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Janus Capital Group Inc. (NYSE:JNS)

Q4 FY07 Earnings Call

January 24, 2008, 10:00 AM ET

Executives

Gary D. Black - CEO

Gregory A. Frost - Sr. VP and CFO

Analysts

Mike Carrier - UBS

Ken Worthington - J.P. Morgan

Bill Ketz - Buckingham Research Group

Robert A. Lee - Keefe, Bruyette & Woods

Marc S. Irizarry - Goldman Sachs & Co.

Cynthia Mayer - Merrill Lynch

Michael Hecht - Banc of America Securities LLC

Michael Kim - Sandler O'Neil

Operator

Good morning. My name is Nicole and I will be your conference facilitator today. I would like to welcome everyone to the Janus Capital Group Fourth Quarter 2007 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. In the interest of time, questions will be limited to one initial and one follow-up question. [Operator Instructions].

Before the company begins, I would like to reference your standard legal disclaimer which also accompanies the full slide presentation located in the Investor Relations area of janus.com. Statements made in the presentation today may contain forward-looking information about management's plans, projections, expectations, strategic objectives, business prospects, anticipated financial results, anticipated results of litigation and regulatory proceedings, and other similar matters. A variety of facts, 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 these expectations and the objectives expressed in their statements. These factors include, but are not limited to, the factors filed in Janus' report 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 day 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 D. Black - Chief Executive Officer

Thank you. Good morning everyone, and thank you for joining us for our fourth quarter earnings call. With me today is Greg Frost, our Chief Financial Officer. As you can see, we had a strong quarter ending a very strong year. Fourth quarter earnings from continuing operations were $0.36 per share, although excluding roughly $0.03 a share of what I call unusual items, earnings would have been $0.33 a share and I will let Greg talk more about the noise in the quarter.

Long term flows were positive $3.2 billion, that's up from a positive $0.7 billion in the third quarter. It represents roughly about 7% organic growth. The industry growth rate in the fourth quarter did slow given the market volatility. We peg the industry growth rate of about 2% in the fourth quarter. So we were really above the industry.

On the Janus ex-INTECH side, another very strong quarter, positive flows of $3.1 billion which is about 10% organic growth. And INTECH flows did turn back positive during the quarter as performance rebounded and I will talk more about that. For the full year, our long term flows were $9.8 billion, which has quadrupled from where we were in 2006.

The assets under management was down slightly from third quarter. That does include about $6 billion of outflows from our money market business. The relative performance remains just superb. If you look across all of our retail funds, 89%, 86%, and 76% of funds outperformed their peers over 1, 3 and 5 years respectively.

If you look at just the Janus managed equity side, as we traditionally do, the numbers are even more compelling 95%, 87%, and 87% over 1, 3, and 5 respectively. And again, importantly, INTECH performance rebounded sharply in the fourth quarter.

We did purchase $109 million money market vehicle, which was downgraded in the quarter. It did result in a $2 million charge and we repurchased another 2.4% of our stock during the quarter at an average price of just over $32. I think it's the first quarter in a while where we paid above where we were on the earnings call. And we do continue to view buybacks as a good use of our capital.

Turning to page 3, slide 3. Again, we had a very good year. The performance remains exceptional just about... just across all the time periods and across almost all of our products. I think the positive long-term flows in Janus is probably the big story for the year given where we were a year ago. We saw a significant improvement in market share. Just as an example in the fourth quarter when you look at our retail market share, we were in 8th position in the fourth quarter. If you look at where we were a year ago in the fourth quarter, the position was 547. So again, a very good momentum on the Janus side.

Obviously, we're proud of our earning share growth of 66%, and again, there was some noise in the fourth quarter, but again there is noise on both sides. We did finally get to our operating margin target of 30%, which we've talked about for a couple of years now and primarily due to significant progress on the Janus side. We did increase our penetration in the domestic intermediary channel. We'll talk more about that, but in domestic intermediary, our gross flows were up over 7% year-over-year and the net flow swing went from negative $6 billion to positive $6 billion, 2006 versus 2007.

We expanded our global and alternative product line up. We continue to build out our non-US distribution footprint. We launched a new advertising campaign that we called Go Farther." We significantly strengthened our brand reputation during the year.

We've put in place a much more efficient capital structure. It gives us the flexibility we need that allows us to be aggressive at buying back stock or doing other things if we want. We did reduce shares outstanding during the year by 14%. And we successfully transitioned the portfolios where there have been PM changes. The performance where there has been PM changes has been off to a good start and other than one institutional client that we lost earlier in the year, back in the first half, we really haven't lost any major accounts. I think we've accomplished what we tried to do as we transitioned the portfolios.

2008 really not much change other than continue to execute on the current strategy. First and foremost obviously we had to continue our strong investment performance. We want to continue to expand our advisory footprint and increase our institutional penetration. We will continue to invest overseas, build out our non-US distribution. We would like to tackle the US retirement market, it's something that most investment managers are focusing very intently on, we are as well.

We will continue to broaden our global and alternative capabilities. As most of you know, we've launched a long/short product about 18 months and it's had extraordinary success both from a performance and a flow generating standpoint. We will continue to strength entrust in the Janus brand and we want to make sure that we keep our key investment and management personnel. When you dig through the details of our 10-K in a few weeks, you will know that we issued long-term incentive grants $21 million during the fourth quarter through our investment team and that vests over four years and you'll also note that we issued a $25 million worth of grants brand to INTECH folks and those will vest over ten years. And again, we have some detail in the appendix. But we want to ensure that the strong performance that we put up over last year continues. You can think of them almost as insurance policies.

Slide five, again, a very strong turnaround. On the flows standpoint, we went from $2.3 billion in flows in 06 to $9.8 billion in 07. If you look at the bottom of the Janus managed side, it went from $9.7 billion negative to a positive $7.5 billion. So that was a $17 billion swing. The Janus ex-INTECH organic growth for all of 2007 was above 8% and again if you want to compare that to the industry growth rate that's probably about 4. And again, Janus ex-INTECH in the fourth quarter was actually over 10% organic.

The INTEC flows of $2.3 billion, we had a rebound in performance in the fourth quarter. We really have not seen any decline in consultant recommendations. We have had some outflows, particularly on the international side particularly in our offshore fund, but we are optimistic that the performance turnaround will continue on the INTECH side.

Slide 6. All four of our channels were positive in 2007. It's the first time that's happened in 2000. If you look at the retail segment up in the top left, retail is about 29% of our business today. It was positive in all four quarters in 2007. The retail direct segment continues to show improvement, still in outflow mode, but the outflows are the lowest they have been in about five or six years. The other piece of the retail business is our supermarket sub-segment. That continues to show very good momentum. It was positive in all four quarters.

Going over to the domestic intermediary side, that's where we have seen the improvement. As we've talked about before, it's about a $12 billion [ph] swing between 2006 and 2007.

The gross flows were up about 70% year-over-year. We have 50 wholesalers on the ground today. That is up sharply from where we were a few years ago, we are continuing to build there. And our broker-dealer business, which is a sub-segment within this continues to accelerate. We had in the broker-dealer business gross flows actually doubled 2007 versus 2006 and net flow has tripled. So, a lot of momentum in that business.

On the institutional side, bottom left, flows were down significantly year-over-year primarily the result of the weaker INTECH flows. We appointed Dan Charles as our new Head of the institutional business in the fourth quarter. He was our top Institutional Advisor. We have a lot of optimism that that number will be better in 2008. We do have a robust pipeline of one not-funded mandates as we ended the year.

Looking at the international business, flat year-over-year roughly in flows, but again it massed some strength that the gross flows were up nicely 2007 versus 2006. The net was flat because we did have some INTECH redemptions in our offshore mutual fund. But we did have some notable successes on the separate account side during the year. So we feel good about that as well.

Turning to page 7, top left, obvious headwinds in the market beginning in the fourth quarter with the market down about 3.3% in the U.S. Globally MSCI was down about 2%. Looking to top right, you can see that industry flows slowed sharply in the fourth quarter. Again, you can think about it in an organic growth sense, it's probably about 4% for industry throughout the year. But in fourth quarter that was down to about 1.8%.

Bottom left, growth handily outperformed value again in the fourth quarter, and through the full year. Again, first time in about 6 to 7 years, growth beat value by about 1200 basis points. Obviously, still over 3 and 5 years growth continues to lag value. Obviously growth had a good performance in 2007.

Bottom right, growth flows exceeded value flows for the industry in the fourth quarter, and that obviously helps Janus.

On slide 8, we have obviously had some turnover among portfolio managers. We are confident that our strong investment performance will continue given our very deep bench. If you look at the top left hand corner, you could see that our average portfolio manager has about the 14 years experience to-date. He has been with the firm for about 10 years. Those were up sharply from where we were in 2000.

Look over in the top right, you could see our average analyst has been at the firm now for about 5 years. It's up from two back in 2000 and our average analyst has about 10 years of experience. We have very low turnover among our analysts or turnover among analysts is less than 5%. We've dramatically increased the research breadth. If you look at the equity research analysts and research associates, where we were in 2000 when we had about $300 billion in assets on the Janus side. And today if you exclude INTECH, we are in the $130 billion range, but we've got far analysts today, and we have 22 research associates who will function as junior analysts compared to none back in 2000. All that translates bottom left into much greater coverage. We are covering 1,300 names today, about 500 on the non-US side. Again dramatically higher from where we were back in 2000.

Slide 9. Performance remains very strong. We talked about the overall numbers, but on the Janus managed side, 95% to 87% and 87% over 1, 3 and 5 years, beating their peers. 68% of our funds are now beating... are now rated 4 or 5 star by Morningstar. As you know, the industry average for 4 and 5 star is about 32.5%. Everyone of our equity growth and core funds are now in the top quartiles across 1, 3, 5, and 10-year periods as of the end of the year.

INTECH performance did improve in the quarter. Some statistics; 77% of strategies outperformed their respective benchmarks on a one-year basis. That was up from 15% at the end of last quarter. So, dramatic turn in some of our INTECH strategies. 89% of strategies have outperformed the benchmarks on a three-year basis compared to 50% as of September 30th, and we don't show the five year numbers, but 100% of the strategies are beating their benchmarks and that's no change from where we were.

You could see the performance numbers graphically on page 10. Again, the numbers continue to be at the highest they have been in about 6 years.

Slide 11, you can see the performance by funds, pretty strong across the board, particularly on the Janus side. Again, every growth in core funds is beating peers. You could look at the top 20 or so fund families and look at that metrics, percentage of funds beating peers, and see where Janus ranks. And some of you actually do this versus the other 20 or so top fund families. Just to give you the numbers, if you look at one year percentage of funds beating peers, we rank first out of 20. If you look at it on a three-year basis, we rank first out of 20. On a five-year basis, we are sixth, on a ten-year basis we are third. So, again pretty strong performance across the board.

Now let me turn it over to Greg who will take us through the financials.

Gregory A. Frost - Senior Vice President and Chief Financial Officer

Thanks Gary and good morning, and thanks for joining the call. As Gary said, I would certainly classify Q4 as a very good quarter. It is noisy, we do have these from time to time. I think we have prided ourselves that we have been able to strip out a lot noise over the last few years, but every now and then you have a quarter like this where you have a number of things come up. So we will work through them with you this morning to make sure you all have full visibility.

And if you do, if you strip out the items, I think Gary and I both believe the core business performed very, very well. Fourth quarter EPS of $0.36, as Gary mentioned, it includes a $0.03 benefit from a number of both operating and non-operating items. On a percent basis, it's a $0.04 per share charge on the operating side and a $0.07 benefits on the non-operating side. And I will certainly cover that in more detail.

Average assets and revenue up nicely in the quarter and operating expenses up 17%. Again, here is where we get into some of the noise. We did have $17 million of departure-related acceleration of long-term incentive comp. This is a non-cash charge. We have had these in the past. We also had a $5 million insurance recovery previously related to previously incurred legal expenses. So those two together were $12 million charge or $0.04.

Excluding those, what you see in kind of the base business is revenue and asset-based base expenses were up in line with revenue. We did see slightly higher G&A costs, and I would classify those as primarily technology and project-related spending in the quarter. From a margin perspective, fourth quarter of 29%. Again, I need to go back to this, but the $12 million did have a 3.8% impact on margin. So if you factor them in, we are very much in line with where we have been over the last couple of quarters.

Going below the line now, we did see a net benefit of $0.07 or $18.6 million. Gary mentioned already that the $2 million charge taken as we purchased the Stanfield Victoria security out of the money fund. We are certainly watching that security closely as we go forward. It's now in our balance sheet. That security is now with an enforcement agent. We are watching it closely and monitoring it. I think patience is the key word here and we will certainly update you all as we get more information.

We have a $3 million state tax benefit. This is a result of truing up our filed tax returns to our tax provision. This one is primarily due to lower than expected state tax rate and in the big charge of... the big gain of $17.6 million, let me give you a little color around that. We did an evaluation of our seed capital investments, which as most of you know, include both mutual funds and separate accounts in the fourth quarter and we determined at that time that the more appropriate accounting model was to mark-to-market changes in fair value through the P&L and treat them as trading securities versus marking them to market through equity the way we had been doing them. This is consistent with many, many of our peers, as most of you know. I don't think this would be a surprise.

We recorded the unrealized gains, which really has been built over the last five or six years through the P&L in the fourth quarter and going forward we will be marking to market these securities through the P&L. So we will have a little more volatility than we historically have had.

Lastly, as indicated in our press release and in here, we did take further impairment on the printing business as we proceed with the sale process. We did see further weakening in the core business in Q4 which was part of the reason and the other reason is we are starting to get bids in the door and as the sale process proceeds, we still hope to close in Q1 and hopefully this is the last time we're going to have to talk about the RSG [ph] impairment charges.

Moving to page 14, this is a full year look at our financial information. Clearly the lines and the trends are moving in the right direction. The last four years in my mind have been stabilized... have been marked by the stabilization of the firm, very, very strong investment performance. Investments and distribution really starting to pay off. As Gary said, positive flow this year across all four channels, positive flows on the Janis side of the house for the first time since the year 2000. That really leads to overall improving fundamentals top line growth and then we will be leveraging the business model yield, the good results that we saw in 2007.

Focusing on 06 to 07, we did see margins eclipse 30% for the first time in a while. Operating margins expansion of almost 600 basis points, incremental margins year-to-year of over 60% and that clearly is in line with our stated goal of 50% plus and then a fairly healthy robust or a very healthy robust gain on the EPS side of over 60%.

Turning to page 15, very, very quickly, as Gary mentioned, this is the first quarter in a while where we sit here today at a price lower than what we bought back in the previous quarter, but we do believe buybacks still provide a good way of returning cash to shareholders. We consistently monitor our capital to ensure we are providing the best risk adjusted returns to our shareholders. And we do take a long-term view of buybacks. And as we look back, not only just in Q4 but over the full year, I think we are very pleased to reduce shares by 14% at a price just north of $26. And then again from a program perspective, almost a third of the shares have been retired at a price just north of $20. So we feel like we continue to do a good job with this program.

And with that, I will it back to Gary.

Gary D. Black - Chief Executive Officer

To summarize, we had a strong quarter capping a strong year. We have superb investment performance. We will try to minimize the impact of the portfolio management turnover we've had. We have a very strong bench, strong research team. We have to make sure that we continue to deliver strong performance, particularly where there has been a turnover of the portfolio manager. The INTECH performance, we are happy that the performance turned in the fourth quarter and the flows were positive. We had a third consecutive year of positive flows for the firm and our organic growth rate is about twice what industry growth rate was last year. We will continue to focus on building out both our intermediary business and our institutional business. We had a good growth in our operating margin. As Greg said an earnings per share in 07. We will continue to return excess cash to shareholder via stock buybacks.

With that, let me open up for questions.

Question And Answer

Operator

[Operator Instructions]. Your first question comes from the line of Mike Carrier with UBS

Mike Carrier - UBS

Hi guys, thanks a lot. Just a question on obviously the environment right now is pretty uncertain. You guys have done a good job on investing on the distribution side. When we look at the pre-tax margin and operating leverage of the model and you look at even ex the noise like 33%, given your strong relative performance, given the long-term kind of strategy of increasing the distribution, given the volatile markets, if we just look at where the assets are today given the market levels, what expenses or maybe even buybacks, what's controllable let's just say in the next 6 to 12 months if we are in these pressurized markets versus what are you going to continue to spend on to keep that long term strategy in place and then also to continue to pay for the performance on the investment side?

Gary D. Black - Chief Executive Officer

Let me start and Greg may add a couple of words. You're right. We do have headwinds in the market and the performance being strong will give us some help as 08 unfolds. Our strategy will pretty much stay the same in 08. We will continue to build out our distribution in the US and it's worked. You can see the flows have just turned dramatically and the acceleration in the domestic intermediary business, you see that as you get to the end of the year, it's been... it's even faster than what we saw at the beginning of the year. So, we will continue to invest in that business. We'll continue to invest in our brand and then we will continue to invest building distribution outside the U.S. That said, we are sensitive to... we are a public company and we have shareholders and the good news is our business model today is far more flexible than it once was in tying a good chunk of our expense base to that of our business results. It is one of the changes that we made with portfolio manager comp last year is to make sure that if the market were to fall off, comp would directly related to the business. So, I think we will continue to invest for the long term as we have. And so I wouldn't expect a big change in the strategy, but I feel good that most of our expenses today are tied to the business mode where a couple of years ago that was not the case.

Mike Carrier - UBS

Okay. Thanks a lot.

Gary D. Black - Chief Executive Officer

Next question?

Operator

Your next question comes from the line of Ken Worthington with J.P. Morgan.

Ken Worthington - J.P. Morgan

Good morning. First, year-end is typically a milestone for retail investors in terms of manager allocation and I guess under normal market conditions, I would have expected Janus to benefit as... in terms of new business as investors chase last year's returns. But market conditions stink, they were lousy towards the end of the year and they have been lousy this year. So how do you think the deterioration in market conditions have impacted these manager allocations or investment decisions by retail investors and is there any date that you can provide to us like maybe account openings like recently versus the same period last year to kind of gauge the acceleration or a lack thereof? So, does that makes sense?

Gary D. Black - Chief Executive Officer

Yes. We can't comment on how the first quarter is going and I think that's what are you asking us since the market turned down, what are we seeing and --

Ken Worthington - J.P. Morgan

But even late in the fourth quarter, I am trying not make this about what are sales this quarter, but you should have seen... I would have expected positive trends, but does the market kill those account openings?

Gary D. Black - Chief Executive Officer

Well, I think when you have strong performance like we have, we will talk about the positive and the negatives. We have very strong performance and you saw the fourth quarter data and if you subscribe to some of these third party services that show retail share data, you can get by month and I know the December data just came out I think it was yesterday. What you see is that the Janus numbers held up in the fourth quarter; that was pretty much the same as the third quarter, whereas for the industry the growth deteriorated. We saw that the data we see, the industry growth rate was up about 1.8% in the fourth quarter and that was down from about 4% or so in the third quarter, or if you look at the Janus numbers, they were pretty much the same as they were in the third quarter. So having good performance, I think, gives us some lift. That said if the markets deteriorate further, you will see folks on the retail side take money out from equities and put it into cash. That's what you have seen historically, but we are not going to make the market fall here.

Ken Worthington - J.P. Morgan

Okay, thank you. And then for the follow up, to what extent is being forced to buy assets from your money market funds damage your reputation in that business? And I noticed you had redemptions in the fourth quarter, given having to buy those assets, should those redemption trends continue?

Gary D. Black - Chief Executive Officer

Yes, again, I don't want to make a forecast. I will say that we feel pretty good about where our money market exposures are. We had... so take the $109 million Victoria position that is now in on our balance sheet, which we had a fair value pricing service come in and judged that it was... it was worth $0.98 on the dollar. So that's where the $2 million hit came from in the fourth quarter. That leaves us with approximately $581 million of what we call SIV exposure as of December 31. That represents about 3.7% of our $16 billion or so of money market assets. All of those... all of that $581 million is bank sponsored. It's Citi and HSBC have it on their balance sheets. The reason that is important is because they can get the SIVs through their liquidity issues, they can raise capital. So we feel pretty confident that the remaining exposure is pretty minimal because Citi and HSBC both have ample liquidity in the market to refinance the liabilities as they come due. Each of those...each of the issues under that $581 million left has had its AAA rating reaffirmed by the rating agencies. As you know, the rating agencies have been very aggressive at downgrading. So, we don't think we have that much exposure in our money market funds. And again, it's about 3.7% of the money market assets.

Ken Worthington - J.P. Morgan

I was really more focused on brand and exposure. Is the brand... is Janus's money market business reputation impaired because within the last decade, you were one of the few firms that had to buyout assets two times. And while the industry is seeing I call it massive money market inflows with what the Fed is doing, is the brand impairing that benefit at Janus? That's sort of what I was going after.

Gary D. Black - Chief Executive Officer

You don't see it. We talked to our money market clients when we took the $109 million security out, clients appreciated the clarity that we provided and the quickness with which we responded when Moody's downgraded. I think we got out there the very next day. We haven't seen any degradation in the brand. We have seen some inflows since that time. I think to your point, a lot of folks have had some money market exposure and I guess the why we look at it is the $109 million is actually... it's not a bad number relative to what some other firms have had.

Ken Worthington - J.P. Morgan

Okay. Thank you.

Gary D. Black - Chief Executive Officer

Next question please.

Operator

Your next question comes from the line of William Ketz with Buckingham Research.

Bill Ketz - Buckingham Research Group

Presentation is very helpful. Just first question is on your comment on the institutional pipeline. I was just wondering if you could flesh it out a little bit more in terms of the way you're seeing the leverage and I am sort of curious as to the differentiation between sort of legacy Janus versus INTECH. And then just given the year-to-date volatility, particularly at INTECH; has there been any marginal changes within that?

Gary D. Black - Chief Executive Officer

Most... the vast majority of the pipeline is INTECH, as it has been traditionally. And I think, look, a lot of our INTECH clients... go back to the comment I made before, it is a consultant-driven market, it is a very process-driven market. Our process, our INTECH process has been in place for 20 years. It's produced very long-term results, better than just about any other either quantitative or mathematical manager in the industry. Most consultants have kept... in fact, I don't know if any of them have actually changed their buys ratings on the INTECH products. So, we feel pretty good given that we have a turnaround in the performance, albeit at short term, it's one quarter. We feel that... we feel pretty good about the pipeline. We feel pretty good about the prospects of INTECH as we enter 2008. And importantly again, we haven't really seen any degradations by the consultants in their endorsement of INTECH products.

Bill Ketz - Buckingham Research Group

Okay. And second question, so it comes back to margins. I am just sort of curious, this environment reminds me about same time last year where you had very good absolute performance, the relative performance... I am sorry, you have very good relative performance, but absolute performance has gone deep negative here early on. Just help me reconcile your commentary with a greater variability of expense and revenues, and I appreciate that through, but is there a potential margins squeeze coming here a little bit? Seem like you are layered in a new level of long-term incentive compensation, I understand the reasoning there. But could some of the incremental margin story be compressed a little bit in this kind of environment?

Gregory A. Frost - Senior Vice President and Chief Financial Officer

Bill, this is Greg. I mean, our long stated goal is to achieve incremental margins greater than 50%, but we do realize that there are going to be years where you are not going to meet that goal for whatever reason. I mean, it could be a lower market, it could be that you're reinvesting in the business heavier than other years. As Gary said, our business model is flexible. Where we preserve 34% margins in a 20% market decline, I don't know, but I don't... it also won't go down to the levels that we saw two or three years ago either.

Bill Ketz - Buckingham Research Group

Okay. Thank you very much.

Operator

Your next question comes from the line of Robert Lee with KBW.

Robert A. Lee - Keefe, Bruyette & Woods

Thanks. First question is going back to the margin, this question is so much about may be what should we expect this year, but if you look at it long-term, where do you think... how should we think about where your margins could ultimately be? I mean, if I compare your margins to your competitors who... and if I adjust theirs for netting out 12b-1 fees, which I believe you don't gross up, you just net. I mean, there are adjusted margins. Some of them are in the 40s. I mean, do you think that's an achievable goal for you... goal for you over time or is there something about your business model that suggested that ever in a good revenue environment that that's really not something you could achieve?

Gregory A. Frost - Senior Vice President and Chief Financial Officer

I think I will just all say it again. I mean, I think our goal is to achieve incremental margins of greater than 50%. Where that takes us down the road as that's continued to grow, I don't know that we have a crystal ball and can predict that. But I do think our goal of 50% incremental margins is what we shoot for every year.

Gary D. Black - Chief Executive Officer

I also... this is Gary. If we can continue to achieve organic growth that is in the 6-7% range, our margins five years from now will be higher than they are today just because we are leveraging the fixed cost base we have. Will we ever get to that number you said, 40%, it's hard to know, but in fact to Greg's point, if we can achieve 50% incremental margins, we can grow organically at 6% or 7%. The number is going to be higher obviously five years from now from where it is today.

Robert A. Lee - Keefe, Bruyette & Woods

Okay. And a question on INTECH. When I look at the redemption rate, I mean, this quarter to last quarter, bearing in mind that sales were up. It seems that for an institutional business, the redemption rate tends... at least recently has been running on the high side, may be there is some kind of seasoning of the book of business that's impacting that, but if I look at again some other competitors, their institutional redemption rates tend... a lot of them tend to be much lower. Is there something about the business mix there? Were there just some couple of specific things in the last couple quarters that's really keeping that redemption rate up above what I sort of think as the peer average?

Gary D. Black - Chief Executive Officer

It's hard to see through the numbers. Again, one of the issues for us in 2007 in the second half was on the international side. We had a big offshore fund and that's a retail fund and we saw huge redemptions in that fund. It's hard to know if those are institutional or retail, but my guess is it's more financial institutions, it's more financial advisors, and they are more performance-driven.

In the U.S., we really haven't seen a big redemptions. We haven't seen... we've seen some rebalancing where folks were saying let's put more money into alternatives, more into fixed income as they practice more asset liability management and try to neutralize their liabilities. We've seen some rebalancing from some of our largest accounts. We haven't been fired by folks because of our poor performance. And again, having been able to show that in the fourth quarter as the market stabilized, we were able to put up very strong performance in the fourth quarter. We think that probably gave us some more time to show that we have turned it around. So, I don't think in the U.S. your assumption that we have seen higher redemptions is necessarily is true. We did see higher redemptions outside the U.S.

Robert A. Lee - Keefe, Bruyette & Woods

Okay. Thank you.

Operator

Your next question comes from the line of Marc Irizarry with Goldman Sachs.

Marc S. Irizarry - Goldman Sachs & Co.

Great, thanks everybody. Gary, just a question for you. It looks like obviously you've put some advertising and marketing money behind what's very good performance, particularly in the second half of 07 and you've ramped up the advertising and marketing spend. I am just curious if you look at the retail sales annualized here, you grow sales rate still for the at least last two quarters sort of stagnant and your domestic intermediary sales sort of stagnant as well despite this ramp up in spend, would you expect that sort of the benefits from the increased spending would accrue sort of in the coming quarters here and how quickly can you dial that back? Thanks.

Gary D. Black - Chief Executive Officer

Yes, I'd just start on the sales being stagnant. That's not a true statement on he advisory business, which is where we put a lot of our resources. That business continues to accelerate. We really have deemphasized our retail business, and strategically we see 80% of flows going through advisors. And so a couple of years ago, as you know, we have decided to invest in that business, and deemphasize our retail business. That said, we decided last year in 07 that we needed to spend money on our brand, not just to talk about our performance, our performance speaks for itself, but just to talk about the research strength of Janus, why our performance can be sustained over time and look, advertising is a long-term investment, you see benefits over... with a 12 to 18-month lag. If you wanted to just get more flows in the near term, advertising will not be the way you go.

So I think long term, we will see the result of strong performance combined with additional brand equity. I think it's still too soon to see that. But again, I wanted to just point out on the advisory side, particularly on the broker-dealer side, we have seen a huge acceleration in the flows.

Marc S. Irizarry - Goldman Sachs & Co.

Okay. And that's obviously where there is more of that spending heading at this point. And then just on the institutional side, can you give an update in terms of how Janus... the Janus brand on the institutional side is moving along?

Gary D. Black - Chief Executive Officer

We've been challenged, despite very strong performance with our institutional products. We've not gotten traction on the Janus side in institutional. Again, we had a management change, Dan Charles took over for John Zimmerman. Dan comes from our sales team. He was one of our top producers. He definitely understands the institutional business. He is very pro-Janus. We think... let's see what happens in 2008, but we are very optimistic. Given our strong performance in the management change that we can finally start getting some traction on the Janus managed side, and not just on the INTECH side.

Marc S. Irizarry - Goldman Sachs & Co.

And just in terms of INTECH, the performance in the fourth quarter at least versus benchmarks, looks like it really improved pretty dramatically. Is there any sort of sense as to just the strategies overall, quant strategies relative to non-quant strategies, just the institutional taste for them relative to what happened in 07? Thanks.

Gary D. Black - Chief Executive Officer

I think it's pretty much the same as it was. I mean, what we've seen in the institutional businesses is separation of beta from alpha, and people say I want to buy cheap beta and you see that with ETFs, you see that with more enhanced index products being demanded, and folks are putting more money into alternatives and that is not changing. And if anything you saw in 2007, particularly hedge funds and private equity firms did quite play well relative to loan only managers. So I think you will continue to see demand into both ends of the market. So the cheap beta, which I will include enhanced index in that will continue to grow and I think the high alpha strategies, so in the loan only space, high tracking strategies, concentrated portfolios will do well, and I think alternatives will continue to do well. And I think we're well positioned in both of those segments to take advantage of that.

Marc S. Irizarry - Goldman Sachs & Co.

Great, thanks.

Gary D. Black - Chief Executive Officer

Next question?

Operator

Your next question comes from the line of Cynthia Mayer with Merrill Lynch.

Gary D. Black - Chief Executive Officer

Okay. Next question?

Cynthia Mayer - Merrill Lynch

-- why and also is the SIV situation in any way going to hold you back in terms of buybacks?

Gary D. Black - Chief Executive Officer

Can you repeat the question? We missed the first part of it.

Cynthia Mayer - Merrill Lynch

Okay. The $168 million in share repurchases, looks like it was a little bit less than the average for the full year and I am wondering why you would have bought less. And also as part of that, does the SIV situation in any way make you reluctant to buy a lot of share, particularly I mean even if the share price were to get low again?

Gregory A. Frost - Senior Vice President and Chief Financial Officer

Cynthia, this is Greg. I think the fourth quarter number, I don't know that we spend a whole lot of time trying to figure out quarter by quarter swings. I think we continue to buy where we believe... I don't think we get caught up in quarter by quarter swings. So I wouldn't read much into the fourth quarter number versus the rest of the year. For the SIV situation, it's not going influence what our thinking is as we go into the quarter a whole lot. I think we do need to make sure that we believe we can get that money back. And as I mentioned, we are going to be watching it very, very closely. But it's not going to have any material impact on how we think about buybacks.

Cynthia Mayer - Merrill Lynch

Okay. And on the G&A, you said it's a little higher because of, I guess, IT spending, is that a good run rate?

Gregory A. Frost - Senior Vice President and Chief Financial Officer

It's a little higher than probably the normal run rate, Cynthia. We just saw some kind of projects getting to the completion phase during the quarter. So I wouldn't expect the higher number to continue.

Cynthia Mayer - Merrill Lynch

Okay. And are you going to be adding more... I didn't hear this, are you going to be adding more wholesalers this year or are you going to take more of a wait and see mode with the markets?

Gary D. Black - Chief Executive Officer

That's the plan. Plan is to continue to invest in our domestic advisory business and we are at 50 today, we will take that up and to continue to invest outside the U.S. as well.

Cynthia Mayer - Merrill Lynch

So will you invest at the same pace as last year?

Gary D. Black - Chief Executive Officer

I don't think we really want to comment on the magnitude of the investment, just know that it will be higher, the number of wholesalers will be higher at the end of 08 versus 07.

Cynthia Mayer - Merrill Lynch

Okay.

Gary D. Black - Chief Executive Officer

But let me just say this; we do take a long-term perspective on spending. We don't manage quarter-to-quarter and so we will execute on our strategic plan no differently than we did in 07.

Cynthia Mayer - Merrill Lynch

Okay. And last question on the INTECH flows, they came back, they are back positive, but would you ever expect to get back to the level of, say, 06 or 05 where it was some 12 and 16?

Gary D. Black - Chief Executive Officer

Lot's based on performances. We obviously would like the number to be higher than what it is in the fourth quarter. But a lot depends on performance and how successful we are... particularly with our new products, we launch INTECH keeper products, which has had extraordinary performance; INTECH global product, INTECH market-neutral product. We see a lot of the value managers struggling performance, particularly the deep value managers. We've had very strong performance there. So a lot of it's driven by performance and how we do with the new products.

Cynthia Mayer - Merrill Lynch

Thanks.

Operator

Your next question comes from the line of Michael Hecht with Banc of America Securities.

Michael Hecht - Banc of America Securities LLC

Okay.

Gary D. Black - Chief Executive Officer

Hello, hi.

Michael Hecht - Banc of America Securities LLC

Oh, hi, sorry. Just a follow-up on INTECH, you kind of I think partially answered it in your previous response, but I mean, is it... can you give us any color on what the traction or I guess kind of gross sales that you've seen in some of the newer products because I kind of noticed that in the presentation materials. I mean, your performance in some of the international products on the INTECH side seems particularly strong, is it just kind of early days because a lot of them don't have three-year track records you had or are you seeing any traction there?

Gary D. Black - Chief Executive Officer

I wish we could comment on it. What we can say is the performance has been strong, and usually flows follow performance, but it's too early to talk about the individual products.

Michael Hecht - Banc of America Securities LLC

Okay, that's fair enough. Can we back up and maybe talk a little about the strategic importance of the money fund business? Since I am guessing it's not a big profit driver, and I am just wondering why it would make more sense to maybe outsource that since it seems to be a low margin non-core type of area.

Gary D. Black - Chief Executive Officer

We have looked at it in the past and concluded it's a good business for us. We have in the past thought about is there a maximum amount of money market exposure we want to have and again rather than getting into the strategic importance of the business, let's just say it is a good business for us, it's profitable, it's a very scalable business and we are comfortable with the exposures that we have.

Michael Hecht - Banc of America Securities LLC

And your business there, just remind me, is it more intuitional or is it kind of retail? I mean, is there a stopping place for the people before they put money into core Janus funds or --?

Gary D. Black - Chief Executive Officer

It's mostly institutional, but obviously in a bear market, having that retail outlet for folks so that we don't lose the money is helpful.

Michael Hecht - Banc of America Securities LLC

Right, okay that makes sense. And I just got a couple of quick housekeeping ones if it's okay. And thanks again for the... all the presentation material you guys provided, it's really helpful. Page 26, the long-term incentive award, amortization schedule, I mean, if I am looking at that the right way, and obviously we need to kind of plug in our own assumptions for what we think EPS growth is going to be, but if we kind of sum the columns across the different areas, we should be thinking about between maybe $50 million and $60 million of annualized expense there for next year... this year, 08, sorry?

Gregory A. Frost - Senior Vice President and Chief Financial Officer

Let me think. If you make here an assumption on EPS growth, you would take the 06 and 07 grants as we laid them out, you can see the 08 grants, the magnitude there that we will be granting in February, that has changed into a three-year routable vest. So you would just take a third of that.

Michael Hecht - Banc of America Securities LLC

Yes.

Gregory A. Frost - Senior Vice President and Chief Financial Officer

And then, as Gary mentioned, the analyst grant over 4 and the INTECH grant over 10. So... and then the odds and ends kind of at the bottom. So I think the math probably works right around where you were.

Michael Hecht - Banc of America Securities LLC

Okay. That's fair. And then just last question, I may have missed this. Did you mention any thoughts on kind of tax rate next year? Is it going to be a little bit lower than we thought?

Gregory A. Frost - Senior Vice President and Chief Financial Officer

It was lower in the fourth quarter because of that true-up I mentioned earlier on the state tax side. I think you'll see us go back to statutory in 08.

Michael Hecht - Banc of America Securities LLC

Okay. That's helpful. Thanks a lot guys. Nice quarter.

Gary D. Black - Chief Executive Officer

Thank you. Next question please. Well, we have potentially one more.

Operator

Your next question comes from the line of Michael Kim with Sandler O'Neil

Michael Kim - Sandler O'Neil

Good morning. Most of my questions have already been answered, but maybe if you could just follow up in terms of giving us additional color on your plans to build out advisory, the non-U.S., the global businesses side from just adding headcount and maybe how you think about the AUM mix evolving over time?

Gary D. Black - Chief Executive Officer

Let me start with non-U.S. Our AUM international is about 7%, which is tiny compared to many of our peers who have been investing for years. It's not lost on us that most of our peers that have built outside the U.S. get a big chunk of their flows from the non-U.S. markets. We don't. So what you will see over the next couple of years is we'll continue to invest both in product and in salespeople outside the U.S. We don't give number per se, but it's a fair assumption that it will be a significant investment. And again, no change from what we've talked about in the past, but we will continue to do that even if the markets are weak here.

On the domestic advisory side, the strategic imperative for us to convert our business from being one that's more direct retail to advisory, we've been very successful with that strategy and the advisory business has just groomed over the last couple of years and particularly the last half of the year you've seen nice acceleration in flows versus where we were a year ago. So, the investment there is clearly paying off and we will continue to invest there, but we don't give specific numbers as to the rate of increase in headcount. Just that we are 50 today and we will take it up. That's about all I can say on the forecast.

Michael Kim - Sandler O'Neil

Okay. And then just in terms of performance fees, it looks like you had a pretty good step up during the quarter, maybe if you could just talk about kind of the general reception from investors in terms of the funds that do you have performance fees and then are there any plans to kind of move additional funds to more of a performance fee structure going forward?

Gary D. Black - Chief Executive Officer

I think our investors are happy. While they are playing a little bit more for fees, they are getting a lot more in performance. So I think most folks including us think that performance fees are good because you are putting your money where your mouth is and when you got a strong investment team, you've got strong performance that pays off everybody. So our investors get more and we make a little bit more. So, we're happy with the experience we have had so far on performance fees and I think our investors are happy.

Michael Kim - Sandler O'Neil

And then plans in terms of any additional performance structure?

Gary D. Black - Chief Executive Officer

I will take a pass at that.

Michael Kim - Sandler O'Neil

Okay, thanks

Gary D. Black - Chief Executive Officer

Okay. So, thank you for joining us today and we will see you next quarter.

Operator

Thank you for participating in today's Janus Capital Group fourth quarter 2007 earnings conference call. You may now disconnect.

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Source: Janus Capital Group, Inc. Q4 2007 Earnings Call Transcript
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