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Janus Capital Group, Inc. (NYSE:JNS)

Q3 2007 Earning Call

October 25, 2007 10:00 am ET


Gary Black - CEO

Robert Garvy – Chairman/CEO, INTECH

Greg Frost - CFO


Ken Worthington – JP Morgan

Thomas Gallagher -Credit Suisse

Marc Irizarry - Goldman Sachs

William Katz - Buckingham Research Group

Cynthia Mayer - Merrill Lynch

Donald Neiman - William Blair


At this time I would like to welcome everyone to the Janus Capital Group third quarter 2007 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

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 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,, and on the SEC’s website, Investors are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date on which they are made. Janus does not undertake to update such statements to reflect the impact of circumstances or events that arise after the date these statements were made.

Investors should, however, consult any further disclosures Janus may make in its reports filed with the SEC. Thank you.

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

Gary Black

Good morning, and thank you for joining us for our third quarter earnings call. With me today are Bob Garvy, our Chairman and CEO of INTECH; and Greg Frost, Chief Financial Officer.

As you can see from the results we reported this morning, we had a fairly strong quarter in most respects. Third quarter earnings per share from continuing operations were $0.29. We did announce our plans to sell our printing business and as a result we took an impairment charge on these assets and have excluded these results for all periods. Other than that, I think it was a fairly clean quarter.

Long-term flows were a positive $0.7 billion which was below second quarter. On the Janus managed side, flows continued to strengthen. We generated $2.9 billion of positive flows in the quarter. Recall last quarter, which was $1.5 billion of positive flows, was the first time we had been positive in about six years.

INTECH flows were disappointing at -$2.2 billion, reflecting some challenging short-term performance; Bob will talk more about that in a minute. We also had $8.1 billion of net new flows in the money market area, which pushed our assets under management up about 9% for the quarter to $208 billion, which is up about 26% from where we were a year ago.

Performance from our investment teams remains exceptional. Across our retail products, all of our JIF products, 89%, 73% and 67% of our funds were ahead of peers over one, three and five years, respectively. On the Janus managed equity side, 100% of our funds are now ahead of peers over the past year; 87% and 73% are ahead of peers over three and five years, respectively.

Our investment margins were 33.7% in the quarter and we repurchased $184 million worth of stock, reducing the shares outstanding by an additional 3.4%, which brings us to a 12% net reduction year-to-date.

Turning to slide 3. Overall flows, again, were a positive $0.7 billion during the quarter. The Janus flows you can see at the bottom, were strong at $2.9 billion.  I think it reflects the outstanding performance which, again, we’ve had now for several years and it also reflects a shift in the marketplace back to growth-oriented managers, following Growth’s performance in the marketplace, which Growth has been beating Value now for about a year.

It also reflects the buildup of our distribution efforts, particularly our intermediary business; we’ll talk more about that.

Many of you get the strategic insight retail market share data. For the quarter, Janus improved to ninth in the industry in the Equities side; for the month of September we’re actually seventh.

Putting it in perspective, a year ago we were 597 -- that was for third quarter 2006 -- and we were actually 19 in the second quarter, so we’ve made some good progress on the retail share front.

INTECH closed, again, with -$2.2 billion, you’ll see that at the bottom right, and I’ll let Bob address that.

On slide 4 by channel, retail net flows were positive for the third consecutive quarter fueled by gains in our supermarket subchannel. In the supermarket subchannel AUM is actually up about 50% versus where we were a year ago. We now have 18 funds on the so-called select list at Schwab and Fidelity, who dominate the channel.

Looking at the domestic intermediary business, the top right, the flows continue to accelerate. The Growth flows are actually double where they were just a year ago. This is the second consecutive quarter of positive net flows, driven by the broker-dealer subchannel. We now have 47 wholesalers on the ground. This is almost all of the Janus-managed products.

On the institutional side, bottom left, we posted net outflows of $1.1 billion; it reflects the outflows from the INTECH products and again, as Bob will talk about it, it’s more a rebalancing by large quantities than terminations. I think most of our institutional clients understand our process, and understand that our performance, while challenged in the short term, has been very strong long term. Our fourth quarter [inaudible] funded pipeline remained very strong, and we are getting some traction on the Janus-managed side. We actually had $300 million of inflows in the quarter on the Janus-managed side.

On the international front, which again is the bottom right, net outflows for  the quarter, sizable net outflows in our offshore mutual fund for INTECH products. But like the institutional business, we have a pretty robust pipeline going into the fourth quarter.

Turning to slide 5, we’ve had a very robust market year-to-date and over the last 12 months, particularly outside the U.S., you look at the MSCI EAFE Growth and Value benchmarks, and that has provided a nice tailwind for the entire industry.

If you look at the top right, retail flows in September rebounded nicely after a pretty tough August. Looking at the bottom left, Growth is now outperforming Value for all periods we show here. So third quarter, year to date, and last 12 months. And over the last 12 months you’ll see Growth outperforming Value by about 500 basis points, which is causing industry flows to shift away from value managers and toward growth managers, which is obviously benefiting Janus.

Given our strong performance and given our distribution buildup, we think we’re very well-positioned to take advantage of this. Again, you saw that Janus flows in the quarter of positive $2.9 billion, which is about 10% organic growth.

Turning to slide 6, the Janus investment team continues to deliver just superb investment performance across all time periods. Again, on the Janus managed equity side all of our products have beaten peers over the past year, 87% and  73% are beating their peers on a three and five year basis. 50% of our JIF funds are rated four and five star by Morningstar.

85% of our Janus managed equity products are actually top quartile over the past year and 80% are top quartile over the past three years. It is a testament to the depth of our investment team. On a since-inception basis, 88% of our Janus-managed products have been in the top quartile since inception.

INTECH performance has been challenging short term, but long-term performance is still very strong. All seven of our strategies for at least a five-year record are ahead of their benchmarks since inception. We’ve talked about batting averages in the past. If you look at the percentage of periods where Strategy has actually out performed its relative benchmark independent of when you start the clock, greater than 75% of Strategy’s have a batting average for three-year rolling periods which means 75% of the time they’re beating the benchmarks. If you look at five-year rolling periods, 85% batting average, which again are very, very strong numbers.

You can see this graphically on page 7. It’s pretty straightforward, the numbers continue to be extremely strong across the board.

On page 8 you see the detail which in the past we’ve highlighted specific performance, but it is exceptional across all the Janus managed products, across all time periods. I will again call out some standouts:

  • Janus 20 top 1% one, three, and five; it’s managed by Scott Schoelzel.
  • Janus Research, top 3% over one, three, and five, which is managed by the research team.
  • Janus Orion, top 2 percentile on a one, three, and five basis, managed by Ron Sachs.
  • Our Venture product which is closed, managed by Will Bales, top 7%, one, three, and five.
  • The Contrarian product, top 1%, one, three, and five managed by David Becker. David is actually the number one across 662 funds over the past three years, number two out of 493 funds over the past five years.
  • Overseas, managed by Brent Lynn, top 1% in the international arena. He’s actually number one out of 1,049 funds over one year, 812 funds over three years, 671 funds over five years.
  • Some of our newer products, Janus Triton, top 5% since we launched it about two years ago, managed by Chad Meade, Brian Schaub.
  • And our Global Research product, which we also launched about two years, is top 5%.

The reason it’s important to just think about this is because we do have a very broad bench, a very deep team of investment talent. I do want to talk at this point a little bit about some of the recent departures at Janus. Some of the investment talent is in the process of either retiring or leaving the firm, which has gotten some press. We don’t like losing any of our investment talent. It is the lifeblood of our firm. This team is the best in the industry, and we want to make sure that we keep them.

As the industry continues to mature and move away from a traditional, self-directed model to advice-driven platforms, toward institutional channels, we have responded by shifting our strategy to better position our clients in the firm. That means that we have moved to more of a hybrid model, both individually managed products and team managed products.

So in some cases the traditional model of having a single manager, we keep that where it’s appropriate. In some products, like on the Janus Fund where we announced recently that Jonathan Coleman  and Dan Riff would take it over, we’ll have co-managed products and we do have some team-managed products, particularly in the institutional space.

We’ve also asked our portfolio managers to play a bigger role in client relationships as a result of the shifts in the industry. We’ve evolved our compensation philosophy to more closely align the interests of our PMs and our clients. Specifically, there’s more focus on consistent, long-term performance defined by three- and five-year performance, and we’ve linked overall compensation to the firm’s success.

So in some cases, that can lead to decreased compensation for an individual, but so far in 2007 our aggregate portfolio manager comp is up sharply given that we’ve had strong performance, given that we’ve had favorable markets and given that we’ve had strong flows.

What hasn’t changed about Janus is the focus on in-depth fundamental research. It is the core of our culture. For 37 years it’s been the driving force behind our strong results. So what I’ll conclude -- and I’m sure we’ll get some questions about this -- is that losing investment talent is never easy. That said, we have a very deep bench and we have the utmost confidence in our succession planning. We feel very confident in our investment team’s ability to continue to deliver for our clients and our shareholders.

With that, I’d like to turn it over to Bob Garvy, Chairman and CEO of INTECH.

Robert Garvy

Thank you, Gary. Hello, everyone. It’s a pleasure to be with you again. I will begin my portion of this presentation on slide 10, in which you’ll note that INTECH celebrated its 20th year of risk-managed mathematical strategies in July 2007. So we now, I think, are a firmly well established provider of risk-managed strategies using a mathematical process, primarily in the domestic market, but as we’ll discuss, now extending out into the international realm as well.

We were founded back in 1987. We have offices in Palm Beach Gardens, Florida; Princeton, New Jersey, in which our research facility resides; and as of June of ‘06 we have established a presence in London with the head of our international business and a high level investment specialist to service our growing business that’s non-U.S. based.

With this 20-year record we now have established -- if not the longest -- one of the longest continuous records of mathematical investment methodologies in the industry.

We of course have had a disappointing performance over the past 21 months. But this underperformance is not unexpected, nor is it outside of what we would have seen in the past year in our actual performance or in our simulated performance. It is significant; it’s unsettling. None of us are happy with it, but as any manager knows that takes positions different from the benchmark itself there will be periods of underperformance. We don’t like it and we are doing everything we can, of course, to deal with it.

But I think it’s important to point out the differences between the kind of performance we’ve been experiencing and that which many quant managers have experienced, particularly in August of this year. There’s a very significant difference between the processes employed by the typical quant manager with which we are usually accompanied, versus the mathematical process that INTECH uses.

First among those is that INTECH is a completely transparent process. There’s not a black box involved in the methodologies that we employ. We first published stochastic portfolio theory and stock market equilibrium in the Journal of Finance in 1982, and so our process was well described in that and has been well described in many other publications that we have released over the ensuing two decades.

We also tend to try to produce a high risk-to-reward ratio versus simply maximizing portfolio returns or minimizing portfolio volatility. We’re very much interested in the information ratio or the relationship between the excess performance that we’re attempting to generate and the risks that we undertake in generating that excess return.

We do employ a mathematical process. There are no fundamental predictions or forecasts about expectation regarding individual securities, industries or sectors within which they reside or the market itself. We remain fully invested at all times.

Our process does not depend on mispricing of individual securities and is consistent with the efficient market hypothesis in that sense. Our investment process is based on mathematical principles, not multifactor modeling.

Turning to page 11, there are two essential things that INTECH needs to do in order to generate an excess return at the risk levels that we are attempting to control. The first of those is to identify and to overweight stocks with higher relative volatility. The second thing is to control the tracking error of the portfolio by using lower correlation among securities to control that tracking error.

As we look back over this period of underperformance, we continue to do those two essential things: that is, our portfolios are continuing to overweight stocks with higher relative volatility while controlling tracking error. So this underperformance that we are experiencing; we believe it is primarily the result of the random nature of the stock price process, and we would expect, given our long history of employing this process successfully, to have that continue in the future.

On page 11, we’ll just give you a very quick review of how we go about building our portfolios. In the first step, of course, we establish an eligible universe. In the case of the S&P 500, for example, for our enhanced strategies or the Russell 1000, that would be the universe with which we begin our process.

We then essentially eliminate stocks that are so small or so irrelevant or too illiquid to trade. To that we apply our mathematical process. This process attempts to identify stocks with higher relative volatility, but then combine them in such a way as to incorporate the advantages of lower correlation to provide a risk-managed portfolio.  Risk management is one of the key elements of INTECH’s process.

Now while we emphasize risk management, of course no process is risk-free but we believe that this mathematical process results in a more efficient portfolio than the capitalization-weighted indices to which it’s benchmarked. We apply this mathematical process consistently across all of the products that INTECH offers. In fact, as I mentioned before, we are continuing to identify both stocks with higher relative volatility and with lower correlation to allow us to control tracking error.

Specifically, on our Enhanced Plus portfolio for example in step 1, we would start with the S&P 500 index. So we start with 500 stocks there. In step 2, as of September 30 of this year, that liquidity screen essentially eliminated ten stocks from that universe, leaving us with about 490 stocks to which we apply our mathematical process.

The risk controls and the mathematical processes that are employed there result in what we believe is a more efficient portfolio than the capitalization weighted index, and as of September 30 of this year, there were 295 stocks in that portfolio. That process is essentially duplicated for all the various benchmarks and strategies that we employ.

Moving to page 12, you can see that we have had substantial growth of assets over the past number of years, and that asset growth has allowed us to reach nearly $70 billion in assets under management as of September 30 of this year.

One of the key considerations when one experiences that sort of growth is the impact of that growth on the implementation process and we have, throughout our history, paid a lot of attention to implementation costs. There were a couple of developments in the industry since 2001 that have substantially assisted us in controlling trading costs. The first of those was an optimization alteration that we made in 2001 which significantly reduced our average order size. Essentially we went from a single very large quarterly optimization to 13 weekly partial optimizations throughout the quarter. That significantly reduced the order size, and as a result of that as well, reduced our trading costs.

Secondly, the decimalization of the market was of substantial benefit to a manager like INTECH, where we hold a large number of securities and essentially trade at the margin on those holdings. So that decimalization also assisted us in terms of the way that we have measured costs. We call those the implementation shortfall costs, which are essentially the difference between the decision price of the stock and the execution price of the security, plus commission costs.

We have spent a lot of time concentrating on developing an efficient and integrated trading system, which is an integral part of the implementation process at INTECH. We continue to study and analyze our trading costs, and to consider alterations to the processes that we employ that will allow us to counter any increases that we will encounter due to information leakage, due to the asset growth that we experience, or other considerations that may enter into the marketplace.

This is not an area in which we’re steadfastly assured that we have all the answers. We continue to look at this, and if it’s necessary to make changes, we will make changes. But as you can see from this graph, at least in terms of the implementation shortfall trading costs, the costs appear to be under control at this time.

On page 13 and 14 we refer to the performance that we have suffered in the short term. The red diamonds on the left of 13 and 14 are INTECH’s performance relative to both the benchmark and a group of institutional managers that fall into our various categories as developed and published by Callan Associates. As you can see, the short-term performance has been disappointing.

But over the long term, extending out longer term, our performance continues to be substantially above both the benchmarks to which they are competing against, as well as the managers that are in these categories.

Very significantly to us on the far right, the information ratio in both these key strategies, the Enhanced Plus and Large Cap Growth remain near the top of the industry from inception. The information ratio of course is key to us because it measures the amount of risk we take for the excess return that we are generating.

So while the short-term performance has been disappointing, we remain very confident that over the long term our mathematical process will continue to provide investors with the returns that they’ve come to expect from INTECH.

We can see on page 15 that over the long term we have been able to achieve high levels of outperformance and that over the short term, underperformance is not unexpected or unprecedented.

On page 15 here you see a graph of all of the strategies that we have that have at least a three-year time horizon and the percentage of time over those various horizons that those strategies have outperformed their benchmarks. You can see clearly that from inception, while some of the strategies over three-year periods are behind the benchmarks, as we move out through five, seven and beyond, all of the strategies achieve 100% outperformance records compared to their benchmarks.

On page 16 we focus on the disappointing flows in the third quarter of ‘07. While those flows are definitely disappointing to us, we believe that INTECH is very well positioned for positive, long-term growth.

I’ll point out in the upper left-hand corner of page 16 that in the period of ‘04 through ‘06 there were some very, very extraordinary, if you will, positive net flows which were part of the growth replacement cycle and the fact that INTECH’s performance was significantly above target during those periods. When you have that kind of performance combined with a major replacement cycle in a category, it’s not unusual for managers to experience unusual positive flows; that occurred.

Now over the past 18 months, our performance has been challenging and that is definitely going to affect flows, but as I indicated, we believe that long-term performance remains strong and that the flows will return to a positive level as that performance improves.

We might also point out that a substantial amount of the net negative flows that we have experienced are actually the result of the restructuring portfolios that institutions are going through and are not necessarily tied to underperformance.

As you know, many institutions are moving away from long-only strategies. They’re moving into hedge funds, to international portfolios, to private equity and other areas than the long-only portfolios which have dominated the institutional marketplace for decades.

We think that approximately 60% of the outflows that we have experienced in the third quarter are actually associated with re-asset allocations as opposed to terminations or redemptions due to performance. Now that’s not to say that if performance continues negatively that we won’t continue to experience outflows, but we would expect performance to return to its normal status; and as that returns, for the flows to stabilize and turn positive.

Finally, I’d like to point out that we are very well positioned for continued growth in the future. INTECH has launched a number of additional products over the past couple of years including a global core portfolio, which will achieve a three-year track record in December of this year; a track record that has averaged over 250 basis points annually above its international benchmark. This product should be very attractive to the non-U.S. based institutions.

We also have launched an international equity portfolio of non-U.S. stocks, a long-short 120-20 portfolio as well as a market-neutral portfolio. These along with our international focus, we believe, will have us well positioned for growth going into the future.

That summarizes my comments. We’ll be taking questions at the end. At this point, we’ll turn it over to Greg.

Greg Frost

Thanks, Bob and good morning, everyone. As Gary mentioned, the quarter from a financial perspective was fairly clean. It was clearly marked by our decision to pursue a disposition of our printing business. For a little color there, it’s no secret that company has struggled financially since it’s been under the Janus umbrella.  I think we believe that both sides will benefit from the transaction. RSG will now have the ability to join up with a partner with the expertise and resources to fully capitalize on its strengths, and Janus can return its focus on its core investment management business. As a result of the decision discontinuing operations, as Gary mentioned, the RSG operations are now classified as discontinued operations. Included in the quarter is the 110 operating loss, as well as a $0.21 impairment charge, which really reflects just the poor year-to-date financial results. To close the transaction in the first part of 2008, and we’ll have more information once the transaction presents itself. The third quarter EPS numbers, as Gary mentioned, of $0.29, up from $0.28 in the previous quarter, and 16 a year ago, showing fairly healthy growth in the business.

Turning to the investment management segments, which will now be our continued operations, as Gary mentioned, it really was a clean quarter. Average assets and revenue both showed fairly healthy growth, really shows the growth on the Janus side from the positive flows, and continued momentum on the performance fee revenue side, which -- there’s a chart in the Appendix -- which shows that growth quarter to quarter.

From a margin perspective, we returned margins of 33.7% in the quarter, slightly lower than Q2, but remember in Q2 we took an almost $4 million net benefit as a result of some legal reserves that we were able to reverse. If you factor that into Q2, margins will be comparable to where they were in Q3. Employee comp and benefits were up, but as Gary mentioned, when you tie the incentive comp to revenue and to the business model you would expect to see it up on higher revenue and the tremendous investment performance. I’ll also call out that based on higher Janus product sales, you’re going to have higher sales commissions during those times.

A quick note on marketing and advertising: we talked about this over the last couple quarters. We did underspend in Q3, and now our Q4 guidance is between nine and 12 million. We are still very committed to supporting our brand and our products, but again, I think it’s fair to call out here that this is a timing issue. We still will be spending money on the brand, on our products, but many of the dollars that we expected to spend in ‘07 will be shifting into ‘08.

And as Gary mentioned from a buyback perspective, finally, we did complete 184 million of buybacks at an average price of just over $28 a share, and we continue to return cash to shareholders in a very prudent and smart fashion.

And with that I’ll turn it back over to Gary.

Gary Black

Thanks ,Greg. So to sum up, we continue to make considerable progress in achieving our strategic and financial objectives. We continue to deliver strong investment performance, which obviously is the most important thing. We have, we believe, limited the effect of turnover because we do have a deep bench and we think a pretty effective succession planning; continue to have positive flows across the company and the Janus ex-INTECH flows continue to look very strong. Despite our disappointing close in the quarter, we do believe that INTECH remains very well positioned for long-term growth. We continue to focus on our intermediary and institutional distribution. The marketplace clearly has recognized a lot of our success. We continue to leverage the business model, and you see that with our operating margin improvements and our growing earnings per share. We do continue to return excess cash to shareholders via buybacks, and we are obviously now focusing on our core business of investment management with the decision to dispose of the printing business.

So with that, I’d like to open up for questions and answers. Operator?

Question-and-Answer Session


Your first question comes from Ken Worthington – JP Morgan.

Ken Worthington – JP Morgan

Hi; good morning.

<A>: Hello.

Ken Worthington – JP Morgan

I guess two questions on the management turnover. I guess, Gary, first, what steps are you taking or do you need to take to preserve the existing team, and if you’re not taking any steps, should we expect turnover to remain elevated?

Gary Black

We don’t like losing any of our key talent, whether it be from the investment team or the senior -- the executive team. But we work really hard to create a culture where our top talent can thrive and can be compensated at the top of the industry if they perform well. We always try to promote from within. That’s the type of culture we have. 16 of our 19 portfolio managers started as analysts here. I think people want to work for a winning firm. And if we can continue to put up performance that’s top in the industry, and we continue to have success in the marketplace, and we continue to pay people at the top of the industry if they perform well, we think we can keep those. That said, we’ll continue to cultivate our deep bench investing in talent and make sure that we have strong succession planning in place. We had a long history, as you know, of developing talented managers, and we do think we’re well prepared to address any potential changes. Will we lose any additional folks? It’s hard to tell. Hopefully, people subscribe to the changes in the business model that we put in place, the evolution of our compensation process. This is -- turnover is a reality of this business, and we could have additional turnover. Hopefully we don’t.

Ken Worthington – JP Morgan

Thanks. And then the follow-up is, with the management turnover, how does that impact your ability to market the funds in these distribution channels: supermarket, broker dealer, 401(NYSE:K)/insurance, and then institutional?

Gary Black

I think the retail world has become very institutional over the last couple of years. If you’re pitching to any of the buyer houses, they all have consultant-like gatekeepers, and they look for repeatability of process. They look for the deep bench. And I think it’s becoming increasingly hard to distinguish between, particularly in the advisory space, retail and institutional. So stability of firm is critical, and we do take it very seriously. I think what I’ve told clients is -- I’ve probably met with probably a dozen clients in the last week, or talked with a dozen clients -- I think people understand the changes we’re making to our business model. People embrace, in the industry, this hybrid model -- so having some solo managers, some co-managers, some team-driven portfolios. And I think people know Janus. We’ve always had a deep bench, but we have experience departures before, and what I think people realize is we have a history of developing analysts into great portfolio managers. David Corkins is a great example. He took over as a PM at the age of 30. He’s built an exceptional track record as one of the preeminent growth managers in the industry, and I think people understand that we have a repeatable process of analyst development, a repeatable investment process, and we think we will have repeatable success in delivering strong results, and I think that message -- most of our clients get that.

Ken Worthington – JP Morgan

Thank you.


Your next question comes from Thomas Gallagher -Credit Suisse.

Thomas Gallagher -Credit Suisse

Hi. I guess just a couple for Bob Garvy. First is, have you altered the INTECH investment process at all? You know, I was listening to your presentation, and it struck me, or it sounded like there were some tweaks to the models that have gone on, so that was question number one. And number two, it looks like the big swing in net flows for the quarter was more on the sales side, and I assume those are going to remain subdued for a while, but can you comment on how you think asset retention holds up?

Robert Garvy

Sure. Well, we have not altered our process, no. Our process has remained essentially intact since its inception in 1987. So the fundamental idea of identifying these more volatile stocks and overweighting them in the portfolio to create alpha and then using correlation analysis to control the volatility and risk of the portfolio itself -- that fundamental idea remains unchanged.

What we do make alterations to from time to time is the engineering involved in the implementation, and so my reference to going from a large trade once a quarter to weekly partial optimizations throughout the quarter really is an engineering idea, or an implementation idea. And those we will make some alterations to through time if we see an advantage to either the implementation, the cost structure or the performance. Those alterations throughout time have been very small. The contribution that they make to the basic process is generally on the order of one to three or four basis points, so they’re quite small, but over time they can contribute to some substantial improvement over a decade or more. And so we continue to work on those and make small adjustments where we can.

The big swing on the sales side versus redemptions: sales are down somewhat but our pipeline remains very robust. We are in a large number of continuing assignments and finals presentations. Our close ratio is down but it’s still above 50%. If we get into a final, we’re closing over 50% of the opportunities that are presented to us. And I think that’s largely -- will be determined by performance. If performance improves, our participation in finals will improve, and I think our close ratio will improve. If performance remains challenging we can expect that our opportunity set will remain muted, and the same thing for redemptions. Redemptions are likely to decline under an environment  of return to a positive performance, which we expect, but can remain challenging if performance continues to underperform.

I’ll point out that September was a positive month for performance. October is a positive month pretty much across the board for most of our portfolios. This isn’t enough time to claim a trend, but it’s certainly better than underperformance.

Thomas Gallagher -Credit Suisse

And so based on what we’re seeing right now, it sounds like we may have seen the trough in terms of net flows. Is that fair to say?

Robert Garvy

Well, over the short term we have, clearly, with September being positive and October being positive thus far. But whether or not that is the bottom of the underperformance is yet to be seen. We outperformed in the first quarter of ‘07 in all of our strategies, except for Growth. So we actually thought that possibly the underperformance in ‘06 had basically been terminated with that, but it turned out the second quarter and third quarters continued underperformance. So we can’t know until we get past it, but certainly over the short term the signs are positive rather than negative.

Thomas Gallagher -Credit Suisse

Okay. I was referring more to net flows as opposed to performance when I was asking about their trough.

Robert Garvy

Oh, I see. Well, I don’t know; that’s hard to say. You know, the institutional business is quite lumpy. You can have big inflows or big outflows that will come as a result either underperformance or, in our case, a substantial amount actually has come from reallocations among accounts. We had one very, very large fund that had done quite well, in fact, and had to limit on the amount of assets that any manager can hold, and we were several hundred million dollars above that maximum amount, and so their outside allocation caused them to scale back. You know, the equity markets have been up very substantially. Many institutions have policy guidelines that limit their equity exposure, and they’ll scale those back when the equity markets are performing well relative to other markets. So I can’t tell you exactly what the flows will be. We can’t forecast those into the future.

Thomas Gallagher -Credit Suisse

Okay, thanks. And then just one numbers question on the comp ratio for Greg. The 32% ratio we saw this quarter, is that likely to go down as we look at ‘08 ballpark? Can you give us any guidance there? I guess I am referring especially in light of some of the recent departures.

Greg Frost

No, with the business model structure the way it is, I don’t think I would expect significant declines in that ratio. It’s tied to revenue, and the departures won’t have a significant impact on that.

Thomas Gallagher -Credit Suisse

Okay; thanks.

<A>: Next question.


Your next question comes from Marc Irizarry - Goldman Sachs.

Marc Irizarry - Goldman Sachs

Oh great; thanks. Just a question on the build-out of Janus-managed accounts in the institutional channel. Maybe, Gary, for you: What do you expect the response to be in terms of either when you market the performance of Janus to the institutional community to maybe some of the PM departures? Is that potentially a stumbling block, and can you provide any comfort that maybe that will be overcome over the near term? Thanks.

Gary Black

I think it’s a balancing act. I think most institutions that we talk to -- and again, we haven’t had that much traction on the Janus-managed side. We’ve been getting traction, and again, we got about $300 million of new flows into that business this quarter. But I think that channel wants team-managed products and we’ve tried hard to deliver team-managed products with repeatable transparent process, where risk management is a part of the investment process. And again, I’ve met with or talked with about a dozen clients in the last week and you hear that consistently: that in order for Janus, the Janus-managed side, to be successful in the institutional business, they need to see that.

On the other hand, to your point, folks don’t like instability. And so we talk about both things: that we are becoming more institutional, team managed, but we have had some departures, which always sets you back when you have departures. I think the good news is still in the performance; we’ve had strong performance pretty much across the board. And when we have had turnover you can look back over the last three years, for instance, where we have had a turnover of one of our products. We’ve had about nine of our funds actually have a PM turnover. In eight of those funds, eight of those nine funds over the past three years, the performance since the PM inception has been in the top quartile. And I think that evidence that it’s about the research, it’s about the investment process. I think people recognize that we are able to repeat that process even if we do have an unfortunate turnover.

Marc Irizarry - Goldman Sachs

Great; thanks.


Your next question is from William Katz - Buckingham Research Group.

William Katz - Buckingham Research Group

Okay; thank you. Good morning, everybody. First question comes back to INTECH -- sorry to keep going this line. But I’m still looking at the slides where you show the performance of some INTECH’s funds against the benchmark with the diamonds and triangles, and what sort of strikes me there is that the delta, the difference between a diamond and a square there, whatever, diamond, triangle, continues to decline over time. And I’m just sort of curious: are you reaching, from a theoretical respective, any kind of scale issues and even though the underlying – the process works, you just start hitting critical mass on AUM?

Robert Garvy

Well, we don’t believe so. Our simulations and our actual performance except for the short term continues to be strong, and in the first quarter of this year we had very strong performance relative to the benchmarks across all the strategies with the exception of the Growth strategy. If we do believe, if we were to believe, that the size of the assets under management were impacting our performance, we would simply stop taking assets in those strategies. We have so many other strategies that have such significant potential, such as the Global strategy, the International strategy, the long, short and the 120/20, that there’s no need to focus -- also Value, for example. We have excellent Value performance and not much in the way of assets, and we may very well be entering a period of a significant shift in value managers as the market shifts more towards growth. So we do not expect – we do not believe that we are at capacity at the current time in our core Enhanced Plus and Growth strategies. Should we reach that conclusion, we will simply stop taking new assets in those categories, however.

William Katz - Buckingham Research Group

Okay; thank you. And then a question for Greg or Gary. I’m just curious: your buyback and dollars -- gets slow a little bit as with the share number. Just a little curious if you could talk a little bit about your outlook for free cash flow usage. Thank you.

Greg Frost

You know, Bill, I don’t think we’re going to vary from what we’ve done in the past. I think we’re going to continue to be prudent and smart in our buyback strategy. I think we still feel like it’s a good use of cash and a good way of returning it to shareholders. Beyond that, I probably not going to speculate.

William Katz - Buckingham Research Group

Okay; thank you.


Your next question is from Cynthia Mayer - Merrill Lynch.

Cynthia Mayer - Merrill Lynch

Hi; good morning. I apologize, I want to ask just one more INTECH question, which is -- and maybe you covered this but I think in the past you said that you thought volatility was good for performance, and I wonder if you still think that’s true or if it’s a particular kind of volatility that helps.

Robert Garvy

Yes, okay. Well, it is the relative volatility of stocks to the benchmark

that allows us to create an alpha above that benchmark. And so overweighting the more volatile stocks is significant to us. Now we have looked at whether or not the lower volatility that has existed in the marketplace over the past couple of years has been a key component of our underperformance, and that does not appear to be the case. And that’s because we’re not attempting to maximize our excess performance. If we were attempting to maximize the excess performance, then we believe there would likely be a direct correlation between the amount of relative volatility in the marketplace and our outperformance. But that’s not what we’re attempting to do. We target a specific amount of excess performance. It ranges from 125 basis points in enhanced strategies to up to 350 basis points of excess performance in our more aggressive strategies. But having targeted those levels of excess performance, if you will, the question then is, is there sufficient relative volatility to provide for that excess performance. And our studies to this point indicate that there is sufficient volatility, even in the low-volatility environment that we’ve experienced generally over the past few years, to provide that excess performance.

Cynthia Mayer - Merrill Lynch

Okay. And then, Gary, on a different topic, I’m just wondering if you could talk a little about the overseas sales, and I’m wondering whether a declining dollar hurts or helps your sales overseas, if you hedge that out in any way, and if the dollar were to bottom, whether that would help you.

Gary Black

Yes, outside the U.S., I don’t think the declining dollar is really that big of a factor. We are investing in that business considerably. Today it’s 7 or 8% of assets. We’d like to take that number higher. It’s probably 15% of our flows. We have put additional folks on the ground on the distribution side, and we’re going to continue to launch new products for that marketplace. So we’ve launched a lot of global products this year, which is what folks outside the U.S. will buy. We’ve really, on the INTECH side, tried to focus on institutions outside the U.S. We opened an office in Australia, Singapore. So we’ll continue to invest in that business, and we recognize that half of the world’s assets are outside the U.S., and so you’ll continue to see us reinvest in that side of the business.

I think we could probably take one more question, operator.


Your next question is from Donald  Neiman - William Blair.

Donald Neiman - William Blair

Oh, hi. Great. Most of them have already been answered. I just wanted a real quick touch on plans for institutional, [inaudible] institutional space. Gary, are you going to continue to be focusing on that or if you have any additional hire information? And to what extent do you think or did that maybe impact flows that impacted the quarter?

Gary Black

Could you repeat the question one more time? I’m sorry; I didn’t quite understand the question.

Donald Neiman - William Blair

Yes, I mean my question was just in terms of plans for adding management capacity to the institutional channel. I know you stepped in as John Zimmerman  left and I wondered what products was on that front and then as well if you could comment on if you think disruption at the management level added to -- potentially added to outflows in the quarter.

Gary Black

I don’t think there’s really much of a change in our strategy. John Zimmerman, who was running the channel, departed, and I’ve been running it as we look for a new head of Institutional. Our commitment to that business is extremely strong. In the U.S. it represents about half the assets on the institutional, so we won’t change our strategy, which is basically going at the largest, probably 1,000 planned sponsors and trying to establish relationships with them, such that, when they’re going to do a search we have good relationship, we have a product that they can use, and that strategy is not changing. Did I answer the question?

Donald Neiman - William Blair

Yes, I guess so. I mean do you think it would -- do you think there was any impact in the quarter -- do some of the impacts reflect any sort of changes at the management level?

Gary Black

I don’t think the departure of John caused the outflows to change. I think it’s more, as Bob Garvy said, some rebalancing, [inaudible] some public funds more than anything, and very little of it actually reflected on the performance.

Donald Neiman - William Blair

Okay; great. Thanks

Gary Black

Thank you very much for joining us, we’ll see you next quarter.

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Source: Janus Capital Group Q3 2007 Earnings Call Transcript
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