Janus Capital Group Management Discusses Q2 2012 Results - Earnings Call Transcript

| About: Janus Capital (JNS)

Janus Capital Group (NYSE:JNS)

Q2 2012 Earnings Call

July 26, 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

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

Michael Carrier - Deutsche Bank AG, Research Division

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

William R. Katz - Citigroup Inc, Research Division

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

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

Cynthia Mayer - BofA Merrill Lynch, Research Division

Roger A. Freeman - Barclays Capital, Research Division

Craig Siegenthaler - Crédit Suisse AG, Research Division

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

Operator

Good morning. My name is Andrea, and I will be your conference facilitator today. I would like to welcome everyone to the Janus Capital Group's Second Quarter 2012 Earnings Conference Call. [Operator Instructions] .

Before the company begins, I would like to reference their standard legal disclaimer, which also accompanies the full slide presentation located in the Investor Relations area of janus.com. Statements made in the presentation today may contain forward-looking information about management's plans, projections, expectations, strategic objectives, business prospects, anticipated financial results, anticipated results of litigation and regulatory proceedings and other similar matters. A variety of factors, many of which are beyond the company's control, affect the operations, performance, business strategy and results of Janus, and could cause actual results and experiences to differ materially from the expectations and objectives expressed in their statements. These factors include, but are not limited to, the factors described in Janus' reports filed with the SEC, which are available on their website, www.janus.com, and on the SEC's website, www.sec.gov. Investors are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date on which they are made. Janus does not undertake to update such statements to reflect the impact of circumstances or events that arise after the date these statements were made. Investors should, however, consult any further disclosures Janus may make in its reports filed with the SEC.

Thank you. Now it 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. Good morning, everyone. Welcome to the Second Quarter 2012 Earnings Presentation for Janus Capital Group.

In the second quarter of 2012, we delivered an earnings per share of $0.13 compared to $0.12 in the quarter. Assets under management were $152.4 billion, down 7.1% versus March. Total company long-term net flows were $3.9 billion out in the second quarter compared to $2.5 billion out in the first. And we maintained an operating margin of 25.3% compared to the 25.9% of the first quarter.

Let me just take a moment to tell you what I think the story of the quarter is, and then I'll turn it over to Bruce Koepfgen for some more information from him. And then, of course, as we always do, we'll take your questions.

For the story on the quarter. Our highest priority here remains investment performance for our clients. We've seen some significant improvement, particularly in our U.S. growth franchise at Janus. But clearly, we have a lot more work to do, and that remains priority 1. We are disappointed with the flows in the second quarter, but we understand them to be in the context of a very challenging external environment for equities in general, for actively managed equities in particular. With correlations returning to pretty high levels in the second quarter driven by macro risk-on, risk-off trading.

This is a tough environment for active management, and it has been for a couple of years in this dimension. With extreme market volatility and a longer-term not such great results in equity markets more broadly, a lot of investors are scared and they're either doing nothing or pulling back from equities. As a result, active equity flows in the first half of 2012 have suffered about a $37 billion withdrawal, so we continue to face a challenging environment.

In the face of that, we're moving forward with our diversification strategy, with our planned organic diversification strategy, which, over time, will leave us much less exposed to the ebbs and flows in any single asset class. Toward that end, we continue to balance -- maintaining business discipline and margins with investment in our team and in our strategic priorities. We've added significant new talent in fixed income, in international, in U.S. institutional and in innovative new product areas. But at the same time, the strategy of organic diversification takes more time than we would like. We're on the right path and we are making progress, but these efforts are too new and, at this point, too small to drive dramatic changes in the flows and the results.

Our balanced business discipline maintained through this process has allowed us to control and reduce operating expenses $8 million compared to the last quarter. We've maintained a 25%-plus operating margin, and we've delivered in this quarter $71 million of cash flow from operations.

Today, what we're seeing from our clients, from advisors, from institutions both in the U.S. and non-U.S. is they are risk-averse. There's strong demand for fixed income and there is -- that creates a very positive trend for our fixed income business. However, we're also challenged by the fact that many clients, particularly institutional clients, are shifting away from actively managed U.S. equities. This creates particular challenges for our INTECH subsidiary.

Many retail and institutional clients are also frozen. They're making no new investment decisions about hiring new managers in the face of fear and uncertainty. Over time, we are very confident their needs will drive them back into equities, where we hope to be well-positioned to help them through our traditional offerings, as well as through our very strong range of more defensive equity offerings. For instance, Perkins, their entire approach is defensive value. Janus has a very strong protected series, offering INTECH as excellent low volatility offerings that should prove very useful to clients as they reenter equity and risk assets more generally. But we're not at that point. Clearly, that hasn't happened yet in the broader flow patterns that we're seeing.

So we're on the right path. We have to be tough in the face of this challenging external environment. So we have to continue to work on improving our investment performance as our top priority. Our improvement in the numbers always takes longer than we want, but we remain confident we're on the right strategic path.

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

Bruce Lewis Koepfgen

Good morning, everyone. Second quarter results are defined by 4 principal items: A decline in net revenue attributable to weak markets; an increase in negative performance fees and net outflows; a corresponding reduction in operating expenses; relatively stable margins and continued improvement in the balance sheet.

Starting on Slide 4. As Dick mentioned, earnings per share for the second quarter were $0.13 compared to $0.12 in the first quarter and $0.23 a year ago. Second quarter average AUM of $155 billion declined 2%, driven by market weakness and net outflows. Revenue of $206 million declined moderately due to the decline in average assets and an increase in negative mutual fund performance fees. Operating expenses were $153.9 million, $8 million lower than the prior quarter due to lower compensation expenses. Operating income were $52.1 million, declined $4.4 million as lower revenue was not fully offset by lower operating expenses. Finally, our operating margin was 25.3% versus 25.9% in the first quarter.

Slide 5 speaks to investment performance. On a complex-wide basis, 1-year performance metrics improved slightly with 48% of mutual fund assets outperforming the majority of Lipper peers compared to 46% of assets in the first quarter. However, it's important to note that this metric has improved substantially from a year ago when only 16% of complex-wide assets were outperforming a majority of their peers. At the same time, several of our larger funds continue to underperform on a 1- and 3-year basis. As Dick mentioned, improving this performance is our #1 priority.

Fixed income performance continues to be very strong, with 100% of assets outperforming their Lipper categories on a 1-, 3- and 5-year basis. INTECH is putting up solid long-term performance, with 79% and 75% of strategies beating their respective benchmarks over the 3- and 5-year time periods.

Based on feedback that we've received from some of you during the quarter, we've added a slide to the Appendix that provides to the historical performance for INTECH using 3-year track record across all strategies. This slide illustrates the fact that over the last 25 years, INTECH's strategies have been able to successfully outperform their respective benchmarks 71% of the time, net of fees.

In addition, INTECH recently celebrated its 25th anniversary, and I want to recognize the excellent risk-adjusted returns they have delivered for clients over that time. Their older strategy, the U.S. Enhanced Plus strategy, which was launched in July of 1987, has provided an annualized excess return of 1.07% above its benchmark net of [indiscernible]. On a complex-wide basis, 40% of our funds had a 4- or 5-star rating at June 30 compared to 32.5% for the industry.

Slide 6 looks at flows. Total company long-term net outflows of $3.9 billion declined $1.4 billion compared to the prior quarter, driven by higher net outflows and fundamental and mathematical equity strategies. Fundamental equity posted second quarter net outflows of $2.5 billion versus $1.9 billion on the first quarter. The decline was driven primarily by a seasonal slowdown in gross sales, which declined 19% compared to the first quarter.

In addition, fundamental equity flows continue to be challenged by the uncertainty in the markets, which is driving investors to fixed income and passive strategies. Our mathematical equity strategies had net outflows of $2.5 billion compared to $1.8 billion in the first quarter, driven by an increase in redemptions.

As we have said previously, the institutional business can be quite lumpy, and in the second quarter, we had a sizable mandate loss from a non-U.S. client who was reallocating assets away from U.S. equity, which accounted for the full increase in redemptions. INTECH, along with many of its large-cap and mathematical quantitative peers, continues to experience an environment with limited demand as the outlook remains tempered by secular trends away from active U.S. equity.

In our fixed income business, net sales remained positive for the 14th consecutive quarter at $1.1 billion. We remain optimistic about the prospects for this business. The portfolios are performing extremely well, and we continue to be well-received by our clients.

Turning to revenue and performance fees. Our total revenue declined by 6% in the quarter due to lower average assets and an increase in negative performance fees. Performance fees in our mutual funds were negative $23 million for the quarter. The change was the result of several funds rolling off periods of relatively strong performance from 2009. At the current level, performance fees are near their mathematical limit and cannot decline materially over the coming quarters. However, due to the 3-year nature of the calculation, renewed positive performance will take time to offset accumulated underperformance.

Slide 8 details operating expenses. Second quarter operating expenses decreased $8 million, mostly the result of lower compensation expense. Employee compensation and benefits declined $5.4 million, primarily due to lower variable compensation. The compensation to revenue ratio was approximately 32% this quarter, which is within the range we discussed last quarter. All things being equal, this continues to be a reasonable range to apply going forward.

Long-term incentive compensation decreased $4.4 million for 2 reasons. First, you will recall during the first quarter, we made an adjustment to the LTI forfeiture estimates resulting in $2.1 million of higher expense, which we did not expect to repeat in the second quarter. Second, we mark-to-market our mutual funds share awards and Perkins SPIs, which accounted for the remainder of the quarter change.

Our combined marketing advertising and G&A lines were $2.8 million higher compared to the prior quarter. This increase was in line with our expectations and comments made on the first quarter call.

As a management team, we remain vigilant on our discretionary expenditures, but we continue to be careful not to deprive the business of the resources necessary to achieve our strategic objectives.

A look at Slide 9 highlights some of the continued improvement in the balance sheet. We continue to generate healthy cash flow, with $71 million of cash flow from operations driving a 21% increase in cash and equivalents. As we have often mentioned in the past, we remain committed to maintaining a strong balance sheet. We believe a strong balance sheet is a precondition to our long-term success. It protects our interest, the interest of our clients, our employees and our firm.

So in summary, delivering strong investment returns for our clients is our highest priority. While our investment performance in 2012 has improved, there's still work to be done.

Given the current environment, management remains committed to balancing financial discipline with investments for our strategic development. As we expected, in the first half of 2012, we experienced significant impact from negative performance fees. However, we continue to keep a close eye on discretionary expenses and the variable nature of our business model is designed to respond to market conditions.

Through the first half of 2012, we have reduced discretionary expenses by 13% compared to the same period a year ago, and the cash flow generation of our business continues to be quite strong.

Lastly, we are focused on strengthening the core of our company, while intelligently diversifying the business. The full benefit of our strategic investments will take time to develop, but we are seeing signs of success today, particularly on our fixed income business, which continues to generate strong flows.

That's all I have, and we'll turn it back to the operator for questions. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] We'll go first to Daniel Fannon with Jefferies.

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

I guess to start, in thinking about the comp accruals in this year, are you assuming any improvement in performance or adjustment to kind of the negative performance? I think you said in your comments that they're likely not going to move given the kind of 3-year kind of roll off, but just curious as about how you're thinking about the year and kind of on the accrual basis.

Bruce Lewis Koepfgen

I think the accrual number that we cited is a reasonable guidepost. But just recall that our compensation plan is a profits-based plan, and it will move with the profits of the business.

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

Okay. And then I guess on -- one more on performance fees. And just thinking about the year and the offset we might see in the fourth quarter, potentially from INTECH, I guess if you think about where they sit today from a relative performance perspective maybe versus where we were a year ago, is it reasonable to assume some positive contribution as we go into kind of the fourth quarter?

Bruce Lewis Koepfgen

Yes, it is.

Operator

Our next question will come from Michael Carrier with Deutsche Bank.

Michael Carrier - Deutsche Bank AG, Research Division

Just one question, maybe just a clarification. When you mentioned the one redemption, I think you mentioned non-U.S. client, but I didn't catch like what bucket that was, whether it was on the quant side or the fundamental equity.

Bruce Lewis Koepfgen

That was an INTECH flow.

Michael Carrier - Deutsche Bank AG, Research Division

It was INTECH? Okay. And then maybe the follow-up, just on expenses and maybe taxes. So you mentioned your discretionary down quite a bit. When you look at the outlook on the investment spend and what the plan is in terms of diversifying your distribution products, like how much have you had to pull back or haven't you? And then just going forward, when you look at the discretionary items, is there more wiggle room if the challenges continue? And then just on the tax rate, just any clarification. It looks like it came in lower than expected, so just what drove it and then just the outlook on that front.

Bruce Lewis Koepfgen

Right. Well, let me start with the tax rate. That was really an adjustment that was due to the expiration of statute of limitations really on some previous reserves, so that was just a $2.4 million reversal that took place this quarter, which have the effect of lowering the tax rate. But our expectation is that this 37.4 going forward is the right number, 37.25 is right going forward. Do you want to speak...

Richard Mac Coy Weil

On your first 2 questions, which I understand to be how much have we had to pull back relative to what you would like to do in terms of diversifying the firm under financial pressure, and then you may have to help me with the other part of that. We are -- we strongly believe that the way forward -- the right way forward for this company is as we've described in our strategic plan. That does require investment, particularly in terms of some new talent. As I mentioned in my comments, we have added -- gosh, over my tenure here, over my couple of years plus, we've added probably a dozen new people to the fixed income business, including some more recently. We continue to -- we have added and continue to add strength to our non-U.S. business. We've added some people who are very talented to our U.S. institutional business, so we are making the investments that we believe are appropriate and necessary to push forward our strategic plan and we're not sacrificing those investments. We're doing what we think we should. That said, we believe in a wire brush theory. I mean, all these things need to be brushed pretty hard to make sure that they're as efficient and lean and as effective as they can be. And through that process, we've managed to achieve margin and $71 million of cash flow from operations we mentioned earlier. So there is a balance. But in that balance, we don't sacrifice what we believe to be strategically necessary. I hope that responds to your question.

Michael Carrier - Deutsche Bank AG, Research Division

Yes, that is helpful.

Operator

Next, we'll go to Michael Kim with Sandler O'Neill.

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

First, just curious where you see the biggest flow opportunities maybe in the near-term. Clearly the fixed income business continues to gain traction and you're working on broadening out your distribution footprint. But still seems like fixed income is relatively small piece of your overall AUM, and it seems like maybe it's early days here for your distribution efforts. So just curious where you think there are some pockets of growth that you see developing maybe as you look across your fundamental and quantitative equity strategies.

Richard Mac Coy Weil

Sure. Thank you for your good question. You're right. Obviously the first thing to mention is the excellent fixed income business we have which crossed $25 billion in assets under management, and we expect it to continue to grow very well going forward. The other opportunities for us, we need to improve some of these negative numbers that have shown up at INTECH and in our core equity franchise, and that's the combination of continuing to improve investment performance, and it's also obviously against the backdrop of what happens in global investor appetite for equities. And so it's hard to predict. And as we said, particularly the institutional part of that business is lumpy, and therefore, it's hard to extrapolate from any given quarter's numbers through to the next one. And that is our main focus, make sure that we're building the right relationships with the clients, that we're improving the investment performance and then we're going to have to endure the challenging external environment until it gets a little better.

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

Okay. And then maybe just to follow up on margins. As the mix of your assets maybe continues to kind of drift away from retail equities in favor of fixed income, and you talked about continuing to spend to build out the non-U.S. distribution, the institutional business, how does that sort of play out in terms of the trajectory for margins? Would you maybe expect margins to be under some pressure as the franchise evolves, if you will, and then sort of rebuild as those newer businesses start to scale over time?

Richard Mac Coy Weil

I think that that's exactly how we think about it.

Operator

Next, we'll go to Bill Katz with Citigroup.

William R. Katz - Citigroup Inc, Research Division

You mentioned that you'd taken some measures to improve performance, so I was just kind of curious if you could flesh that out.

Richard Mac Coy Weil

Yes, we've talked about this some in prior calls. We've taken a look at the process of particularly the Janus investment team here in Denver. And Jonathan Coleman and the equity investment team here has -- they've concluded that a certain amount of process change was appropriate and they've undertaken that. They've shifted some responsibilities around amongst analyst and around a little bit less amongst portfolio managers. But these sorts of changes we think are productive and lead to really increased alignment and focus across the team and an increased clarity of mission for the participants in the team. We think those things are having a very positive effect already, but it takes time for the full effect of that to be seen. But we're confident that some of those changes have been contributors to the improved performance in the U.S. domestic growth part of our business. I can't say the same sorts of things at Perkins and INTECH. INTECH's process continues to deliver pretty darn good results over a long, long period of time as Bruce mentions. And in particular, they have excellent risk control. So when they're on the downside of the distribution, it's modest and they tend to come back quickly. So they offer a really nice long-term alpha with good risk control and liquidity, which we believe over time will be recognized for its high-value to clients. And then Perkins has been doing their defensive value investing their way for 30 years now, and they're good at it. But they're going through a period of painful underperformance, particularly in the mid-cap product. And that doesn't involve any investment changes. They're sticking to their knitting. And we're very confident that over time that will produce the right outcomes for clients but we're going through a challenging period right now. But our response to that is not Perkins hasn't been making any changes to their investment process at all.

William R. Katz - Citigroup Inc, Research Division

So a follow-up question is sort of going back to your comments -- not the first time you've said it but just want to get an update. In terms of the secular decline in asset equities, where are the volumes going?

Richard Mac Coy Weil

Well, I mentioned that in the first half of the year, active equity saw -- got to go back and get the number right -- $37 billion in net outflows in the first half of the year. I think the passive side had more than offsetting inflows of $57 billion during the same period. So clearly, a lot of the equity money is going to passes. As we've mentioned since 2008, you go through this period of pretty high correlations and macro driven risk on/risk off trading. That's not a particularly favorable environment not only for Janus but for all active equity managers. That gives passive, I think, a competitive advantage relative to active, but I don't think will be sustained through longer periods of time when we expect a little bit of a rebalancing of the boat in favor of actives over time. But clearly, passive's going to be a tough competitor that's here to stay, and that's going to be an ongoing part of the industry that we have to deal with. We take comfort from the fact that we know that people, generally in the United States and more broadly around the world, are structurally underinvested in equities. With fixed income yields so low, it's simply impossible for people to meet their investment goals and needs investing in low returning fixed income opportunities over the long haul. You can choose your expert and choose your number. But if retirement plan obligations grow at something like 7%-ish, you just can't get there reliably over the long period of time by investing in fixed income only. Clearly, fixed income's going to have a very important part of the story, but people are structurally underinvested in equities. They will come back, and it's our job to be ready to be a good partner for them when they do.

Operator

Next we'll go to Ken Worthington with JPMorgan.

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

You dip your toe back into stock buybacks. How comfortable are you to ramp this up to a more significant level given the low price of your stock and the good cash flow, should market conditions really remain as they are today?

Richard Mac Coy Weil

I'm hesitating in my answer to you, Ken, because I'm thinking about what is the proper description of market conditions remaining as they are today. I don't quite know how to characterize that. But let me take a shot at answering your question. As we said, we generated $71 million of cash flow from operations in the quarter. We are clearly fans of a strong balance sheet but, of course, there are natural limits to how far you take that. We have gone through, in some detail, with you our analysis on prior calls of how we think about using that cash. And clearly, once you get through your strategic needs, you look very hard at the smart ways to return that capital to shareholders, the environment causes us to be more conservative, which means we would -- we believe we need a higher, stronger balance sheet than you might otherwise need in a less volatile circumstance. So the effect of the external environment is to make us more conservative, and the effect of that is to cause us to want to have a stronger balance sheet than we might otherwise need. That said, over time, we'll clearly think hard with our board about appropriate ways to return that capital to shareholders. We take that very seriously.

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

Great. And I'm going to try to be very balanced here. In terms of performance, Perkins' mid-cap value and overseas are having a rough go of it. Maybe talk about what's weighing them down. And then on the other side, Balanced and then 2040 are doing fabulous, maybe what's helping them out there.

Richard Mac Coy Weil

Yes, our posture on this call is not to talk too much about individual products. Part of that is we think you can get trapped in a huge amount of very detailed conversation, which may not be appropriate for a setting like this. And part of it is also candidly influenced by regulatory stuff where, if you start talking about individual products...

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

Can I redefine my question then, to make it maybe easier?

Richard Mac Coy Weil

Sure.

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

Where things are going well because there's a number of products are going well besides the ones I mentioned. What's helping you out? And then where things are challenging because there's a bunch that are challenged, maybe what's hurting there, so to make it more vague?

Richard Mac Coy Weil

Sure. Well, obviously we don't want to disrespect the excellent work done by some folks like Ron Sachs and others in the Janus Denver platform. Some of this is just they are very good portfolio managers who went through a tough period and are coming back and delivering better results as we expected. Some of it, as I described, is I think there have been process changes that have enhanced alignment and focused better and made the team more effective, and I think that has been rewarding. And some of it candidly was we had a very positive and favorable environment in the first quarter for active equity investing, and we made the most of that. So I think that explains some of the good news. On some of the things that are continuing to have trouble, the stories are really idiosyncratic. I mean, if you're a Perkins value process that doesn't typically invest a lot in utilities, and utilities ends up being the best investment sector, you're going to miss something. That doesn't mean your process is broken. It's been proven to be effective over a long period of time. But at that point in the cycle, you're clearly going to experience some pain. So the stories really get idiosyncratic. On the international Janus franchise, the overseas part of it, we haven't done as well recently as we'd like and expect. We have a terrific investor, maybe our most talented investor in the whole firm in managing that product, but we've been going through a tough period. So we got to be honest about that and focus with him on supporting him and getting him through that. I think there is no systematic broader lesson around that, that we've drawn at this time. We haven't made any changes in that part of the process. But we continue to evaluate it on a daily basis and nobody is satisfied with these returns.

Operator

We'll go next to Marc Irizarry with Goldman Sachs.

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

Just withstanding your comments, I guess, you made about adding some talent, you've add a lot of talent on the comp side. How should we think about the comp ratio going forward? I think you got it maybe to 30, 33. Previously, what sort of the range -- what would be the guidance for the year for the comp ratio?

Bruce Lewis Koepfgen

Marc, I think we're comfortable with where it is right now. I mean, it's in the range that we think it's probably normal, so I think you can comfortably use that for the balance of the year.

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

Okay, great. And then just performance fee outlook, sounds like your comments suggest that maybe this is sort of the level that you'd sort of expect when you're thinking about the comp ratio going forward, but maybe there's not a lot more downside to performance fees here but that -- it might take a little longer to roll off some of the performance fee reversals?

Bruce Lewis Koepfgen

I actually think that's a pretty good summary. I mean, the math of the calculation, as I said, at about its maximum downside. But the nature of the calculation being a 3-year look back, it forces a good bit of time to pass before we can make meaningful ones.

Operator

And next, we'll hear from Cynthia Mayer with Bank of America Merrill Lynch.

Cynthia Mayer - BofA Merrill Lynch, Research Division

Just maybe looking at Page 6, I noticed that the sales rate's higher for fixed income than for most products, which make sense, I guess, given its growing area smaller base. But the redemption rate is also higher and it's been ticking up. Is that a function of just smaller base or a function of short-term bonds being less sticky or something else? Are you at all concerned that the money coming in is less sticky in this?

Richard Mac Coy Weil

I don't think we've drawn a conclusion that there's been a fundamental change in the stickiness of the money. I think if you look more broadly at the industry, in the quarter, fixed income saw an uptick in redemptions more broadly, and we clearly -- we participate in that. I do think you're right that a substantial part of our franchise is our excellent short duration product and the short-term fund is naturally going to have less stickiness than some other kinds of product, so that does affect the overall redemption rates. But we haven't noticed a real change in behaviors other than I think we participated in a broader industry trend at that line.

Cynthia Mayer - BofA Merrill Lynch, Research Division

Okay. And then on the seed investments, I'm wondering since you're being conservative on the buybacks, is that something you'd be interested in adding to? And can you just maybe remind us of what the asset composition is there?

Richard Mac Coy Weil

Yes, Bruce, the exact number of the seed investments?

Bruce Lewis Koepfgen

About $220 million, $218 million, something like that works [indiscernible].

Richard Mac Coy Weil

Apologies, we clearly don't have that precise number right in front of us. But we have made, I think, very substantial seed investments. I don't think we're going to seriously increase that number from here, but we always look at reallocating that number to more efficient uses. And so we'll be shifting over time seed capital out of things that have been seeded into newer things and that sort of redistribution. But I wouldn't expect the aggregate number of seed capital to go up a lot from here.

Bruce Lewis Koepfgen

The $247 million is just financials, so this is the market value of a full seed position.

Operator

And next, we'll go to Roger Freeman with Barclays.

Roger A. Freeman - Barclays Capital, Research Division

I guess within fixed income, do you think at the level of $25 billion or so in AUM you're at, that you're getting sort of full operating leverage, or where ultimately does that need to be? In other words, are the margin in that business comparable or still below the rest of the business?

Richard Mac Coy Weil

I think that we -- it's a hard question to answer for the following reason. As you experience success and grow, you tend to reinvest in the franchise and you tend potentially to expand the franchise. And so the cost base assumptions that you use for determining forward-looking margin curve, if you will, the development of the future margin, are affected by those assumptions and those things aren't known perfectly. Clearly, a $25 billion we're entering a zone where we'll have increasing operating leverage out of future growth in that business. But where it sort of reaches full mature margin again is -- involves some guesstimation around how much more investment you might make to get there. I think it is clear that it is increasingly profitable in growth from here for us. And I think over a fully mature business can deliver margins that are in line with our total company margins, clearly. And so we don't see that mix as negative over time. We see that as a terrific business that we're very proud of. But at its smaller size, clearly, the margin has not been at that level. So we're coming up the curve, and exactly how fast we do depends on future investment decisions. It's hard to be precise.

Roger A. Freeman - Barclays Capital, Research Division

That makes a lot of sense why you're in growth. And I guess to that point, you had mentioned continued adds around your new initiatives. We also bring international and institutional into the fray there -- that you've had some recent hires. I mean, across those 3 initiatives, how many new professionals came on during the past quarter?

Richard Mac Coy Weil

One or 2 in U.S. institutional, a couple in -- a few offshore, 3 or 4 offshore, and 1 or 2 in fixed income, and those are not exactly precisely but they're right...

Roger A. Freeman - Barclays Capital, Research Division

No, that's fine. I just need -- yes, just the order of magnitude.

Richard Mac Coy Weil

We have -- I think in the -- let me give you first half numbers, if I can break it out of the quarter. In the non-U.S. side for the first half, we hired 10 sales professionals. And in the U.S. institutional, we hired a client strategist and a head of U.S. Consultant Relations. In our alternative sort of new innovative product area, we hired Andrew Weisman. He's putting together a team as we speak. And we've hired a few folks in fixed income.

Operator

Next we'll hear from Craig Siegenthaler with Crédit Suisse.

Richard Mac Coy Weil

I'm sorry, on the last question. My team is waving me. Those were gross adds. In terms of net, it was -- we -- that didn't represent a net increase. That was a redistribution of resources, so those were gross additions to those important strategic areas, but it doesn't represent a net headcount increase. I'm sorry, I stepped on the next questioner.

Craig Siegenthaler - Crédit Suisse AG, Research Division

Craig Siegenthaler, Crédit Suisse. Most of my questions were answered, but I had a kind of a topical question. I want to follow up to one of your earlier responses regarding kind of equities, how it's structurally underinvested, retirees won't have enough for retirement, higher returns, et cetera. I'm wondering when do you think this equity -- the equity flows will recover? And also, why would it potentially recover before you have a higher move in interest rates which could trigger negative returns in bonds, at the same time, maybe a positive returns in equity? So when will this occur and why would it actually occur before the event of higher rates?

Richard Mac Coy Weil

Yes, the simple answer is I can speculate with the best of them on the answer to that, but we don't know. The slightly more complicated answer is modestly higher rates may be good for equities and dramatically higher rates may be bad for equities in which direction the rates go and how fast. I think there is cost for concern that rates are going to stay down here for a pretty extended period of time. So in the short-term, my personal and our business planning expectation is really that rates stay pretty low for a short to medium period of time, and investors have to grapple with how do I meet my needs in the face of pretty darn low fixed income returns and I've got to choose some risk assets in order to deliver whatever my 7%-ish kind of target might be. I think that's the main driver. But I can't -- I wouldn't be sitting in this seat if I knew for sure exactly when people were going to be buying a lot more equities. Seemed to be happening first thing this morning, though.

Craig Siegenthaler - Crédit Suisse AG, Research Division

Sure. Maybe just a follow-up on -- over at INTECH. If I dissect kind of sales versus redemptions, can you talk about how RFP activities been turning specifically in INTECH versus kind of your outlook for redemptions here? I'm just looking also Slide 6, which is a good reference piece here.

Richard Mac Coy Weil

Yes, we don't make public INTECH's RFP flows, so I can't give you that. I can't -- what I can say is clearly that the institutional investing population has not turned back towards U.S. equities and actively manage U.S. equities in a significant way. Some of that is they've gotten more liability focused and naturally have lengthen their fixed incomes. And some of that is they've just been burned and haven't loved U.S. equities a lot. I think there's a great investment opportunity, which results from that in sort of a contrarian way, but it hasn't happened yet. And predicting when these folks are going to go back into the water is just something I can't do for you.

Operator

We have time for one last question. That question will come from Robert Lee with KBW.

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

I'm curious, is it possible to kind of size the percentage of assets and maybe specifically focusing a bit on the overseas fund or mid-cap value? The percentage of assets that are in kind of more sub-advised business, whether it's 401(k) platforms and whatnot? I mean kind of with the thinking that given some of the challenging 3-year numbers that maybe those assets are more susceptible to starting to lose some space in some platforms.

Richard Mac Coy Weil

Yes, I think it's a good question. We don't have that data for you today, so I'm afraid I can't give you that sort of granularity about the mix of business in those 2 funds, so I apologize. I can understand why you're asking, but I just don't have that data for you.

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

Okay. And maybe just another question. If I look across your product line, I mean, you do have some products, I think, conservative allocation fund where I think performance has been relatively good. A couple of products and places where you have seen better flows through the industry and at least within those maybe doesn't seem like you've been participating as much. I mean, what do you ascribe that to? Is it kind of just not people don't associate the Janus brand with some of those products, or is there anything you could do to kind of pump up sales of that? Is really all the focus right now on kind of the fixed income that's where the momentum is?

Richard Mac Coy Weil

Some of your language was a little hard for me to understand, but if you narrow your question to focusing around asset allocation products, we do have some good ones. I will say that most of the ones that have sold well in the marketplace are driven by shops that have strong macroeconomic forecasting bias, so for instance, my old shop. And that sort of brand reputation, I think, helped -- helps drive some of those asset allocation products. But we have here an excellent, more traditional balance fund, which accomplishes a lot of the same mission. It's been gathering assets, and it's a really just a very good cooperation between our Janus equity side and our Janus fixed income side. And we do believe that we have enhanced opportunities going forward in asset allocation space. We think that's something also that probably Andrew Weisman can help us with. We're hard at work in those areas, but we're not close to unveiling a change that will make a difference that I will highlight on a call like this.

Thank you, everybody, for your time and attention today. We appreciate it, and we'll talk to you next quarter.

Operator

And once again ladies and gentlemen, this concludes today's conference call. Thank you for attending.

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