's working very well for us and also for them as near as I can tell. And so I think it's not a major issue that those provisions timed out. We don't view that as super material from our perspective.

But of course, it's real and they do have more flexibility now than they had and if things change and if they become, minded to make different decisions, they of course, have more freedom now to do it. It's just with the relationship working well and the results strong we don't anticipate any change in our relationship that we can foresee.

Craig Siegenthaler - Credit Suisse Securities (USA) LLC (Broker)

Just a follow-up on the M&A front, now that you really finished building up the balance sheet and you're pretty comfortable with the level of cash and investment versus debt. I'm wondering what type of transactions would you consider in the future in terms of product set, geography and size.

Richard Maccoy Weil - Chief Executive Officer & Director

Well, I think we've been very pleased with the results of the two acquisitions we've done during my time here. I think the VelocityShares acquisition and the Kapstream acquisition, both brought good diversification to us in terms of some products, but also in terms of distribution, which is very important. And most important of all, they brought excellent people. Those are pretty rare things that bring those three elements. When you find them, I think you try as hard as you can to execute on that basis. But it's a pretty special thing to find, find those opportunities. We'll continue to look, but that's a pretty good recipe if it has those three parts.

Craig Siegenthaler - Credit Suisse Securities (USA) LLC (Broker)

Thank you, Dick.

Operator

We'll take our next question from William Katz with Citigroup.

Unknown Speaker

Good morning. Thanks for taking our questions. It's a Jack Hugher (39:03) here stepping in for Bill. Just, again one more follow-up on INTECH. It seems like there's been obviously very positive flow momentum in the non-U.S. channel and maybe a little bit of bifurcation with the U.S. channel maybe not capturing the same gross sales. Just wondering is this just a performance challenge or is there something else going on that will led (39:27) to this product being more attractive, this suite of products being more attractive to international clients than to U.S. domiciled clients? Thanks.

Richard Maccoy Weil - Chief Executive Officer & Director

I think we've talked about this in some prior quarters. I think the U.S. – the challenges on the U.S. side are somewhat related to investment performance. I think they're somewhat related to what's going on in the marketplace for the main client base. The pressure that is created when many of those clients are looking at barbelling their portfolio and going for a large portion of passive and then very active for the remainder.

So I think some of its market structure, some of it's the performance of some of the U.S. products, and conversely I think they have in some of their newer global and non-U.S. products they have very strong performance. So some of that explains it.

Just to fill in the blanks a bit, in the first quarter of 2016 the net flows inside the U.S. for INTECH were $1 billion out. And the net flows for the non-U.S. clients were $1.6 billion in. And so I think that's a continuation of some of the trends we've been talking about. It's not just a single factor that drives that, but we've seen that consistently now for a little while, and I'm not aware that that's going to change rapidly. But I do think they're gaining more energy in the U.S. and I'm optimistic that over time they can get the U.S. moving forward as well.

Unknown Speaker

Thanks. That's helpful. And then on the ETFs that you launched in February, just kind of curious on what kind of the reception has been so far and B, if there's anything else in the pipeline and what kind of longer term opportunity this could be for you guys?

Richard Maccoy Weil - Chief Executive Officer & Director

Well, thanks for that question. I think to build an ETF business that's meaningful in the context of the size of our overall business is the work of five or ten years. And so I think you don't start down a project like this, unless you're committed to staying over a period of years. It's very early days, a couple months after the launch of our first two products. I think the way you measure new products in the ETF channel is primarily whether they're actively trading because I think liquidity becomes a huge hurdle for those new launches of ETFs that don't actually have active trading. I think they die on the vine. And so we're gratified that we've seen some regular trading and some liquidity in these early days in our brand new ETFs. So I think that's a good start. And that's the start we are describing.

In terms of meaningful asset size pouring into those things, that's going to take some time and that will be the work of the years ahead. But if we can keep the trading volume active and growing, those are the earliest indicators that we can point to that say that we're on the right path.

In terms of other stuff in development, yes, of course, we do. I think to be successful in the ETF space, I don't think you can just have one or two offerings. I think you need to offer a few more than that and we will. It's hard to predict with great confidence exactly which ETF will be more successful. It's the kind of marketplace where I think you want to have a handful of offerings out there to give yourself the best chance to succeed. And so we're working towards that. We're not going to be a huge ETF provider with 100 offerings out there, but neither will we stick with two.

Unknown Speaker

Thanks for taking my question.

Operator

We'll take our next question from Alex Blostein with Goldman Sachs.

Alexander Blostein - Goldman Sachs & Co.

Thanks. Good morning, everyone. A question for you around the 401(k) business I think, in some of the highlights and intermediary discussion you talked about being in the all top 25 platforms in DC providers. Can you give us a sense how much you guys currently have in 401(k) platforms and kind of how meaningful a contributor has this channel been for you guys in flows in the first quarter?

Richard Maccoy Weil - Chief Executive Officer & Director

Let's see if I have the right data for you. I think the assets if I look in our U.S. intermediary business, I think we have approximately just under $60 billion in our U.S. intermediary business of which about $19 billion is DC. So that's about 32% of our U.S. intermediary business. I don't have the same breakdown in flows for you. I apologize.

Alexander Blostein - Goldman Sachs & Co.

Okay.

Jennifer J. McPeek - Chief Financial Officer & Executive Vice President

I pulled it up here for you. We have – we had on a net basis $0.1 billion in our intermediary business. The DC platform was close to flat for the quarter.

Alexander Blostein - Goldman Sachs & Co.

Got it. That's helpful. And then, Jennifer just a question for you around operating margin. So totally get the dynamic around the market impact of the averaging and the pressure on the revenue side this quarter but I guess when we take a step back, taking your comment into account, taking the growth initiatives you guys are still trying to pursue in a flattish market backdrop, is it reasonable to still expect some positive operating level from you guys this year or given this backdrop it might be a little more difficult?

Jennifer J. McPeek - Chief Financial Officer & Executive Vice President

Well I think in a flattish market environment we're not going to be cutting costs and so it really depends on how our sales are going, right, how our flows are going. And whether or not we're able to grow the overall asset base? I do think that there are some headwinds, though, in the short term but not in the medium term to improving our operating margin.

The first is that we have increased our budget and I talked about this last quarter for marketing for the year. You didn't see that in the first quarter but you should see it through the rest of the year and I think that, that marketing's really going to pay off. It's very focused. But it will affect the operating margin during the quarter that the spend occurs.

And the second is we need to watch how our asset mix is coming through and that may impact margins. And I'm just not sure what direction that will take. We're seeing an increase in institutional separate accounts. Obviously whether or not performance fees come through will impact our overall margin there. We're seeing a shift in our asset base to more fixed income. I think that – and also with the addition of Kapstream that's accelerated that trend. So when you play that all through, although there will be impact to our revenue rate and how that flows through to the operating margin, it's a little too early to tell, but there will be factors in play.

Alexander Blostein - Goldman Sachs & Co.

Great. Thanks for walking through that.

Operator

We'll take our next question from Michael Cyprys with Morgan Stanley.

Michael J. Cyprys - Morgan Stanley & Co. LLC

Hi, good morning. Thanks for the question. Just wanted to follow-up on INTECH inflows. So the first quarter of inflows in a few years. So just curious how much of that is from a single mandate win and how we should be thinking about the trajectory of flows to INTECH going forward from here? And also could you just touch upon, some of who are the clients of INTECH, pension versus endowments and so forth, and what specifically they're looking forward at INTECH and how this strategy fits more broadly in their context of asset allocation?

Jennifer J. McPeek - Chief Financial Officer & Executive Vice President

I'll answer the first part of the question which is around the client concentration for INTECH. This quarter we saw some diversification in where those flows were coming from. So it's not all one big client. We're very encouraged because there's a combination of new clients as well as top-ups or increases in funding from existing clients. So just a real reflection of confidence in INTECH as the manager.

And sorry: what was the second part of your question?

Michael J. Cyprys - Morgan Stanley & Co. LLC

Just around the trajectory of flows going forward, and I guess the third part was just around the clients, who they are, what they're looking for, how do they think about broader asset allocation?

Jennifer J. McPeek - Chief Financial Officer & Executive Vice President

Well...

Richard Maccoy Weil - Chief Executive Officer & Director

I think that's a tough – that's, given the diversity of what they offer in term of their process against a large number of different benchmarks, and also their really excellent ability to customize solutions for the institutional client base, I think different folks are looking for different things and it's pretty hard to generalize.

If forced to generalize I think you can say their process really offers pretty strong, pretty consistent alpha with good risk controls. So that it's not – it's a reduced volatility approach compared to a lot of other active managers and of course they offer opportunities to have reduced volatility compared to the underlying benchmarks, and people are finding that very appealing. If they can invest in liquid benchmarks and get a benchmark or better return with lower volatility, I think that package is quite appealing to folks, as they do their – sort of their risk budgeting for their asset allocation. And that's a lot of, I think what's driving their success. I hope that's helpful. It was a little – it's hard to group everything they're doing under a couple of sentences.

Michael J. Cyprys - Morgan Stanley & Co. LLC

Got it. Okay. And if I could just ask another question, you mentioned asset allocation. You launched some new products in that suite there. Can you just update us on the strategy and how that buildout is progressing?

Richard Maccoy Weil - Chief Executive Officer & Director

Sure. Myron Scholes, Nobel Laureate, and his colleague Ashwin Alankar came to Janus -- I'm going to get it wrong I know it (49:24) a year and a half ago or so, and worked to bring some of the ideas that they have been developing through their careers to asset allocation. And I won't try and summarize the whole thing quickly, but I'll say I think they have a better structure for a fundamental base asset allocation than is typical, given their insights into the market, and then they vary that primarily using signals from derivative markets, which essentially gives them a – if you want to think about it, an indicator of where the smart money in the world is betting in terms of opportunities for big upside or big downside changes.

They're not really focused on daily changes. They're very focused on just capturing the major ups or the major downs and having their asset allocation tilted well for those things. Net-net they have an opportunity to outperform with their asset allocation, both in up markets and in down markets. And that sounds pretty special. I think it is. I think it has the opportunity to be a very successful competitor in asset allocation. And so we're optimistic about the future. But it's early days. The first adopters we expect will be institutional, but we're still at the beginning phases of this effort and we'll report as it rolls along.

Michael J. Cyprys - Morgan Stanley & Co. LLC

Super. Thanks very much.

Operator

We'll take our next question from Daniel Fannon with Jeffries.

Gerald E. O'Hara - Jefferies & Company

Great. Thanks. Gerry O'Hara sitting in for Dan this morning. Just a couple follow-on questions at this point. You mentioned that a number of the performance fees were driven in the quarter by a combination of INTECH and non-INTECH strategies, and apologies if I missed this, but what are some of the non-INTECH strategies institutional that are being marketed with performance fees?

Jennifer J. McPeek - Chief Financial Officer & Executive Vice President

It's largely fixed income. But we also have some of our equity research strategies under performance fees.

Gerald E. O'Hara - Jefferies & Company

Okay, helpful. And then just a quick one on the intermediary channel, this slide here with respect to the 25 top kind of DC providers or record keepers that are being utilized, is that any change from years past? Is it perhaps more or is it generally kind of a stable number of providers?

Richard Maccoy Weil - Chief Executive Officer & Director

I don't have that number in front of me. But I think that's a pretty stable level of working with all the major DC providers.

Gerald E. O'Hara - Jefferies & Company

Okay. Fair enough.

Operator

We have time for one final question. We'll go next to Chris Harris with Wells Fargo.

Christopher M. Harris - Wells Fargo Securities LLC

Thanks for squeezing me in here, guys. Just a bigger picture question about performance. You highlighted the fact that Perkins' performance has gotten a lot better and that's clearly a positive. But just one thing I'm wondering about: does the improvement there come at the expense of the growth franchise or could there be markets where both Perkins and the growth franchise do well simultaneously?

Richard Maccoy Weil - Chief Executive Officer & Director

Thanks. That's a good question. I think the answer is a little nuanced, with apologies. I think for the most part you will see the defensive value oriented strategies at Perkins perform better in different market conditions than the growth strategies at Janus. But that's not a universal truth. There have been periods when they both underperformed and periods when they both outperformed. So it's not an absolute. But sort of in the center of the bullseye I think they'll typically perform in different market periods, and that's part of how we think about the construction of our company and the diversification of our company.

In some ways asset management companies are a little bit like ferryboats. You don't want everybody running to the same rail at the same time because it causes the boat to rock a lot more than it otherwise would. And having this diversification in terms of products and having this diversification in term of clients moving in different directions at different times is very helpful for maintaining the overall stability of the franchise. And so we like that diversity, but certainly it's not an absolute.

Jennifer J. McPeek - Chief Financial Officer & Executive Vice President

I will add to that, that in terms of performance fees, they can both do well at the same time because they are measured against different benchmarks for growth and value respectively.

Christopher M. Harris - Wells Fargo Securities LLC

Got you, okay. That makes sense. And just a quick follow-up on INTECH. Slide 12 is particularly compelling. You guys laid this out, beating the benchmark 70% of the time roughly. When you guys look back at the historical performance, are there particular markets where INTECH tends to do quite well and then particular markets where maybe it doesn't perform as well or is it just purely random?

Richard Maccoy Weil - Chief Executive Officer & Director

No, it's not purely random, but it is not – most people have been trained I think to think about the markets in sort of fundamental investor terms. And really what drives INTECH's strategy is relative volatility of the different parts of the indices in which they invest. And so most of us are not typically tracking relative volatility. Even the VIX tracks sort of overall volatility and that isn't the driver either. It's how much relative volatility do the stocks show against one another in a given liquid index.

And the more of that there is, the more opportunity that creates for them to do what they call volatility capture or put another way, capturing rebalancing premium. And so most of us typically don't have good mathematical tracking of relative volatility and we're not particularly aware when it's higher or lower. And so it can lead to a little bit of a frustrating conversation when you try and put it into more traditional market description terms, but if you have measures of the divergence of stocks within a liquid index that would be the key environmental factor that drives their process.

Christopher M. Harris - Wells Fargo Securities LLC

Thank you.

Operator

That concludes our question-and-answer session. At this time I'd like to turn the call back over to our speakers for any additional or closing remarks.

Richard Maccoy Weil - Chief Executive Officer & Director

Sure. Let me just close by saying thank you all for your time today. I think Janus continues to work towards improving our position to capture market share. We continue to work towards improving our position in the U.S. retail market with success. In the non-U.S. markets we've had really exciting success. The markets have been a challenge.

2016 was off to a very volatile start. We're obviously pleased, as is the rest of the market, with the recovery that's been shown, but clearly the average level of assets during the quarter was challenging for us and not just down a bit. But that said we remain committed to our strategy to investing in our business areas where we're seeing positive momentum. We're encouraged by our market share gains in U.S. intermediary and non-U.S. in particular and we're as a firm going to continue to be focused on executing our strategy and try not to let the sort of shorter term external environment change what we're doing. That said as Jennifer mentioned during the call, we get to a protracted decline, we do have levers to pull and we'll go through the exercise of studying that carefully should that occur.

So thank you all very much for your time and attention this quarter.

Operator

That concludes today's conference. Thank you for attending.

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