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Janus Capital Group, Inc. (NYSE:JNS)

Q2 FY08 Earnings Call

July 24, 2008, 10:00 AM ET

Executives

Gary Black - CEO

Dan P. Charles - Sr. VP and Managing Director of JanusINTECH Institutional

Gregory A. Frost - EVP and CFO

Analysts

Mike Carrier - UBS

Bill Katz - Buckingham Research Group

Ken Worthington - J.P. Morgan

Michael Kim - Sandler O'Neill & Partner

Craig Seigenthaler - Credit Suisse

Marc S. Irizarry - Goldman Sachs& Co

Cynthia Mayer - Merrill Lynch

Michael Hecht - Banc of America Securities LLC

Operator

Good morning. My name is Anita and I will be your conference facilitator today. I would like to welcome everyone to the Janus Capital Group Second Quarter 2008 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. [Operator Instructions].

Before the company begins, I would like to reference their standard legal disclaimer, which also accompanies the 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 plan, projections, expectation, strategic objectives, business prospects, anticipated financial results, anticipated result of litigation and regulatory proceedings and other similar matters. A variety of factors, many of which are beyond the company's control, affect the operation, performance, business strategy and results of Janus and could cause actual results and experiences to differ materially from the expectations and objectives expressed in those 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 Gary Black, Chief Executive Officer of Janus Capital Group. Mr. Black, you may begin your conference.

Gary Black - Chief Executive Officer

Good morning everyone and welcome to Janus' Second Quarter Earnings Call. With me today are Greg Frost, our Chief Financial Officer and Dan Charles, who is head of our Institutional business.

As you can see from slide two, Janus had a fairly decent quarter. Earning per share was $0.34 excluding a one-time tax benefit of $0.06 a share due to a reduction in the Colorado tax rate. Earnings per share was up sharply from a year ago and versus first quarter. Long-term flows were positive $5 billion. This was the highest quarterly flows we have had in almost eight years. It reflects continued strong investment performance across the board, combined with the benefits of building out our global advisory business over the past few years.

Both Janus at $4.8 billion positive, Janus ex-INTECH at $4.8 billion positive and INTECH at $0.2 billion positive were positive in the quarter. AUM quarter-over-quarter was up about 2%. Investment performance remains very strong with 78%, 81%, 83% of funds leading peers over one, three and five years respectively. These numbers remain near the very top of the industry.

During the quarter, we announced plans to increase our stake in Perkins, Wolf, which is our Chicago-based value franchise from 30% to 80%. This allows us to significantly broaden our value platform. We will be launching a large cap value portfolio in some form in the fourth quarter, which we think will do quite well in this market.

Lastly, we purchased $75 million of Janus stock in the next quarter. That reduced our shares outstanding by another 1.3%.

Tuning to slide 3. As I mentioned, total company long-term flows were $5 billion. This is the highest since third quarter of 2000. This translates to an annual organic rate of about 11%. INTECH flows, you can see in the second chart, bounced back. It turned in a positive quarter, driven by a large separate account mandate that was awarded to us by a highly regarded well known institutional plan. INTECH redemptions, while better quarter-to-quarter and year-over-year, continue to reflect the shift among U.S. plans away from large cap long only equity to alternatives and to global equities.

INTECH performance, I will talk more about that in a minute, bounced back nicely in the quarter. Looking at the Janus ex-INTECH flows, they were $4.8 billion, which is an organic growth rate. If you annualized it, it was about 17%. We continue to gain market share in the U.S. mutual fund space. Over half of our funds posted positive flows in the second quarter.

As I mentioned upfront, the Janus ex-INTECH number, which is $4.8 billion, it had about $0.9 billion of Perkins flows. Perkins is gaining share from some of the more well known deep value managers who have had not so great investment performance of late.

Turning to side 4, the retail intermediary business continues to march higher. Quarterly flows were up about 37% from this time last year. Those flows are actually more than double what they were just two years ago. This was led by the strong showing in the broker dealer segment, which executed over $2 billion of net flows in the quarter. Our financial institution segment did over $1 billion in flows during the quarter. Redemptions were lower across the board in the mutual intermediary space.

On the institutional side, flows were breakeven in the quarter, again, largely driven by a single separate account mandate that we won. I think Dan will talk more about what's driving the institutional business. But the factors that have caused INTECH flows to struggle over the past several quarters, there is a few. We have talked about them in the past, but it's a continuing shift by plan sponsors away from long only equities toward alternatives in global. Two, I think last year's short-term under performance has obviously led to some redemptions. And third, we continue to build out our institutional sales team and we're not yet fully staffed.

Janus ex-INTECH business within institutional continues to get traction. Second quarter flows were positive $300 million versus $800 million outflows in the first quarter. The one not funded pipeline in the institutional business remains barely robust.

The international slide, that last chart, the flows of $1.5 billion were the highest we've had in least eight years. Redemptions, while still high, have come down sharply.

Turning to slide 5, as you can see at the top left, negative returns continued across most of the key indices in the second quarter. Year-to-date through June 30th, both U.S. and most international indices were down in excess of 10%. Looking over the top right chart, equity flows remained positive in the second quarter, but this was driven by a strong April and May. My guess is industry close for July will be negative given the sharp decline we have seen in global stock markets in June.

And at the bottom left, growth investing and [ph] deep value investing as the full impact of the credit crisis emerged with financials, which is a staple of most value portfolios not doing well. And then over at the bottom right, growth managers continue to take share from value managers, reflecting the growth, they have done better from a performance standpoint than value.

Normally, we'll talk about our internal market share. Let me just give you the numbers. For the 12-month period ending June 30th, Janus ranked 13th in the industry in net flows. This is versus 40th during the same period last year. And if you again look at the retail intermediary business, we see that the market share data, our organic growth rate in that segment, in that market for the same trailing 12-month period was about 7%. So looking over [ph] the last 12 months, the organic growth about 7%. And that compares to the industry growth rate of about 1% to 2%.

Turning to slide 6. So what's driving our strong organic growth? Obviously, our exceptional performance. Janus mutual funds are outperforming their peers over all periods.

Some highlights. On the Janus-managed equity side, 80%, 86% and 85% of leading peers over one, three and five years respectively. 79% of our funds are rated 4 and 5 star by Morningstar. Among the top 20 asset managers by AUM, Janus ranks first over the past year, ranks third over three years, six over five years in terms of percentage funds leading peers. Importantly, 100% of our funds where there has been a PM change, whether they launched in the last two years, 100% are beating their peers as of June 30th. INTECH's performance bounced back nicely in the second quarter. Long-term performance remained strong. Over the past year, 92% of their strategies are ahead of the benchmarks. The five year, ten year number, you can see that the 100% peer number still continues to improve. And when you think about INTECH, the product set that has expanded pretty dramatically over the last couple of years and some of the new products that we've launched, have done quite well.

Let me just give you some examples. We launched a global product about three years ago, over the last year, of 580 basis points above its benchmark. We launched an Eastern [ph] product about a year and a half ago; that's 560 basis points above its benchmark over the past year. We launched a long short market neutral product about a year and a half ago. It's had an absolute return of 9.6% or 560 basis points above LIBOR over the last year. So I think from an INTECH standpoint, things are looking pretty good.

And then last page, which we always show on page 7, slide 7, you can see the continued strong performance graphically. And again, these are numbers that rank very near the top of the industry.

So with that, let me turn it over to Dan Charles, Head of our Institutional business.

Dan P. Charles - Senior Vice President and Managing Director of JanusINTECH Institutional

Thanks Gary. Good morning everyone. One of our corporate objectives is to continue to increase our institutional penetration. Our institutional business today is really the tale of two managers. INTECH is certainly well established in the intuitional marketplace and we are focused on building upon their long-term success.

With respect to Janus, we've evolved the business to better serve our institutional clients and we are committed to establishing Janus as a viable player in the institutional marketplace.

If you look at page 9 in the top left-hand corner, you will note that our institutional AUM has grown at a compounded annual growth rate of nearly 18% over the past 3.5 years. Currently, our institutional AUM makes up approximately 33% of Janus Capital Group's assets. In terms of our AUM by subchannel, the business continues to be well diversified among the Taft-Hartley marketplace, public funds, corporations, endowments and foundations in addition to our institutional cash management business.

Looking at flows for the channel, a couple of points to highlight. As we have said in the past, the growth replacement cycle and above targeted excess returns at INTECH drove significant net inflows from 2004 to 2006 and really unprecedented in many ways.

More recently, we have seen three trends emerging in the business which have impacted our first half 2008 long-term net flows. Number one, we continue to see a secular change away from long only equities as institutional investors continue to look at hedge funds, alternative investments including hedge funds, real estate and private equity. Secondly, although INTECH performance in the second quarter was encouraging, recent short-term performance in the growth strategies has been somewhat challenging and has led to some redemptions. But as Gary mentioned, we're encouraged by what we saw in the second quarter and we are even more encouraged based on the long-term results. Thirdly, we're also working to build out our sales team and make certain that we're fully staffed in the marketplace. We're also encouraged to see that our Janus-managed strategies are continuing to gain traction as we did have $300 million of positive net flows in the second quarter.

What I thought I would do next, turning your attention to page 10, is just give you a quick overview of what we're doing to position Janus in the institutional marketplace. And then we'll spend some time talking about how we are going to position INTECH as we move forward.

To further position Janus as a player in the institutional marketplace, we are going to continue to focus on the largest institutional investors as defined by P&I's Top 600. We are going to continue to proactively seek opportunities to expand relationships with existing clients wherever possible. We are going to continue to differentiate and position our existing products. As you will see, on the right hand side on the table, Janus-managed strategies have solid long-term performance track records.

Additionally, what's encouraging to see is that we are seeing strong performance not only from our individually managed portfolios, but also from our team managed and co managed strategies as well. And then finally, we will continue to strategically launch new products to meet the demands of the institutional marketplace.

In terms of challenges, the biggest challenge that we have to overcome at Janus in the institutional marketplace I believe is overcoming the legacy perception of Janus as a retail-centric manager. But on that point, we believe that today, we have got the right products, we have got the right process and the right people to be successful.

From a people standpoint, we continue to invest in the resources to better serve our clients, giving us the opportunity to expand existing relationships. From a process standpoint, we believe we've made it more transparent and demonstrated that it is in fact repeatable. And from a product standpoint, the strategies are better positioned to meet clients' needs and seem to be performing very well. So we are encouraged by that.

Turning our attention to INTECH. The job there, as I mentioned at the outset, is really to continue to build upon INTECH's success. We continue to focus on increasing penetration with institutional investors with our enhanced core and grow strategies, which is where the majority of INTECH's assets resides today. But in addition, we are also positioning INTECH as a provider of risk managed strategies. For example, our risk managed large cap value strategy has a very strong long-term track record and we believe is well positioned to gain share as many fundamental value managers have generally underperformed in a difficult capital market environment.

As I mentioned before, with some clients moving away from long only equities into alternative strategies, we continue to look for ways to leverage some of our recently launched strategies. For example, our global core strategy just hit its three year number, we've launched an international equity strategy. We continue to see demand in those areas. We have also launched a suite of 130/30 strategies as well as a market neutral strategy as Gary mentioned.

In terms of addressing challenges, while INTECH's recent short-term under performance has been somewhat challenging, we are encouraged that 92% of the strategies are outperforming their respective benchmarks on a one year basis as of June 30th. Importantly, as you can see, by the batting average table on the right side, INTECH continues to have broad-based success across multiple disciplines.

And I am on page 11, on the right hand side, if you look at the enhanced plus strategy, you will note that that strategy's inception date was July of 1987. It's outperformed its benchmark, which, in this case is the S&P 500 74% of the time on a one year basis, 80% of the time on a three year basis and 85% of the time on a five year basis and finally, 100% of the time on a ten year basis.

Along with performance, we continue to promote a further understanding or deeper understanding of INTECH's investment process.

In closing, we believe we have positioned Janus to become a viable player in the institutional marketplace and we believe that by leveraging existing and new products at INTECH that we can continue to build upon their success.

Now I would like to turn it over to Greg Frost, our CFO to cover our financials.

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

Thanks Dan and good morning. Second quarter earnings per share as Gary mentioned of $0.40 versus $0.24 in the first quarter and $0.28 a year ago in the second quarter of '07. Included in the $0.40 is a $0.06, what I will call, a one-time tax benefit from a change in the way we calculate Colorado state taxes. The Governor signed a law which modified the impushment [ph] methodology specifically for investment companies doing business in multiple states, which gives us a benefit and really creates two things for us.

One, going forward, effective January 1, 2009, we expect to see a roughly 1% lower effective tax rate. And two, because of this lower tax rate, we need to revalue our deferred tax liabilities. And this revaluation of the deferred tax liabilities is what created the $11 million benefit that we reported in the second quarter. I'd expect to see no further impact of this in Q3 and Q4 of this year, but clearly in Q1 of '09, we should all expect to see the lower tax rate which we view as a nice positive.

Second quarter performance fees increased $6 million. This clearly was the main driver of the margin expansion we saw during the quarter. This primarily was caused by a Janus-managed separate account which reached its one year anniversary in the second quarter. And for the terms of the contract, we reported and calculated the full year's worth of performance fees in one quarter.

Going forward, this account will be calculated and recorded quarterly. So said another way, I look at it and say we had $4 million to $4.5 million of incremental revenue in the quarter that will not necessarily repeat itself in subsequent quarters.

Operating expenses of $199.1 million in the quarter, very much in line with the higher revenue and assets we saw. And we did see a slight spike up in G&A and I will... this to me is two things: one, a continued expansion internationally, which we talked about on these calls previously and also some higher litigation costs with some ongoing legal matters that the firm is facing.

Net investment gains, a swing of $12.5 million quarter-to-quarter. The $3 million that we recorded positive in second quarter is made up of $1.5 million of actually realized gains on seed capital that we redeemed and a 1.5 million of mark-to-market gain versus the entire 9.5 million mark-to-market loss in Q1.

From a capital perspective, we talk about that often on these calls. I think in this crazy market, it's probably worth repeating. From a capital perspective, we do look first to our strategic priorities and we look to invest in our business to drive shareholder value. And over the past several years, this has included distribution build outs, expansion internationally, investments in our research team and our research products under development of and launching of other new products and continued investments in our subsidiaries such as Perkins and INTECH.

Beyond these, we obviously continue to believe buybacks are an effective way to return excess cash to shareholders. But we do strive to prudently manage our capital and liquidity to provide some flexibility to weather these difficult market conditions and obviously to remain investment grade, which we are committed to.

And lastly, as with all financial firms in this market, we are trying to strike the balance between investing in the business, which frankly given our superior investment performance across all our products, Janus, Perkins and INTECH, we believe it's a great time to be investing in the business and trying to manage discretionary costs in a way that it is appropriate given the challenging market conditions.

Turning to page 14, from a Perkins perspective, Gary covered this a little bit in his opening comments. He did announce the acquisition of additional 50% to move our ownership to 80%. From a pure accounting perspective, this will move Perkins from an equity earnings affiliate up to a consolidated entity. We do provide a little bit of details on the remaining 20% which we'll obviously provide more detail as we get... as we move through the proposed process. The proposed detail also includes the grant of profit interests awards, which we believe will help retain and incentive the key employees to really grow the value platform. It's important to note that these profit interests awards will be treated as compensation expense and will be marked to market over their vesting life.

The transaction we expect to be neutral to slightly accretive in the short-term, solidly accretive in the longer term. And I think there might be a little bit of confusion about this. So I will spend a little bit of time here.

Today we record 50% of Perkins revenues through a sub-advisory agreement which will clearly move to 100% upon consolidation. I think there is some perspective that we are moving from 0 to 100, but it's only 50 to 100.

The build out of the platform will also require some level of additional resources and expenses as we build out the infrastructure to support the growth. And finally, what used to be perhaps distributed out to owners through partnership distributions in their LLC models will be replaced by more standard compensation programs. And it's important to note over all periods, we view this as solidly cash flow accretive to the business. And to me, I look at this and to me, it certifies the relationship with a firm with great investment performance and obviously a nice growth rate over the past few years. And it's an important step for Janus to ensure that we have a breadth of products available to our shareholders.

And with that, I'll turn it back to Gary to wrap up.

Gary Black - Chief Executive Officer

Thanks Greg. So in summary, I think we can... if you look at the last slide, slide 15, our relative investment performance remains quite strong despite the challenging market. And it's strong across the board, strong obviously at Janus but also with INTECH and at Perkins. The total long-term flows as we mentioned are at their highest level in nearly eight years. And while we're obviously pleased with this, it should be obvious to everyone that, as Greg said, market conditions do remain volatile. And while Janus is weathering the storms quite well given our strong performance and our ability to take market share, we are not immune to market forces.

Third point, as Dan mentioned, Janus-managed products continue to gain a lot of traction in the institutional marketplace. You saw in that one slide a very strong performance which obviously drives results in that business. Our investments in our retail intermediary business on our international channel is clearly paying off. Again, both numbers at the highest they have been on the international side in at least eight years. The intermediary side continues to just march forward.

We are executing on our strategic initiatives that we laid out early in the year. The additional 50% purchase of Perkins allows us to build out our value platform. And as Greg mentioned, current operating margin flexibility is a change from where we have been in the past. But as the market goes up or down, our economics go up and down with it. So we are really pleased with that.

With that, let me take some questions.

Question And Answer

Operator

[Operator Instructions]. Your first question comes from Michael Carrier of UBS.

Mike Carrier - UBS

Thanks guys. Just on the cash management side, you increased your stake in Perkins and then also in INTECH. In this environment, you have got a lot of the financial institutions trying to figure out how to raise capital, some of them are potentially going to put up their asset management divisions for sale. I am just trying to figure out, like when you look at your product offerings and given some of the holes in your product mix, is there any areas of opportunity that you think could potentially come up in this environment or is it more focused on organic growth and new product launches?

Gary Black - Chief Executive Officer

Let me take that. It's Gary. I think historically, Janus has always been a, let's build it ourselves as opposed to go out and buy stuff. And obviously with INTECH and Perkins, we knew those businesses quite well. We knew the management teams, we understood the investment process. And so for us to take advantage of the very close relationship we've had with those folks, that's why we made the decision to go up [ph]. We are very confident about the investment processes. It's increased our stakes in those subsidiaries.

I think looking forward, we are comfortable with our core competencies today. I think where we are growing our business is in the alternative space. But even there, I think we can do that organically. So I think you can never rule out a compelling acquisition if something was cheap enough. But I think our bias has always been grown it organically rather than buy stuff.

Mike Carrier - UBS

Okay. And then just as a follow up on the distribution side. You gave some color on the institutional side. When you look at the institutional, and then I'll call it on the retail side, the third party, or the broker dealer channel, when you look at the opportunity of that market, where are you at in terms of penetrating that market and then particularly on the broker dealer financial institution platforms, how many of those platforms are you on ...some people will call it is as preferred waste of funds, just trying to get your sense of what the opportunities going forward to continue to make head wins in this channel?

Dan P. Charles - Senior Vice President and Managing Director of JanusINTECH Institutional

This is Daniel. I will take the first part of that question. From an institutional standpoint, as I mentioned we continue to focus our efforts on the largest institutional investors as the buying back pension and investment and at least in my view INTECH has very wide acceptance in a number of significant clients and pretty good penetration. Just as an example, our Taft-Hartley business, we have 30% market share of those plan sponsors in the P&I Top 600. So there are 60 Taft-Hartley plans, we manage money for half of them.

From a Janus standpoint while that number is somewhat lower, we are beginning to move the needle there and we are encouraged by what we are seeing.

Gary Black - Chief Executive Officer

On the intermediary side, I think it's going to be more of the same. We will continue to focus on a broker dealer channel. As I mentioned that business, we've built it out over the last couple of years. If you look at where we are with the gross flows or net flows. So if you want with the gross flows, the business is probably 60% bigger than where it was even say a year ago. The flows are very, very strong. Financial institutions, we are focusing on that as well. Retirement platforms out there with the moments to more open out texture. We think we're well positioned to get on some of these retirement platforms. That's where the area focus is. We are on all of the major platforms out there today.

Mike Carrier - UBS

Okay thanks.

Operator

Your next question comes from William Katz of Buckingham Research.

Bill Katz - Buckingham Research Group

Good morning, and I apologize that you may have covered this in your opening remarks and I joined just a couple of minutes late. Was there any unusual account wins in the quarter within the long-term side of the business?

Gary Black - Chief Executive Officer

I don't think we usually disclose that Bill.

Bill Katz - Buckingham Research Group

Okay. I guess the broader question I have then, Gary, just sort of curious, you mentioned during July, volumes will be down, is that on the retail side or overall and then just wondering how you could contrast [ph], how Janus is holding about to that observation?

Gary Black - Chief Executive Officer

Yes, Again this is... we're about three weeks into the quarter and again if you would have looked statistically, we guys do this for living. You could forecast industry flows by some sort of moving average of what the market performance is and we saw April-May were very strong, June was positive but just okay in terms of the industry flows. My bet is that July, equity flows given the June was the worst June and I guess in 78 years. My guess is that July equity flows might prove to be negative now. If the market continues to rebound as it has in the last couple of weeks. We could come back and have a really strong August and September from an industry standpoint.

From a Janus standpoint, obviously the 5 billion employees in the second quarter, was a great number for us. And I don't want to forecast what we're going to do in the third quarter but, obviously its going to fall over, what happens with the market and what happens with those performance.

Bill Katz - Buckingham Research Group

One more question on how is that operating leverage sequentially, in a difficult environment, if you are normalizing the market environment who knows what that really means, but where are you in terms of improving the margin of legacy Janus if you will?

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

Bill this is Greg. I would say that we are continued to make progress there. I think that the changes we've made over the past number of years including the compensation structure, there will be more expenses to variable from effects obviously, its going to benefit normally the consolidated margin with the Janus only margin as well.

Bill Katz - Buckingham Research Group

Okay Greg. Thanks so much.

Operator

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

Ken Worthington - J.P. Morgan

Hi, good morning. You mentioned in the slides, international continuous to do, better and better and then you got a kind of small focused business in Europe. What's really causing the, more recent success, like things we are going further for a while, why the incremental success this quarter, and any reason are we shouldn't think its either sustainable or you can continue to build on it?

Gary Black - Chief Executive Officer

I think the flows, success we have had international will continue. Couple of reasons, first and foremost, the investment performance on our off store trust very strong. Obviously, the separate accounts that we run for folk's performance has been very, very strong. We continue to build out the sales effort non-U.S. I think we probably doubled the size of the team in the last two years.

And we are getting to your question where are we getting traction? We are seeing it across the board. We are getting a lot of traction on the Janus-managed side. And again, when performance is as strong as we have it, you get a lot more doors to open and you get a lot more people to take you seriously, particularly if you put up the numbers not for one year or three years. We have been putting up strong numbers now for about six years.

And so people are taking notice. I also think that when you look outside the U.S. people honest value versus growth if there are in the U.S. And relative to a lot of the deep value managers that were very successful outside the U.S, folks like us performance numbers look very strong compared to our competitors.

Ken Worthington - J.P. Morgan

Okay. Good enough. And then secondly, ownership of Perkins, Wolf, and INTECH, you have been increasing ownership at now of both businesses for the last couple of years to 80 to 85%, is that where you need to be or is that where you need to be longer term like is it is at some point I know you have got the option of buy more of each but is the end goal here and the next couple of years to be at 100% or is 80%-85% the right place to be?

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

Yes, it's hard to know we like the employees of both INTECH and Perkins to be align with us. And we will always have some stake that is earned by the employees of both INTECH and Perkins. So I think for now we have a program by which we INTECH regularly, INTECH shares regularly, Perkins, the way these deals is constructed, there are call options where we can bring in some of the remaining 20% starting in the here later but options from the founders where they can put some of the stocks the remaining 20% back to us starting I the year four [ph]. Do you think it's a good idea for the employees of INTECH and Perkins to own some of the stock.

Ken Worthington - J.P. Morgan

That's great. Thank you.

Operator

Your next question comes from the line of Michael Kim from Sandler O'Neill & Partners.

Michael Kim - Sandler O'Neill & Partner

Hey guys. Good morning.

Unidentified Company Representative

Good morning.

Michael Kim - Sandler O'Neill & Partner

I think in the past you talked about kind of having to demonstrate the consistent out performance across both good and bad markets. In order to really gain some traction with the consultant community, certainly your performance has held up quite well since the market churned lower last year. So should we expect to see kind of incremental step-up inflows in the near term on the legacy Janus side, just as your performance continues to remain strong?

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

I think the performance is about, it's the highest its been for throughout in six years. It continues to be strong. It's hard to forecast when folks will fully recognize the performance. I don't, I cant tell you if you should forecast higher flows or lower flows, it is a function again if you look at statistically of your relative out performance, I think the strength of your brand then your distribution may. But also it's based on where the market is. So I can't help you really forecast flows except we are well positioned to take advantage of what's going on in the market right now because our performance is so strong relative, particularly to the deep value competitors, who have just gotten crushed over the last 6 to 9 months.

Michael Kim - Sandler O'Neill & Partner

Okay. And then moving on to the retail side of the business, certainly you've seen a step up in flows kind of despite the market volatility. If we were to assume the markets stabilize and ultimately start to trend higher, again, as it relates to the retail business, where do you see the greatest opportunity? Is it reasonable to kind of assume that sales in the direct channel might ramp up the quickest and therefore have kind of the biggest impact on overall margins?

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

I think it will be a continuation of what we've seen. I think the biggest improvements will continue to be in the broker dealer space. The supermarket channel does tend to do well when the markets are strong. We're not emphasizing the traditional direct market anymore. And we've been in outflow mode for several years in that business. So I would expect that the sharpest improvement flows will continue to be in the broker dealer, retirement, the financial institutions and the supermarket channels. on the retail side, on the retail intermediary side.

Michael Kim - Sandler O'Neill & Partner

Okay. That's helpful. Thanks.

Operator

The next question comes from the line of Craig Seigenthaler of Credit Suisse.

Craig Seigenthaler - Credit Suisse

Good morning. Now that we are seeing better performance at INTECH over the near term and there is still good long-term performance, should we expect INTECH's flows to strengthen here, or could some of the industry headwinds for the quieter [ph] mathematical industry weigh on flows?

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

And I will let Dan answer that as he is out in the field. It's hard to know. You have seen a lot of... we are not quantitative, we are mathematical, but you have seen many quantitative managers struggle, both in performance and flows. Our performance as you saw in the second quarter has bounced back 92% of the product are leading peers. I think we are most excited at some of these new products, where there is a lot of growth in both U.S. plan sponsor community and outside the U.S., so the global product set now that we have two years is a huge opportunity to us. Eastern [ph] in the U.S. is now... I think it was launched in November of '06. So it's coming up on its two year mark.

Obviously, the market... the long short market neutral product, there is huge demand for that. We have got a products, so we pretty excited and in we mentioned is briefly but the values space we you have exact what happens in growth space back in 2000, when all of a sudden folks wanted to risk management within the growth space. We may be entering at same period in the values stays we have had a lot of deep value managers take much may then some points advantage so, have a brief product there with a very long track record that is well positioned as well.

Dan P. Charles - Senior Vice President and Managing Director of JanusINTECH Institutional

Yes, I would just add that you know the institutional business is it's tends to add and flow based on where search activity is in and we feel like historically we done a very good job capturing share in the enhanced core growth areas and I think it's Gary stated quite correctly, we continue to position. We don't want people think of INTECH this is an enhanced for growth manager, we want to think of INTECH as a provider of risk manage solution and that why we are going to continue to make efforts to position our value products, the rate of 130/30 strategies in addition to global and international equity where we are seeing search activity. And so, think our job is just to make sure well, making sure that we are in a position to have something at discussion with institutional investors that are based on their needs.

Craig Seigenthaler - Credit Suisse

And on the value side, I think your risk managed product is beating its benchmark like 600 basis points over the last year. So it's probably your strongest performing product, relatively right now. I'm just wondering the '01, '02, '03 was the primary was most growth at INTECH on the growth side, the growth investment power side.

Dan P. Charles - Senior Vice President and Managing Director of JanusINTECH Institutional

It was. That's where INTECH really focused initially was in the enhancement and the growth space. What we've been doing in the consultant community as making certain that work, that will making sure that they are aware of the risk strategies that are available.

And what happens in the consultant community, if they tend to lump you into a bucket on occasion and so, you do start to go back into a job of explaining, how the films positioned to serve the market price.

Craig Seigenthaler - Credit Suisse

Iunderstand. Actually one of -- also one question for Greg on the kind of numbers, looking at the investments portfolio looks like there is a 9 million improvement in other income which includes just two items there. And I think you just broke out about 3 million of one time positive about 20 minutes ago. So, it's looking like there is about 6 million improvement, I am just wondering what is the underlying asset mix look here, I believe there is some equity sensitive of assets, there is also some bond assets that's coming here to generate income. So, just kind of -- the asset mix, so that's kind of apply a yield to those, to different assets?

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

We had never really broken out our -- capital portfolio. The $9.5 million loss in Q1 was all the marked to market loss, but the $3 million gain that we booked in Q2 was... $1.5 million was from redemptions that we booked the gain, the other $1.5 million was pure marked to market. So I would say our seed capital portfolio tends to be in a separate account arena. There is quite a bit activity on... or quite a bit of investment on the INTECH side. And that's I think, given the performance numbers we are seeing, that's where you get some of that improvement.

Gary Black - Chief Executive Officer

The vast majority is equities.

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

Yes.

Craig Seigenthaler - Credit Suisse

I was just going to say if the market is up let's say 2%, should we expect something in the $5 million to $10 million positive range or is that too high? How else do you [ph] find that's a pretty broad assumption?

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

I'm not going to probably go there. I think you can probably get there yourself. I think that we look at it market plus Alpha.

Craig Seigenthaler - Credit Suisse

Can you actually disclose what the total size of that portfolio is?

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

It's in our 10-Q that we'll be filing with --

Craig Seigenthaler - Credit Suisse

Okay. Okay, thank you very much.

Operator

I would like to remind everyone that in the interest of time, questions will be limited to one initial and one follow up question. Your next question comes from the line of Hogen Li from Morgan Stanley.

Unidentified Analyst

Good morning. Just a question on the Stanfield Victoria securities. Could you give us an update on how they are performing and whether you're seeing any interest from potential opportunistic buyers for these products?

Dan P. Charles - Senior Vice President and Managing Director of JanusINTECH Institutional

I would say interest is probably minimal, given the market condition that we still find ourselves in. Obviously we didn't take any further impairment charges in the quarter. We have left it where it was at year-end. It's still working its way through the process and really at this, point we have no further information to report.

Unidentified Analyst

Could you just remind me whether these are... how these are valued on a cash flow basis? Are these level III assets?

Dan P. Charles - Senior Vice President and Managing Director of JanusINTECH Institutional

They are considered level III assets and we have gone through kind of a detailed look inside the portfolio and grouped assets were appropriate and made assumptions where appropriate to come to our number.

Unidentified Analyst

Great. Thanks. And just one follow up, if you could maybe walk us through how the financials again will be impacted by the change... in increased ownership in Perkins, Wolf? If I could just qualify, I thought the $7 million or so you recognized over the past few years in equity and earnings of unconsolidated affiliates is from Perkins, Wolf

Dan P. Charles - Senior Vice President and Managing Director of JanusINTECH Institutional

That's correct.

Unidentified Analyst

Okay. So, sorry, would it be right to assume then that net income would have been around $23 million for Perkins, Wolf just based on the increased ownership?

Dan P. Charles - Senior Vice President and Managing Director of JanusINTECH Institutional

I think that's a fair statement.

Unidentified Analyst

And so now, you guys will be consolidating both on the revenues and expense side for this business --

Dan P. Charles - Senior Vice President and Managing Director of JanusINTECH Institutional

Correct. And as I mentioned before in prior years, we have recorded 50% of revenue through a sub advisory agreement and then obviously 30% of earnings below the line. And that will obviously move up to a consolidated entity within our financials. The equity earnings goes away. We will record 100% of the revenue and 100% of the expenses. And as I mentioned, we do expect on the expense line for certain things to increase as we can invest and build out that platform.

Operator

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

Marc S. Irizarry - Goldman Sachs& Co

Great. Thanks. Hi everybody. Gary, in terms of the institutional business, can you give us, on Janus-managed stock, can you give a little more color on where you're seeing the greatest successes? And then also, what's sort of the institutional response been to the products where there has been some PM switch outs?

Dan P. Charles - Senior Vice President and Managing Director of JanusINTECH Institutional

Hey Mark, this is Dan. Good morning. Why don't I take that one? What I am encouraged to see from a Janus-managed standpoint is that we've begun to see some traction in our concentrated growth strategy where we did have a PM changed. And this gets back to kind of positioning Janus Research. Once you understand research, whether it's team managed, co-managed or individually managed, we're going to see success. We've also had traction with our global research strategy in addition to our international equity strategy, which is co-managed. And so as I look at our institutional business, I would say it's broad based. It's not limited to just one or two strategies.

Marc S. Irizarry - Goldman Sachs& Co

Okay, great. And then just on the follow-up, I guess this would be a good problem to have. But can you address maybe sort of where you are seeing any capacity issues, if any, at this point?

Gary Black - Chief Executive Officer

I'll tackle that. We don't really give out capacity numbers. We have a couple of products that are... remain closed. Our Janus 20 product is closed on the retail side. Our venture product is closed. Our overseas product is closed. I think we've got good capacity in most of our portfolios, but we don't break it out.

Marc S. Irizarry - Goldman Sachs& Co

Okay, great. Thanks.

Operator

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

Cynthia Mayer - Merrill Lynch

Hi, good morning. Just wondering since institutional sales are getting some traction, if you could talk a little about what you seeing in terms of performance fee structures versus straight fees and whether we should expect to see any more variability in earnings as that builds out.

Gary Black - Chief Executive Officer

This relates to our observations about the market, Cynthia.

Cynthia Mayer - Merrill Lynch

Yes. Yes, and in terms of your own sales, are you tending to sell more mandates with performance fees, without performance fees?

Dan P. Charles - Senior Vice President and Managing Director of JanusINTECH Institutional

This is Dan, Cynthia. We continue to make performance fees available. Certainly as clients want to pay more for Alpha and less to Beta. But I would say from a Janus-managed standpoint, the majority of our sales this year has been off of our standard fee schedule with appropriate breakpoints for separate accounts and co-mingled vehicles.

Gary Black - Chief Executive Officer

And to Dan's point, we'll offer performance fees and we try to get, if you look at the target rate of return on a portfolio, we try to earn more when you figure our a performance fee at that target of return than we would on a standard fee schedule to compensate for the risk that you're taking on the P&L. And I think INTECH has been very successful at getting good premiums versus the normal lead when they've had performance fees. We try and adopt the same discipline on the Janus side.

Cynthia Mayer - Merrill Lynch

And are you seeing clients tend one way or the other?

Gary Black - Chief Executive Officer

I would say it varies depending on the client. Typically, we'll have a base fee, a participation fee, and as Gary said, we want to earn a premium over the standard fee as we are generating excess returns above the benchmark.

Cynthia Mayer - Merrill Lynch

Okay. And just in terms of circling back to the capital management, it seems like the size of the buybacks have been diminishing the last five quarters or so. And I'm wondering once the SIV [ph] issues are resolved, should we expect those to go back up or is it more a question of that you've done some many buybacks at this point that you feel it's less important to do that really large size

Gary Black - Chief Executive Officer

I think... it's a good question. As I mentioned before, we try to look internally first, and we look at reinvestments in the business. We looked at investments in the subsidiaries and to the extend that excess remains, we believe buybacks are still a great way of returning cash to shareholders, but I think its going to vary from time-to- time when you are in periods where you are investing heavily in the business and making acquisition in subsidiaries as we find ourselves and today I think buybacks by definition come down a little bit. But I think it all depends over time how we generate the cash flow and where we choose to deploy it.

Cynthia Mayer - Merrill Lynch

Okay. Thanks.

Operator

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

Michael Hecht - Banc of America Securities LLC

Hey guys. Good morning.

Gary Black - Chief Executive Officer

Good morning.

Michael Hecht - Banc of America Securities LLC

Just a question on the alternatives business as Janus, I know it's small, but can you remind me just what make up the $1.2 billion in AUM you have there? And then where would you like to see that get as a percent of total when you see that as more of an organic build or any interest in acquisition there?

Gary Black - Chief Executive Officer

I think it's a great opportunity for Janus; that's the long short fund, which we launched I would say August of 2006. We raised $ 1.2 billion on the heels of extremely strong performance. So we've shown... we've demonstrated to the market that we can do that. We are building out other alternative products. I mentioned the INTECH market mutual product. We have other long short products in the works at Janus. And once you establish that platform in the marketplace and that reputation that you can do it, the gatekeepers, whether they be in the advisory space or in the institutional space will let you in once you've demonstrated that your research capabilities can do that. So we're very optimistic as we roll out additional alternative products that the market will be receptive to them.

Michael Hecht - Banc of America Securities LLC

Okay. So focus is clearly organic versus anything on the acquisitions front?

Gary Black - Chief Executive Officer

Yes.

Michael Hecht - Banc of America Securities LLC

Okay. And just a follow up, the commentary on the tax rate, 1% lower tax rate as we go into '09. Should we think into that as relative to like the full year '07 rate?

Dan P. Charles - Senior Vice President and Managing Director of JanusINTECH Institutional

Yes, when you back out minority interest and you look at pretax income ex-minority, you have a 38.5% rate, we expect that to come down 1%.

Michael Hecht - Banc of America Securities LLC

Okay. Got you. Great. Thanks.

Gary Black - Chief Executive Officer

Okay. We'll see everybody next quarter. Thanks for listening to us today. Thank you.

Operator

This concludes today's conference call. You may now disconnect your line.

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Source: Janus Capital Group, Inc. Q2 2008 Earnings Call Transcript
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