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Janus Capital Group (NYSE:JNS)

Q1 2012 Earnings Call

April 24, 2012 10:00 am ET

Executives

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

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

Analysts

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

Michael Carrier - Deutsche Bank AG, Research Division

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

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

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

William R. Katz - Citigroup Inc, Research Division

Matthew Kelley - Morgan Stanley, Research Division

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

Cynthia Mayer - BofA Merrill Lynch, Research Division

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

Roger A. Freeman - Barclays Capital, Research Division

Operator

Good morning. My name is Kathy, and I'll be your conference facilitator today. I would like to welcome everyone to the Janus Capital Group First Quarter 2012 Earnings Conference Call. [Operator Instructions] Also as a reminder, today's call is being recorded.

Before the company begins, I would like to reference their standard legal disclaimer, which also accompanies the full slide presentation located in the Investor Relations area of janus.com. Statements made in the presentation today may contain forward-looking information about management's plans, projections, expectations, strategic objectives, business prospects and anticipated financial results, anticipated results of litigation and regulatory proceedings and other similar matters. A variety of factors, many of which are beyond the company's control, affect the operations, performance, business strategy and results of Janus, and could cause actual results and experiences to differ materially from the expectations and objectives expressed in their statements. These factors include, but are not limited to, the factors described in Janus' reports filed with the SEC, which are available on their website, www.janus.com, and on the SEC's website, www.sec.gov.

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

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

Richard Mac Coy Weil

Thank you, operator. Welcome, everybody, to the first quarter 2012 Janus Capital Group call. I'm obviously Dick Weil and with me as usual is Bruce Koepfgen, our CFO. The story of the first quarter 2012 for us is one where we demonstrated fundamental business improvement across importantly both investment performance and better net flows. However, the expected performance fee impact we've discussed with you in prior quarters took full effect and more than offset fundamental business improvement in our financial results. Let me focus on investment performance for just a moment.

Prior to the first quarter 2012, our Janus-managed large-cap growth strategies have been through a very difficult 18 months. In the first quarter, their performance improved dramatically. It's hard to generalize about many different portfolios but one very substantial difference is the change in the environment. Since the crisis at the end of 2008's correlations between stocks, the number of stocks and the broad index moving in the same direction on the same day had been very high. Buyers alternatively scared and optimistic about global macro and the stability of financial institutions have expressed those views by buying and selling beta or in other words, the index. In such periods, the rewards for differentiated bottoms-up stock picking are reduced. In such period, the more one looks like the index, the better. As a high-conviction fundamental manager, our Janus platform is not at its best during these periods.

During the first quarter of 2012, correlations have fallen dramatically to much more normal levels compared to history, and our differentiated stock picking has once again been rewarded. This gives us the opportunity to demonstrate the strengths of our research and our investment team. We recognize one quarter's good performance is far too short to fully remedy our recent underperformance, but Q1 2012's is a very good start.

Turning to our quarterly results. Q1 2012 EPS was $0.12 compared to $0.19 in fourth quarter 2011. When evaluating this result, please take care to understand elements around both the fourth quarter of '11 and the first quarter of '12. Bruce Koepfgen will take you through the details of this more carefully, but the first quarter included about $0.03 charge due to 2 elements: change in LTI forfeiture estimates, less people are leaving than we expected; and charges related to our recent debt buyback. When you compare that against fourth quarter of last year, you should remember that about $0.05 of benefit in the fourth quarter of last year was from compensation reversals.

Finally, I want to point out that we announced a 20% increase in our regular quarterly dividend. This small step demonstrates that our board is confident in the strength of our balance sheet, that we continue to generate strong free cash flow from operations and we take seriously our duty to return capital to our shareholders.

With that, I'll turn it over to Bruce.

Bruce Lewis Koepfgen

Thanks, Dick. Good morning, everyone. As I work my work through the materials, I'll attempt to focus on a few items that I think help to explain our quarterly results.

First, total company net flows improved quarter-over-quarter. Second, revenue improved primarily from market tailwinds but also significantly improved investment performance. Third, the quarter-over-quarter increase in operating expenses, particularly compensation and LTI, are being driven by the fact that several fourth quarter items did not repeat. And fourth, our improving balance sheet and our capital deployment philosophy.

If you're following along on the deck, I will begin my comments starting on Slide 5. Earnings per share for the first quarter was $0.12, as Dick mentioned, compared to $0.19 in the fourth quarter and $0.21 a year ago. As noted on the slide, fourth quarter earnings per share included a $0.05 benefit from compensation reversals. For the current quarter, earnings per share included a total charge of $0.03 related to a change in our LTI forfeiture estimates and the loss on the earlier extinguishment of debt. We do not expect to have either of these charges repeat in the second quarter. First quarter average AUM of $158.9 billion improved 7%, driven by strong markets and investment performance. First quarter revenue of $218.4 million only increased slightly as the increase in average AUM was mostly offset by the expected increase in negative mutual fund performance fees. First quarter operating expenses were $161.9 million, which was $16.9 million higher than the prior quarter, primarily due to year-end compensation and LTI adjustments that we had in the fourth quarter that did not repeat. As a result, operating income of $56.5 million declined 20%, as the slight revenue improvement was more than offset by a 12% increase in these operating expenses. Margins for the quarter were 25.9% versus 32.7% in the fourth quarter.

Turning to investment performance. As Dick mentioned, we are very encouraged by our year-to-date performance, especially in our large-cap equity strategies that underperformed in 2011. At the same time, we want to be realistic, and we recognize that more work is necessary to improve intermediate track records. 5-year performance remains strong across the complex and 58% of our funds had 4- or 5-star overall Morningstar rating at March 31, compared to an industry average of 32.5%.

Slide 7 details the components of company net flows for the quarter, driven largely by an improvement in fundamental equity gross sales. Total company net outflows of $2.5 billion improved 38% compared to the prior quarter. Fundamental equity posted first quarter net outflows of $1.9 billion versus $3.2 billion in the fourth quarter. Improvement was driven by a 53% increase in gross sales. Fully 80% of our fundamental equity strategies had quarter-over-quarter improvement in gross sales. INTECH saw net outflows of $1.8 billion in the quarter, compared to $2.2 billion in the fourth quarter on lower redemptions. In our fixed income business, net sales remained strong at $1.2 billion on continuing momentum across all channels. We remain optimistic about the prospects for this business. Portfolios are performing and continue to be well-received by our clients.

Turning to Slide 8. Total revenue increased 1% in the quarter, as revenue from higher-average assets was offset by the expected increase in negative performance fees. First quarter was the first full quarter where all planned funds were subject to performance fees. As in prior quarters, we have a schedule on Page 15 listing performance fees by fund for your reference. Largely as expected, we saw the negative performance fees on our mutual funds increase to $19.5 million from $13.8 million last quarter.

Slide 9 compares operating expenses quarter-over-quarter. First quarter operating expenses increased $16.9 million as a result of several compensation adjustments that occurred in the prior quarter, which did not repeat. Compensation increased $9.9 million, primarily due to the $9 million accrual reversal that took place in the fourth quarter and did not reoccur in the first quarter. The compensation-to-revenue ratio was approximately 33% this quarter. All things being equal, this sits in a reasonable range to apply going forward.

Long-term incentive compensation increased $8.9 million for 3 reasons: First, in the fourth quarter, we had a $4.2 million valuation adjustment with the Perkins SPIs that did not repeat in the first quarter. Second, during the first quarter, we made an adjustment to the LTI forfeiture estimates as employee turnover improved over the past year. This adjustment resulted in $2.1 million of higher expense. We do not expect this to repeat in the second quarter. Third, we rolled out our 2012 LTI grant, which resulted in a $2.6 million of additional expense for the quarter. At the suggestion of many of you, we have added the LTI amortization schedule back in the appendix, which I think you'll find on Page 17.

So just to be completely clear, fourth quarter included a total of $13.2 million in cost benefits related to compensation adjustments, which did not repeat in the first quarter; $9 million of accrual reversals; and the $4.2 million Perkins SPI adjustment. Additionally, in the first quarter included a $2.1 million charge related to a change in LTI forfeiture estimates, which also will not repeat in the second quarter. The distribution costs increased $1.8 million. This increase was largely in line with assets subject to these distribution fees.

Lastly, management continues to exercise financial discipline when it comes to discretionary expenses. Our combined marketing, advertising and G&A lines were $4 million lower than the prior quarter. The management team will remain vigilant on these discretionary expenditures, but we'll be careful not to deprive the business of the resources necessary to achieve our strategic objectives.

Lastly, a look at Slide 10 highlights the continued improvement of the balance sheet. As we have mentioned in the past, we believe a strong balance sheet is a precondition to our long-term success. It protects the interests of our clients, our employees and our shareholders.

In the first quarter, we saw our cash balance decline as a result of our successful debt tender and the seasonal payment of bonuses. In the last few quarters, we have talked about capital deployment so it makes sense to summarize our capital planning process here again. First, as a general principle, we believe that preserving liquidity and financial flexibility is critical. Second, we will set aside capital for contractual obligations. Third, we look to deploy cash strategically in the business to drive future growth. Finally, we consider the return of excess cash to our shareholders.

Based on this framework, we have taken the following actions this quarter. We've repurchased $59 million of outstanding senior notes through our recent tender. We initiated a programmatic anti-dilutive share repurchase program to offset stock issuance related to our LTI program beginning with the 2012 grant, which was roughly 2.3 million shares. We paid out a previously established quarterly dividend of $0.05 a share and as Dick mentioned today, we announced the 20% increase in our quarterly dividend to $0.06. We recognize that these actions are incrementally small, but we believe they demonstrate management's commitment to returning capital to shareholders, consistent with maintaining a strong balance sheet.

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

Richard Mac Coy Weil

Thank you, Bruce. Just in conclusion, before we take your questions, for me, the key messages for the first quarter of 2012 are improved fundamental equity performance, as we discussed earlier; a significant improvement in total company net flows, as Bruce detailed in his comments a moment ago; negative performance fees coming in, unfortunately, substantially negative but about as expected and we continue to execute our conservative capital policy in terms of the debt reduction steps and then increasing the dividend, as Bruce described; and lastly, we continue to execute our strategy of intelligent diversification, driving forward in fixed income, building out our non-U.S. franchise, strengthening our efforts in institutional space, all the while continuing to deliver operational excellence, and that has been and continues to be our strategic outlook.

With those comments, I'll take questions from those on the call. Thank you very much. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] And we'll take our first question from Michael Kim of Sandler O'Neill.

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

First, I know it's difficult to segregate, but any sense of how much the sequential step-up in fundamental equity gross sales related to maybe a seasonal uptick in retirement account contributions versus maybe the recent improvement in relative performance trends?

Richard Mac Coy Weil

I think it's hard to dissect the reason for flows at that level. Clearly, there is some seasonal effect in the DC business and that was positive. And just as clearly, the better returns are short term so probably haven't taken full effect in terms of broad client trends. So I think you're right to point out it's a mix, and we don't have any way to give you a scientific dissection of it.

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

Okay, fair enough. And then maybe a question for Bruce. I understand remaining disciplined on the expense side but just given the sequential drop in marketing and advertising expense this quarter, is there any risk here of maybe impairing kind of the long-term growth prospects of the franchise? Or do you just feel like there's other areas that might be more value-added to focus on at this point?

Bruce Lewis Koepfgen

Michael, I think that's a great question, and I've tried to condition my comments to suggest that we, as a -- I think as a management team are very focused on containing discretionary spend. But we are highly sensitive to the fact that we have an interesting agenda and strategy, and we're not going to deprive the business of the resources it needs. So it's a good question. We're tuned into it, and we'll make sure that we continue to spend at a level that advances that agenda.

Operator

And next, we have Michael Carrier of Deutsche Bank.

Michael Carrier - Deutsche Bank AG, Research Division

Dick, maybe first one for you. Just when you look at the performance, the challenges that you're facing and then some of the strategies that you mentioned since you took over, whether it's on the fixed income side, the international, some of the distribution, I guess maybe just get an update on where things stand, what areas are progressing as expected versus some of the areas where you might have pulled back a bit. I think we've all been focused on the performance, and we've seen some lift there. But I think on the strategy side, that's kind of taken a backseat, at least, lately. So just an update on that would be helpful.

Richard Mac Coy Weil

Sure. Just to review, the strategy of intelligent diversification was focused on those things we can do with differentiated excellence that we can sell at good profitability in a size that matters. Looking at the set of those things, we identified fixed income and that is delivering very well. We're proud of the progress. Gibson Smith is the leader of that effort, and the team had just done a great job. And we believe we have momentum across institution and retail channels inside and outside the United States. Our non-U.S. distribution expansion investing in that and building that out a bit was the next piece of the puzzle. And candidly, we've added a number of -- a significant number of salespeople to the field. They're brand-new, only just having started and so where that is in the pipeline is this year is probably not yet the sweet spot for that group. It'll probably take one more year for that to have full effect this year. As new folks are ramping up, we expect to see improvement in that business. But hopefully, that would be more fully in effect and -- next year. The next one is developing our U.S. institutional presence. That's probably the slowest of all, candidly. Most of the U.S. institutional business runs through consultants. They're notoriously slow to change opinions, adopt new products, et cetera. So the pace of change in the U.S., particularly DB institutional business is quite controlled and deliberate. And so that's probably third. So sometimes I tell people internally the fixed income is now the international [indiscernible] and the institutional is a little bit after that. Lastly, we are focusing on product diversification to make sure that we have good solutions for our clients, and that's just an ongoing effort. It's a little hard to give broad comments about the progress in that area. We're very proud of our protected growth offerings. INTECH's got some new low-volatility products and an income product that we're very excited about, so the strategic development is to fill in the product buckets. I think they're going well. And then, early in my tenure here as CEO, I had to explain the lack of operational excellence in the form of some very significant checks we wrote for errors. And we invested in and built out operational excellence as our last strategic focus. I think George Batejan and the new team that's coming to drive that forward have done a very good job, and one is never safe in this business. But I think we have a strong control environment and good people and procedures in those places. So those have been the strategic and remained the strategic focus for us, and I think the progress is going reasonably well. But unfortunately, these things take time.

Michael Carrier - Deutsche Bank AG, Research Division

Okay, that's helpful. And then, Bruce, maybe just the -- it's a question on some of the numbers that you went through in the comp guidance, all that's helpful. I just wanted to make sure on the LTIP, if we look at the run rate that we had in the quarter, we're on $19 million. We'll shave around $2 million off that. And then just for the 2012 grant, is that fully in this number? And then, I think, just the 2 other nuances that I saw is just in the non-op, looked like there were maybe some investment gains. Just any color on that and then the tax rate looked a little elevated but because of the charge, I'm not really sure. There could have been some moving parts there.

Bruce Lewis Koepfgen

Yes. Let me take the first piece. You're correct, the $2 million one is a proper adjustment to the $19 million. And then just as you look at those numbers, just recall that you had the SPI adjustment in the fourth quarter of last year and then the $2.6 million that comes on from the 2012 grants that started with us this year, this quarter.

Michael Carrier - Deutsche Bank AG, Research Division

Okay, got it. And then anything on the investment gains and the tax rate?

Bruce Lewis Koepfgen

Yes. The tax rate was a little higher this year -- or this quarter than normal due to some tax adjustments attributable to past LTI awards. If you back that out, you'd be pretty much on top of the 37.25%, which is kind of a statutory rate which we'll use going forward.

Operator

And next, we have Ken Worthington of JPMorgan.

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

Maybe heading back to marketing, you're building out a bunch of the strategies, global fixed income, et cetera. Can you talk about where you're dedicating your marketing resources and maybe how the marketing strategy is changing, again, pointing out that the marketing dollar or the dollars fell this quarter?

Richard Mac Coy Weil

Yes. Janus is blessed with a wonderful franchise name that's broadly known, largely due to the fact that it was built during a period of direct mutual fund sales. And that channel is no longer really open to new entrants and it's a unique asset we have here that probably can't easily be recreated by others today. We continue to focus on investing in that. Janus has a strong reputation for being independent thinkers, and we're building our reputation as being disciplined investors across a broader set of assets. And so we're investing in sort of modernizing the Janus brand and the name, while recognizing it's a unique, strong asset and that's really our focus.

Bruce Lewis Koepfgen

Ken, this is Bruce. Just one other thing to keep in mind we may have mentioned last quarter, there are in these marketing numbers some seasonal lift in the fourth quarter. So in terms of trying to condition your models, something between the fourth quarter of last year and the first quarter this year is probably the right place to be.

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

Okay, great. And maybe just moving on to INTECH. INTECH, for many, many years, INTECH, the performance used to be consistent and very good. And then it seems like over the last 4, 5 years, you have like a -- INTECH has a good year, then has a disappointing year and a good year and a disappointing year. And it's not really stringing together more than a year's worth of good numbers at a time. So I guess the question is, maybe for Dick, as you've dug into this, what is your confidence in the INTECH methodology? And is there something that's leading to maybe less consistent performance over the last 5 years and maybe in the first 10 years of INTECH's existence? Is it competitors have gotten smarter? And just your views would be great.

Richard Mac Coy Weil

Yes. I'm very confident in the INTECH process. I think it's extremely thoughtful, well researched, well understood and very likely to deliver positive performance alpha over medium and long periods of time but like every other investment strategy on the planet, it doesn't work in all periods at all times. So I think their performance indicates that we should have confidence in their long-term capabilities. In terms of more discontinuous performance more recently, I'm not aware of a structural change in the markets that really can be shown to explain a change in their performance profile. We know that there are an awful lot more rapid traders. We know that there are people who are looking for small signals and stocks. We ask ourselves whether some of these pattern traders are affecting how INTECH does its business. INTECH is very focused on how it executes its strategies, not in terms of the investment strategy or the stocks it's buying but how it goes about the actual active buying and selling, the execution of the orders, in order to avoid falling into the traps created by some of those very quantitative rapid traders. And there is a little bit of -- there's research and thought going into how to make sure that the more modern market conditions is filled with these guys doesn't disadvantage INTECH. But the learning we have so far is I don't think that explains -- that doesn't make us more pessimistic about their process. So my view of them is really unchanged. I think they have a very excellent process. It's very likely to work over medium and long periods of time and like other investment products, it won't work in every period.

Operator

And next, we'll move to Dan Fannon of Jefferies.

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

I guess, in terms of flows, the Triton debenture fund had been the most consistent asset gatherers on the equity side and just wanted to see, are there other funds that either have performance that are maybe not on the radar or smaller or in style buckets, that are in areas that are actually gathering assets currently that we should be focused on or that you think have the potential to start to gather assets for you?

Richard Mac Coy Weil

I think the -- I'm a little afraid I missed the heart of your question but I think the increase in sales we saw this quarter was pretty broad and it's not narrowed down to one bucket or another. And come back at me with a further clarification, if I'm missing your point.

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

Yes. I was just trying to see if there are other smaller funds that maybe are on the radar screen that we're watching that you've either seated recently or have good performance or are in the style buckets where dollars are actually going, that you think have the potential or are in position to start to see some growth.

Richard Mac Coy Weil

Well, starting in the slightly higher level, we have identified about 5 product buckets that we think our product strategy, that we think are crucial to our clients, both institutional and retail, both domestic and international, over the next 5-plus years. And those buckets are insured or skewed results; income, absolute return, really in the form of sort of controlled risk with relatively lower equity risk factor and interest rate risk factor; real return, and asset allocation. And we're hard at work in each of those buckets. And we think those are very exciting places that will prove very profitable going forward. I mentioned earlier on the call that INTECH has come forward with 2, I think, very important new offerings: a low-volatility strategy and an income-oriented strategy. And they're at work on some other really good ideas. So we're optimistic about that. Within not so long ago, our fixed income team launched some global fixed income strategies that are off to a very good start, and we're very optimistic about that. Perkins has one of the best global value products that is relatively new that we've developed over my tenure here, that we're very optimistic about. And Janus has obviously the protected growth, which has been a real market innovation and I think will be increasingly successful over time. And that's only really a partial list. I could go on. We'll continue to work hard at these buckets. The other side of the coin is we have to make sure that we maintain focus. We have to prune some. And so we need to keep our focus on having a limited but very appropriate product set so that we can keep our resources focused on the best opportunities. So we focus on pruning as well as new products. And I think that's -- there's a lot to be excited about in that set. The new product probably takes at least 3 years to really start delivering in a significant way. So these are medium term kind of projects.

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

Okay, that's helpful. And then I guess just to follow up on the previous question around INTECH. I guess, has there been any -- and it doesn't look like there was much change in terms of the gross sales or redemptions in the quarter. But I guess, as you think about conversations and the appetite generally speaking for quantitative strategies, has that changed at all?

Richard Mac Coy Weil

I think, broadly speaking, the world has not yet turned back to equities. I think equity is, broadly speaking, under-owned. And that's true in institutional and retail. So we haven't seen a broad change in the institutional appetite for equities, in general; active equities, more specifically; and quantitative active equities, most specifically. So I think INTECH is doing better, and they'll continue to fight the good fight. But it's -- environmentally, we haven't seen either of the institutional or the retail folks turn back equities in a way that I think they will, as better equity market performance draws them back in.

Operator

And next we have Jeff Hopson of Stifel, Nicolaus.

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

Any sense with the improvement in the performance, any kind of soft indicators in terms of more potential meetings to get on platforms, et cetera, and anything you're seeing there? And then on the performance fees, my calculations are that at least 1 or 2 of these underperforming funds are now back in kind of a neutral area. Is that consistent with your thoughts as well?

Richard Mac Coy Weil

On the performance fees, I don't think -- without knowing the specifics of your math, it's hard for me to comment. But I don't think so. You should probably call us after the call and get with John Groneman and the Investor Relations team to make sure you have the right data that you're looking at. Oh, I'm sorry. The first part of your question was performance helping sales. I don't have specific data that I can share with you on performance effect on placements. Obviously, it's a positive. But one quarter is not long enough. And it will help, but I can't really cite any specific data for you in terms of platform placements.

Operator

And next, we have Bill Katz of Citigroup.

William R. Katz - Citigroup Inc, Research Division

Just coming back to the discussion on comp. Just going back to my notes, it looks like last quarter you mentioned comp might be 30% of revenues and now it's 33%. Can you just sort of talk about the dynamics for the erosion sequentially?

Bruce Lewis Koepfgen

Yes. Bill, we've tried -- as we talked on the last call, we're trying to provide some indication of where these kind of normalize out. 33% is this quarter. The difference that you're seeing, I think, is going to result from the performance fees.

William R. Katz - Citigroup Inc, Research Division

Okay. And the second question is just on the discussion on capital management and thank you for the greater color. What would it take to have more decisive net reduction and share count? What are you looking for to get a little more aggressive. I know the lineage [indiscernible] of the company is not great. But generally speaking, with your cash flow improving and attrition decelerating, at what point would you start to get a little more aggressive on buyback?

Bruce Lewis Koepfgen

I don't have a specific metric for you, Bill, on that. I think our feeling is, as we've described it, we feel it's in everyone's best interest for us to maintain a pretty conservative posture here. But we're doing the things that we think we can do to return great returns for our shareholders. It has been a primary objective of us -- or for us to reduce the leverage on the balance sheet and then as we've been able to fund our strategic initiatives to then look at other things that we can do. And as we mentioned, we've increased the dividend this quarter. We've also started to engage in a repurchase of the LTI shares that we put out in the normal course of our incentive compensation programs. So at this point, that is all we envision. That is something that we'll take up with our board on regular intervals[indiscernible].

Operator

And next, we have Matt Kelley of Morgan Stanley.

Matthew Kelley - Morgan Stanley, Research Division

So just following up on INTECH, sorry to beat that horse here. But on the annualized gross sales, they're staying a little bit weak. Obviously, you need more equity re-engaging. What -- can you guys give us a sense for how your margin in that business just directionally has been changing, if at all? And what sort of money you're still spending on that business?

Bruce Lewis Koepfgen

Matt, we really don't provide any guidance on the margins in the business. So I can't help you much on that one.

Matthew Kelley - Morgan Stanley, Research Division

Okay. And then you -- Dick, it was helpful to hear the 5 buckets that you guys have prioritized for strategy. So when you think about where you are in each of those buckets versus where you want to be, I guess it'd be helpful to get some color. But just curious how -- what areas of those you think you have an edge and where you're really more in kind of build-out mode.

Richard Mac Coy Weil

Sure. I guess I've given you 2 things. I gave you what we call our business strategy, which is around the diversification and then I gave you the 5 product buckets. I assume you're referencing the 5 product buckets, is that right?

Matthew Kelley - Morgan Stanley, Research Division

Yes, that's right.

Richard Mac Coy Weil

Okay. The first product bucket was sort of insured or skewed results. And the big effort we've made in there is our 2 protected growth: our U.S. and our global protected growth funds, which I think are unique in the marketplace and very strong. We don't -- I think those are good lead horses. We wouldn't close our eyes to other opportunities, but I think we have a good representation in that space at the moment. It's also worth noting that Perkins' entire business is built around the prospect of being conservative when the stock markets are going up fast and being protected a little better than others on the downside, which is in effect an expression of the same sort of philosophy and that their business is built around that. And INTECH is offering some exciting new low-vol offerings, which can be seen in that sort of philosophy as well. So I think we're well represented but the work is never done. Two was income. We have, as I mentioned, INTECH with a new income offering. We have some other things in the works, but there's more -- there's definitely more work for us to do there. That's a area in development, clearly. Three was absolute return of a -- the problem with that label is it's too darn big and we actually mean a fairly different subset of that. We're not looking to create "swing for the fences" hedge funds or that sort of thing. But as we anticipate higher rates in the world, we think people will be looking for solid returns with relatively lower equity risk factor and interest rate risk factor. We have some efforts in market neutral and short, that we're working on. But that's clearly an area for future development. Four is real return. I'd say that's under development but with more room to go there, too. And lastly is asset allocation, which probably falls in the same bucket. So I think we've started, and we have reasonable representation in each of these areas. But there's certainly more room to go across the board. I hope that's helpful for you.

Operator

And next, we'll move to Robert Lee of KBW.

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

I have a[indiscernible] question for you on the retail distribution. I mean, you clearly talked about today and in the past about the initiatives to expand your global distribution and product set and institutionally, that a lot of your -- if I step back a second, a lot of your 5 product buckets now are necessarily I think geared towards developing products for the retail channel and one of the things that at least I found fairly opaque over the years is getting a sense of your retail distribution organization and resources. And you talked a little bit maybe about how your resource kind of in the U.S. retail-wise and how maybe you have or think you may need to reorient that, whether it's more wire house, more independence to really be -- or do you think you have kind of the right strategy and game plan today?

Richard Mac Coy Weil

I guess, first, I'll say I don't think these product buckets are only retail. I think most of them have application both for retail and institutional. The next thing I'd say is I think it's a great strength of the Janus franchise that we have really strong retail distribution. I think you can see evidence of that in the fact that Perkins has enjoyed a market-leading position in small-cap and in mid-cap that our Triton fund on the Janus platform as in SMID seen a market-leading position that our fixed income flows now are doing quite well on the retail side. I think there is ample evidence across the board that our retail distribution is very effective when we have a product sort of in the desired slice of the retail population with good performance. I think we've proven we do distribute it very well. So I think of that as a great strength to the firm. We have approximately 100 folks in that distribution effort inside the United States, about 1/2 -- a little less than 1/2 internal, a little more than half external. And where do we need to develop? We probably need to spend more time focusing on some of the independents and RIAs. And we probably need to develop our capabilities to be a solution provider and asset allocation provider. It's probably not coverage or focus of coverage. It's probably content that we can build better and be a better partner for our many platforms and partners in this business. So I think it's improving the quality of our thought leadership and partnership, more than probably anything around what we cover.

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

Okay. And then one -- again, one last question on INTECH, sort of maybe beating a dead horse here. But I'm just curious. I know over the last several years, the original founders have kind of substantially phased out I think. Do you think that, that's any of your sense in talking to clients that, that's maybe at the margin had some impact on how investors think about INTECH? Or you think that's kind of -- do you think that plays into it at all?

Richard Mac Coy Weil

Actually, I don't. I don't think it plays into it at all. I think those founders did a terrific job of building a firm, and then they identified successors. And they went through a multi-year transition to those excellent successors. I think Jan and Adrian, who are the CEO and CIO there, took their jobs after a long tutelage under their predecessors. And it was about as good a leadership transition as I can imagine. In the investment process, it remains entirely consistent with prior periods. Adrian has been the driver of that investment process for along time now. And so I haven't heard that, and I don't believe it would be fair if people were thinking of it. What we see is institutions are not putting out searches for active equities. And as a subset of that, they're not putting out searches for quantitative active equities. And that's a very challenging environment for a quantitative mathematical active equity firm like INTECH focused on the U.S. institutional market. And I don't think that condition lasts forever, but it hasn't turned yet.

Operator

And next, we have Cynthia Mayer of Bank of America Merrill Lynch.

Cynthia Mayer - BofA Merrill Lynch, Research Division

Just a follow-up on the comp question. You mentioned the comp-to-revenues ratio guidance went to 33% from 30% because performance fees went down. But conceptually, wouldn't performance fees affect comp? And I'm just wondering if maybe you could clarify how the performance fees do affect the comp?

Bruce Lewis Koepfgen

Well, okay. Let's start at the top. So performance fees are a direct offset to revenues. So as they process through the income statement, they of course will serve to lower bottom line results and compress margins at some level. Our comp model, as we've discussed in the past, is built off bottom line results, which is we realize a little difficult for you to get to precisely. So we've tried to offer up some assistance here as a rate to revenue to help you in your modeling.

Bruce Lewis Koepfgen

Yes, so -- I guess, Cynthia, the only thing I guess I would say to that is it's not going to be a one-to-one relationship of -- on that comp line. No.

Cynthia Mayer - BofA Merrill Lynch, Research Division

Right, but they would affect it, though, less you're saying, because they affect the denominators so much more.

Bruce Lewis Koepfgen

Yes. Cynthia, I think we've gone about as far in this comp discussion as we can. So I mean -- I would strongly encourage you to give us a call. We'll be happy to kind of go around on this again to create whatever clarity is necessary.

Cynthia Mayer - BofA Merrill Lynch, Research Division

Okay. And then maybe just drilling down on the question of seasonal impact. Could you let us know what your 401(k) assets are at this point? And where those are concentrated? Would that be Janus growth primarily or Perkins as well?

Bruce Lewis Koepfgen

Cynthia, we really don't disclose that level of detail on our assets. I'm sorry.

Cynthia Mayer - BofA Merrill Lynch, Research Division

Okay. Can I ask one more instead, then?

Bruce Lewis Koepfgen

Why not?

Cynthia Mayer - BofA Merrill Lynch, Research Division

On the drop in G&A, was that from anything in particular? And how sustainable is that?

Bruce Lewis Koepfgen

No. I think if you looked at each of the line items in G&A, you'd see decreases across the board. I ascribe that going back to my prior comments just to really good cost discipline on the part of the team here. So no, there's nothing -- there's no real story there.

Operator

And next, we'll move to Marc Irizarry of Goldman Sachs.

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

Dick, can you talk a little about the product strategy? You mentioned the buckets for the new products. Two questions, I guess, one, the fees associated with those products when you think about the sort of the blended fee rates or the fee rates for those products, should we expect that over time that there'd be a positive impact from fees from some out of those products? And then also are you going to think about performance fees -- are there going to be performance fees associated with them as well?

Richard Mac Coy Weil

In most of these buckets, I think it's far too early to give you an intelligent answer to your question in the sense that the products and the vehicles that will fill these buckets haven't been fully developed. It's worth noting that fees vary according to channel as much as according to strategy. So where and how you package it and sell it matters to the fees as well as what the underlying investment strategy is. And so for that reason, I can't really give you a good answer to your question. It's just too early. I would also note that the scope of the existing business is large enough. And these products are small enough that it will be a while before you would notice any fee difference kind of no matter what the answer was just because the relative size is a stock-and-flow question. The stock is quite large compared to the flows for the short term.

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

Okay. And then just on expenses, the marketing dollars down pretty large sequentially. When you think about what's going on in the retail channel and the intermediary channel in particular, are you seeing more need to maybe ramp up the marketing over time? Are you seeing any pressure from the retail intermediaries to maybe spend a little bit more on your side to either get your own message out there or just to support the channel generally?

Richard Mac Coy Weil

I think the retail and intermediary channels are putting pressure on us to in -- across all the ways we relate to spend more to support and to pay more for their partnership when we feel that pressure, yes. At the same time, I think we have discovered that our best judgment is that we can do less of some of these things than we've done before without hurting the business or the strategy. So we've -- I think we have been successful about managing to a tighter ship without sacrificing a lot on terms of market effect. And we've also -- candidly, we're reorienting some of the efforts, changing resources towards some of the content and the partnership, some of the thought leadership, our Janus Labs Program, which is excellent. So it's a shift in the mix as well that we're focusing on. But overall, I think we've been successful at just making the darn thing more efficient through good work by a lot of people here.

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

Okay. And then just one question on the performance fees for private accounts. Could you just -- the number ticked down sequentially on the [indiscernible]. If you can just enlighten us a little bit on how big the private accounts are and how we should think about maybe that number going forward.

Bruce Lewis Koepfgen

We don't -- Marc, we don't speak to that specifically. I would just remind everybody that in the fourth quarter of last year, we did have this $3.4 million of separate account performance fees that pay annually and it tends to hit -- it does hit in the fourth quarter so that will naturally not repeat in the first quarter.

Operator

And our final question for today will come from Roger Freeman of Barclays.

Roger A. Freeman - Barclays Capital, Research Division

Just on the lower turnover than you were expecting, what do you attribute that to? Have you been expecting a higher turnover just because of the new comp plan last year?

Richard Mac Coy Weil

No. It's not that fun and exciting. It's -- we do a historic analysis of the amount of LTI. Our accounting experts have identified a methodology with our auditors that they believe is the right methodology. They look backwards. They're based on that historic record, have an anticipated level of forfeitures. As we move through time, as the future doesn't match the past, you can have adjustments up or down. In this case, turnover went down, which is a good thing. But the effect of that is, as it rolled through the numbers to cause our accounting experts to adjust their expectations for the future. And that's why you see the charge. It's not related to, in any way that I understand, to the new comp plan or management decisions or -- I can't give you a more fun explanation for it, I'm sorry.

Roger A. Freeman - Barclays Capital, Research Division

Okay, that's fine. Okay. And then the second question would just be around operating leverage or variable contribution margins vis-à-vis broader market performance. Did you -- is there a range besides some of the stuff we've talked about around -- like marketing and advertising expense? But just related to your big initiatives, institutional and international fixed income, where you would ramp up or down pending essentially overall stock market performance and what the amount of management fees that it can drive, i.e., do we see operating leverage, higher market levels? Or do you crawl that back?

Richard Mac Coy Weil

No. I think we have substantial operating leverage. In pursuing these initiatives, we have already made a modest investment in, for instance, 10 or so new sales people outside the United States and those sorts of things. We've offset a good part of that by reductions we've made elsewhere on the team. But net-net, we don't see big capital investment or increased expenditures on the table to pursue the agenda as we've laid it out. Candidly, we feel under a huge amount of pressure to be very, very efficient, given the performance fee pressure that's been created on us. And we're working very hard to get these things done at a bare minimum of expense. And we don't expect any big balloons or bubbles or sort of pigs and the snake at this point. And we would call your attention to it if we did, but there's nothing on the horizon that we see of that nature.

Operator

And that does conclude today's question-and-answer session. I would now like to turn the conference back over to our speakers for any closing remarks.

Richard Mac Coy Weil

Have a great day. Thanks everybody for your time and attention. We look forward to speaking with you again next quarter.

Operator

And that does conclude today's conference call. We'd like to thank you for attending.

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