Janus Henderson Group - Earnings Call - Q1 2020

Transcript

Speaker 0

Good morning. My name is Nicole, and I will be your conference facilitator today. Thank you for standing by, and welcome to the Janus Henderson Group First Quarter twenty twenty Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period.

In the interest of time, questions will be limited to one initial and one follow-up question. In today's conference call, certain matters discussed may constitute forward looking statements. Actual results could differ materially those projected in the forward looking statements due to a number of factors, including, but not limited to, those described in the forward looking statements and Risk Factors sections of the company's Form 10 ks for the year ended December 3139 Form 10 Q for the quarter ended 03/31/2020, and in other filings made by the company with the SEC from time to time. Janice Henderson assumes no obligation to update Thank you. Now it is my pleasure to introduce Dick Weil, Chief Executive Officer of Janus Henderson.

Mr. Weil, you may begin your conference.

Speaker 1

Thank you, operator. Welcome, everyone, to the first quarter twenty twenty earnings call for the Janus Henderson Group. I'm joined by Roger Thompson, our CFO today. First and foremost, I hope that everybody listening on this call along with your loved ones are all safe and healthy. I want to acknowledge the heroic work of many in our society supporting all of us in the continuation of our businesses and our lives.

It's their resilience and sense of duty which keeps our society going during this COVID nineteen crisis. I also wanna recognize the very hard work of our own employees who've put in tremendous hours and creativity to adapt to these extraordinary circumstances. And it's thanks to them that today we can report that we're working safely from our homes and that our company is operating successfully. On today's call, I'll provide an introduction and a little update, and then Roger will give his update on quarterly flows, investment performance, and financial results. After those remarks, we'll take your questions as usual.

For me, the story of the first quarter is really two stories. Roger will give you more specific information in a minute, but we were having a very good start to our year in January and February. Investment performance was strong, and we seem to be gathering positive momentum across our business. Then, of course, the COVID nineteen crisis hit in March, and that changed things. Let me step down a level and focus on what we've actually done in the first quarter.

Immediately after the WHO declared a global health emergency, we moved aggressively to implement our emergency scenarios in offices around the globe. We were guided by our simple principles, taking excellent care of our clients while simultaneously protecting our employees and their families. The very good news is that these efforts have worked, powered by the hard work of our amazing employees. Currently, we have greater than 95% of our employees working remotely, with every single one of our 28 offices, operating under an emergency business continuity plan. Our infrastructure and planning have held up extremely well.

We're able to do our daily business, maintain our strong control environment, and continue to take good care of our clients and remain in good contact with them. I'm extremely proud of how our employees have successfully adapted to these challenges and this new way of doing things while remaining focused on keeping our clients at the heart of everything we do. A little more on the clients. At Janus Henderson, we understand in times of crisis like today, we need to be closer than ever to our clients. We need to communicate with them about what we're seeing in the financial markets and hearing from the companies we cover.

And we need to listen to them to understand their fears and concerns and answer their questions. I'm proud to say our communication effort has never been stronger. From the start of the pandemic, we put out a vast amount of focused content that's been created to answer key client questions. I'm hearing great feedback from clients that we are listening well and responding effectively. While no one can accurately predict the future, I think our experts are doing a very good job helping clients make timely and better informed decisions.

From an investment perspective, COVID nineteen has obviously created unprecedented challenges. We've been we have been very focused on maintaining our client promises. During the crisis, our portfolio managers and analysts have been working harder than ever doing their deep research. They're talking to company management teams, revisiting their financial models, and stress testing company balance sheets in an aggressive way. In fact, the companies that we've been talking to have been very responsive, and in some ways, access has never been better.

Current valuations reflect a huge amount of liquidity management and perhaps also some panic selling. Large gaps are opening up between market value and our own well researched opinions. In the coming months, we will see great opportunities to invest for our clients in a way that should drive returns in the years ahead. The global health crisis is a significant challenge, but our investment teams are rising to it, and they're actively seeking out opportunities created by the volatile markets. I'm proud to report our investment team has adapted well and is working well.

Despite the remoteness of not being in the office, our teams are collaborating effectively and intensely, and I remain very confident in their success. Before I turn it over to Roger, let me also touch on financial condition. Considering the strength of the market declines around the world, I to make sure I talk about our financial strength. Despite the lower levels of AUM, we continue to deliver significant profits with a strong margin. We're generating a substantial positive cash flow.

We continue to have a strong balance sheet. Against this backdrop, our Board remains committed to paying our regular dividend. Our strategy of simple excellence remains our path forward. We continue to deliver for our clients, for our owners, and for our employees. Our financial strength is allowing us to continue to invest in becoming both more simple and more excellent.

Finally, let me turn to ESG. The COVID nineteen crisis rightly deserves all of our focus and attention, but we have not reduced our commitment to developing our ESG approach, governance, and policies. Janice Henderson has a long history of active management and initiatives that cover a diverse range of product oh, sorry, of topics such as corporate governance, sustainable investing, and climate change. We are committed to acting responsibly, not only in the way that we invest, but in the way that we engage our clients and support our employees and manage our impact on the environment and societies and communities around us. Particularly during this pandemic, I'm proud of our initiatives that we've undertaken to support the local communities and charity partners.

Our culture and values are even more important at times like these, and I'm proud of what we're doing. In conclusion, we're living in unprecedented times. Our top priority remains to deliver excellence for our clients while safeguarding the safety of our employees and their families. Our long term track records remain solid. That's investment track records, obviously, sorry.

Our client relationships are strong, and we're on a very solid financial foundation. We continue to move our business forward. I can't thank our employees enough. You've shown great resilience and professionalism during this trying time while also dealing with the obvious personal challenges created by this pandemic. Please stay safe and healthy.

With that, let me turn it over to Roger.

Speaker 2

Thanks, Dick, and thank you everyone for joining us. I sincerely hope that everyone and your friends and family and colleagues are safe and healthy. Looking at the first quarter's results, market volatility in the last five weeks of the quarter, coupled with the previously communicated redemptions, resulted in $12,000,000,000 of net outflows. Period end AUM was down 21% compared to the fourth quarter. That said, the average AUM for the quarter was down only 3% from the prior quarter.

And as we sit here today, AUM is up around 10% from the March. In terms of our GAAP results, there is one significant item in the quarter. The decline in AUM as of the March 31 and the and the economic uncertainty of COVID nineteen is affecting the value of our intangible assets and goodwill, which resulted in an impairment of $487,000,000 I'll remind you that this is a noncash adjustment. The adjusted financial results were actually stronger than the same period a year ago, but down a little compared to the prior quarter with adjusted EPS of $0.60 compared to $0.65 a quarter ago. Finally, we returned $97,000,000 of cash to shareholders during the quarter via dividends and share repurchases.

Moving to investment performance on slide five. Long term investment performance remains strong, with 6566% of firm wide assets meeting their respective benchmarks on a three and five year basis as of the March 31. Relative performance compared to peers is even stronger, with 69%, 84%, and 79% of AUM represented in the top two Morningstar quartiles on a one, three, and five year basis, respectively. We take a long term view of investment performance, understanding that very short term results will fluctuate period to period. The last five weeks of the quarter were unprecedented in volatility and liquidity terms.

Our investment team is focused on identifying opportunities that are being created by recent market events to position portfolios for the long term. Turning to total company flows on slide six. For the quarter, net outflows were $12,200,000,000 compared to $6,700,000,000 last quarter. This reflects an increase in gross redemptions due to the $6,000,000,000 of mandate losses that we previously told you about on our full year earnings call, along with elevated redemptions created by the extreme volatility in the laxer part of the quarter. The gross redemptions were partially offset by higher gross sales.

Gross sales were 37% higher than the same period a year ago, and the $21,400,000,000 of gross sales is the best result since the merger, continuing the momentum we saw in the second half of twenty nineteen. Slide seven provides a little more color on the quarterly flow results. Normally, we don't focus on such short term flows, but with the circumstances of this quarter, we felt that as a one off, it was important to provide this level of detail to help explain the results. The 12,200,000,000.0 of outflows is almost entirely made up of the 6,000,000,000 of previously notified and disclosed redemptions in the global emerging markets and core plus fixed income and outflows in the month of March caused by the market volatility. Outside of these items, January and February outflows were less than a billion dollars and included a continuation of the strong momentum in our intermediary business.

I'm pleased to say that as we begin the second quarter, the pace of retail outflows has slowed significantly, and as you'll see in the public data soon to be published, in April, intermediary outflows sorry, intermediary flows are currently around flat. Moving to slide eight, which shows the breakdown of flows in the quarter by capability. Equity net outflows for the first quarter was 6,900,000,000.0 compared to 1,300,000,000.0 in the prior quarter. The quarterly results was due to the previously notified 1,100,000,000.0 redemption in EM and outflows over the last five weeks of the quarter. Flows into fixed income were negative in the quarter at 3,400,000,000.0.

Excluding the previously notified 5,000,000,000 low fee redemption in core plus, the remaining fixed income business was positive for the quarter due to institutional mandate wins primarily received in Australia. Intake outflows were $2,000,000,000. Multi asset flows continue to be driven by strong flows into the balanced strategy. Total inflows for this capability in the first quarter were $900,000,000. And pleasingly, the strategy continues to be in the first Morningstar quartile over all time periods.

Alternative net outflows of 900,000,000 were primarily from the UK Property Fund and UK Absolute Return Fund, which is actually performing very well. Slide nine is our standard presentation of US GAAP statement of income. Excuse me. Now turning to slide 10 for a look at the summary financial results. Despite the difficult market environment, our adjusted financial results are better across the board than they were a year ago.

This improvement resulted from better performance fees, slightly higher average assets, and good cost discipline. First quarter adjusted operating margin was 37.2% compared to 36.9% in the prior quarter and 34.4% a year ago, reflecting that strong cost discipline. Finally, adjusted diluted EPS was $0.60 for the quarter compared to $0.65 for the fourth quarter and up from $0.56 a year ago. On slide 11, we've outlined the revenue drivers compared to the prior quarter. Lower average assets, performance fees, and one fewer calendar day were the biggest drivers of the quarterly change in adjusted total revenue.

Net management fee margin for the first quarter was 45.1 basis points, which was up slightly from the fourth quarter. The quarterly increase is due to mix shift. The margin has been resilient during the market downturn with the exit rate down only slightly compared to the first quarter average. Performance fees were lower primarily from segregated mandates, which are seasonally higher in the fourth quarter. Regarding US mutual fund performance fees, the first quarter remained relatively flat to the fourth quarter at negative $1,900,000 but it improved significantly from the negative $8,900,000 a year ago.

Moving to operating expenses on slide 12. Adjusted operating expenses in the first quarter were $278,000,000 which is a 5% decline compared to the fourth quarter. Adjusted employee compensation, which includes fixed and variable staff costs, was down 2% compared to the prior quarter. Fixed costs were actually up 4% due to annual pay rises, seasonality of payroll taxes, resetting, and four zero one k matches. Given the latter two are q one only items, fixed staff costs will be lower in Q2.

Variable compensation was lower by 8% due to lower profits. Adjusted LTI was down 25% from the fourth quarter from the impact of mark to market adjustments. In the appendix, we've provided updated detail on the expected future amortization of existing grants. The first quarter adjusted comp to revenue ratio was 42.4%. This ratio is in line with guidance.

In a moment, I'll talk about what we anticipate for the remainder of 2020 given lower asset levels. Adjusted non comp operating expenses were virtually flat to the prior quarter, which as a reminder included a onetime $5,500,000 credit. The absence of these credits was offset by lower expenses, particularly in marketing and travel. Finally, our recurring effective tax rate for the quarter was 27.4. The higher effective tax rate compared to the statutory rate guidance of 23% to 25% is primarily a result of book to tax differences on stock based compensation.

Considering the lower asset levels entering the second quarter, I wanted to spend a few minutes revisiting our expense guidance for 2020. As a reminder, we have a keen focus on sound financial discipline with an awareness of margin pressure, but with an emphasis on the long term as opposed to short term results. That said, in this environment of so many unknowns, particularly around the depth and duration of the crisis, we are being prudent in managing expenses. This includes the hiring freeze, canceling or deferring the hiring to fill vacancies, reviewing contractor use, and a review of all non compensation related expenses. In looking at compensation, lower assets will drive lower revenues, putting pressure on the adjusted comp ratio, which we now estimate to be in the mid forties.

Our guidance for non compensation expenses was low to mid single digit growth compared to 02/2019. We now anticipate non comp to be flat to slightly down on 02/2019. And finally, the firm's statutory tax rate is expected to remain at 23% to 25%. But as we saw in the first quarter, the effective rates will be impacted by various differences which arise quarter to quarter. The updated guidance assumes roughly flat AUM for the remainder of 2020 and continued low activity from travel low activity and travel from COVID nineteen through the summer.

We'll update guidance accordingly on future earnings calls should these assumptions materially change. Turning to slide 13 and a look at our balance sheet. A balance sheet that can withstand volatile markets such as the current environment has always been a priority of board and management. We are in a net cash position, have no debt maturing until 2025, and the minimal debt we do have equates to less than 1x EBITDA. On Slide 14, we provided additional detail on the first quarter cash activity.

First, cash flow from operations is positive despite including annual compensation payments in the first quarter. For the remainder of the year, we don't anticipate any large operational cash needs, so forecast generating significant cash flow that can be used for further investment in the business or to return to shareholders. Second, we returned $98,000,000 to shareholders via dividend and buybacks. The dividend remains well supported by the business results, and today, we've declared a static $0.36 per share quarterly dividend. During the first quarter, we purchased 2,100,000 shares of our stock for $31,000,000 at an average price of $15.11 Our thoughts around the buyback in terms of returning true excess cash to shareholders have not changed, and we believe it is a good use of cash at the current stock prices.

So whilst we'll constantly review, you should expect to see us in the market in q two. During the quarter, we finalized the sale of Geneva Capital Management, which resulted in net cash proceeds of $38,600,000 in addition to an earn out over the next five years. Finally, we had $98,000,000 in net seed redemptions in the quarter. In the prior quarter, made a $100,000,000 short term investment in our seed book, which we redeemed in q one. The net result of this activity is a slight quarterly increase in cash and cash equivalent balance to just over $800,000,000.

This cash balance, coupled with the expected cash flow generation for the remainder of the year, provides a solid foundation to weather this storm and to come out winners. I'd now like to turn it back over to the operator for Q and A.

Speaker 0

Thank you. Ladies and gentlemen, at this time, we will conduct the question and answer session. In the interest of time, questions will be limited to one initial and one follow-up question. We'll take our first question from Ken Worthington with JPMorgan.

Speaker 3

Hi, good morning. Thank you for taking my questions. I think first, can you talk about the differences you saw between the reaction of your European investors, your U. S. Investors and your Asian investors to the COVID nineteen crisis and the downturn in the various markets?

And as the world recovers, would you expect to see or how would you expect to see, customers reengage by region, given your mix of business and your relative performance?

Speaker 2

K. Let me let me let me start on that and perhaps Dick will will come in as well. Looking at flows, it was interesting. You know, we saw outflows in March in The US and in Europe. Actually, interestingly, in Asia, outside, you know, the one big fixed income outflow that we talked about on the prior call, flows in Asia were actually positive.

We had our best quarter in Asia for quite some time, and that has continued. So it has been different, but, yeah, March was a March was a pretty consistent outflow in in in both Europe and The US. Jake, anything to add to that?

Speaker 1

No. That covers it, Adi.

Speaker 3

And and then on the regate reengagement side, any any things that you would expect here as the market recovers?

Speaker 2

I I guess, you know, the biggest thing there is we are very active in the in the marketplace. We're seeing considerable, you know, client interactions. Our pipeline in institutional is actually stronger than it has been since the merger. Our pull through of of information is very high. So yeah.

Yeah. It it's it's obviously difficult to say, given, you know, where markets are and where they may end up, but, you know, activity is pretty high everywhere.

Speaker 0

Our next question comes from Dan Fannon from Jefferies.

Speaker 4

Thanks. I guess just following up on that last comment there, Roger, with regards to biggest pipeline since the close of the deal. Can you talk about the breadth and your products that entails?

Speaker 1

Yeah. And this is Dick. It's a it's a broad list of products. It's not just in one thing. It includes some absolute return and and fixed income and equity.

It's and it's geographically diverse as well. And so, look. You know, Roger's the CFO, and he never believes pipeline. What he believes is cash in the front door. And so we'll see how well we can convert opportunity into into flows and long term relationships.

But, you know, I I think all of us would have had a question going into this crisis. How well can you reach out and connect with clients and even prospects through this remote working environment? It turns out better than I think any of us would have anticipated. I think, we are seeing some clients turn to, Zoom or remote, finals presentations in a way that seems to be working for them and and working for us. So, our business continues to move forward, and, and we're optimistic about what we can accomplish.

Asterix, none of us have a crystal ball, as to whether, you know, the market is gonna continue in a relatively stable way or whether, there'll be more very significant upsets on the horizon. So, you know, that we will live in the broader environment as that moves. But but assuming a relatively stable platform from which to work, we're pretty optimistic about what we can accomplish.

Speaker 4

K. And then just a follow-up. You know, the non comp guidance of flat to slightly down, you know, just you you mentioned a couple of different things in terms of what you're evaluating. I assume you had just gone through a lot of those evaluations through the merger. So curious how much is actually, you know, business decisions that are being made versus, you know, the no travel and kind of work from home kind of natural, you know, reduction in some of the expenses.

So you get a little more color around, you know, that that what you're actually doing versus kind of what's, you know, what's what's an output of of the current environment.

Speaker 2

Yeah. You're right. You're you're quite right there, Dan. There are some things that sort of naturally look after themselves. We normally spend about $4,000,000 a month in in t and e and, obviously, are not you know, our our marketing and conferences and things like that and and client events is obviously very significantly diminished, and we're expecting that to continue for a period of time.

There are you know, we've tightened our belts on a couple of things, but the other thing I think is very important to note is we're continuing to invest in the business. We've got a number of projects that we plan to do this year. The vast majority of those, we're still doing this thing this we're still doing them this year. And, again, you know, Dick talked about how the organization is working. To be able to deliver those things, in this market, I think is oh, sorry.

In this environment where 95% of people are working at home, I think is pretty remarkable, and we're pretty confident of of, of progressing with those. Some of them will take a little bit longer. So, again, we've we've you know, some of that is that some of those things that we hope to finish in 2020 will probably drag out to 2021. So a little bit of cost that will drag into next year, but we are continuing to invest in the business. And that that's baked into that guidance of flat to slightly down.

Speaker 0

And we'll take our next question from Simon Fitzgerald from Evans and Partners.

Speaker 5

Good morning. Thank you for taking my question. I only have one question this morning. Just in regards to the impairment, if you could just sort of highlight in terms of the what the test was there or the measurement that resulted to the impairment? And was it certain contracts as opposed to others?

Like, I just wanted a bit more detail around that impairment charge, understanding that it's noncash.

Speaker 2

Yeah. Yeah. Thanks, Simon. Yeah. You've got yeah.

I I think all firms would would will be looking at this, and, yeah, you've got a triggering event. There's a there's there's no doubt you've got a triggering event with with the AUM decline and the and the uncertainty in the market. You then just need to look at, you know, where your where your where your period end assets are and and then and then look at that. You know, we we sit with a pretty significant impairment and goodwill balance. You know, we're an intangible business.

And and when you look at that and you and you come up with some reasonably prudent assumptions of where you are and where you might be on the upside and downside from from the March, You know, you model something and that, you know, you've got some contracts and some goodwill that looks a little bit it looks a little bit toppy at those prices. So we've written that off. But as you say, it's non cash item.

Speaker 5

Thank you.

Speaker 0

And our next question comes from Mike Carrier from Bank of America.

Speaker 6

Good morning and thanks for taking the question. I guess another question on flows. I mean, I think if I look at the sales in the quarter, pretty strong given the environment. Redemptions, obviously, it had affected. But when you look at the trend line there, any granularity on where you're seeing kind of that relative strength?

And then, Raj, just on the the comment on April, I think you said, you know, relatively flat. I just wanna make sure I I don't know if it was just intermediary or overall, but just any clarity there. Thanks.

Speaker 2

Let me take the the the the second bit of that first, Mike. Yeah. Intermediary is flat. Institutional is lumpy, but we've tell we've talked about the pipeline. We talked about the pipeline there.

So, and there's nothing big to tell you about, I think, is is you know, that's how we normally describe in yeah. Institutional is we'll tell you if there is something as we did at the end of last year. There's nothing big out there, that you need to be aware of, but institutional and intermediary is is flat. Sorry. Could you just remind me of the first half of the question again, Mike?

Speaker 6

Yeah. The first part was just, you know, when I look at the strength in sales, you know, that you guys saw during the quarter, just anything, you know, that kinda stood out? Because on the redemptions, like, we obviously know, you know, what happened in the quarter and where we saw, like, industry outflows. But on the sales side, just any more granularity around that.

Speaker 2

No. It's pretty broad brush. You know, you see you you can see in the in the deck that we saw increased gross flows in a number of capabilities. Some of our long standing strong products like Balance continue to be positive. Absolute return income, very strongly positive.

There's some other fixed income areas. It's small cap, global value. So it is it is fairly broad, but it as always, it's different by geography in our business, but fairly broad.

Speaker 0

And we'll take our next question from Andre Stadnik with Morgan Stanley.

Speaker 7

Good morning. Just wanted to ask a couple of questions. Firstly, just following up on the flows and intermediary flows going flat in April. Can you just talk a little bit of what's changed? Some geographies doing better than others, and is it better gross sales?

Is it lower gross redemptions? What's changed in April?

Speaker 2

Primarily a redemption story, Andre. Yeah. I think there was a yeah. There there was, obviously, was a a reaction in in March, and but that seems to have there's a pause at least now in terms of in terms of redemptions. We're still seeing good activity in in in in gross, so the the decrease to get to flattish for for intermediary is really around less redemption.

But it's the same everywhere. US, Lux, Dublin, The UK, and Asia are all are all around flat. So it's not that one region has changed completely and others haven't. It's pretty you know, again, for us, I don't think that's the same everywhere, but for us, we're seeing flattish flows in intermediary, you know, the result of gross ins and gross outs being about flat, in in all markets, which is which is a dramatic change from April. But again Sorry.

Dramatic change from March. Sorry. Dramatic change from March. But but as Dick said, you know, we caveat that with with that just happens to be where we are now. I think the important message is, yes, April looks different than March, but, obviously, we can't tell you what May is gonna look like.

Speaker 7

Cheers. Thank you. And and my second question, just thinking through where the operating margin could end up, should we be thinking about mid-30s for FY 2021

Speaker 4

or FY 2020?

Speaker 2

I think we I think we previously said mid I think we previously said mid to high thirties. That that, you know, that that remains our long term aspiration. But with lower asset levels, yeah, you're you're probably looking in the lower thirties.

Speaker 7

Thank you.

Speaker 0

We'll take our next question from Ed Henning with CLSA.

Speaker 8

Thank you for taking my questions. Can we just start off on Intech? Look, the outflows have been getting better there, but performance seems to be getting a little bit worse. Can you just touch on conversation with clients and how and what the outlook is there for FinTech?

Speaker 1

Yeah. I'd say in the first quarter, the performance was a little bit better overall, but they have so many different products moving in different directions that any such com comment is, you know, has to be taken as a pretty blurry outline. Underneath the covers, they have a lot of different products, moving in different directions. But it generally speaking, the Intech products in the first quarter performed sort of as as described on the tin. So, you know, that's not strong enough outperformance to really drive them back to a very healthy front foot.

They need to they need to put up good performance over over a long period of time to to to get to the level of success that we that we aspire to for them. So they're not, you know, they're not back to sort of green lights and full health. But, but, you know, they're continuing to do their job and work hard. They do an excellent job of explaining things and communicating with clients as they continue to evolve their business. They have a a significant number of strategies that have been excellent in this environment and and have delivered out performance.

And, obviously, those will probably be the things that that, you know, a lot of clients will be more interested in. But they they continue to have opportunities to to sell business and move ahead. And and they're focused on, you know, healing some of continuing to heal some of the damage of of some of the past. We've talked about they've they've added some risk control practices into how they manage money, as lessons learned, from the past. So they're they're an improved business, and they're continuing to sort of try and build forward.

No special guidance that we have around their future at this point.

Speaker 8

Okay. Thank you. And just one one other question. If you look at the the world now, and and you've obviously got a very strong balance sheet, you've highlighted. Given all the market moves, does that change your appetite at all to look at any inorganic opportunities?

Speaker 1

We we've sort of always answered that question the same way, which is never say never, But we we really are focused on first things first. We want to deliver the simple excellence that we can deliver in the current configuration of our company. We see lots of opportunity to improve how we're doing what we're already doing. And our priorities are more focused on that than they are on big m and a or changing things in a in a inorganic and significant way. But never say never.

You know, we continue to look at things. We continue to educate ourselves. We continue to listen to to folks who would like to chat. And and mostly, that's a learning exercise. But you know, you can't you can't ever foresee the future perfectly.

Something could potentially happen. But it's not the highest thing on our priority list.

Speaker 8

No worries. Thank you.

Speaker 0

Our next question comes from Nigel Pitoway from Citi. Hi,

Speaker 9

guys. First of all, just, it seems like on Slide 35, there's reasonable evidence of that sort of LTIP flex here you were talking about. I mean, just checking, I mean, the assumption behind that pretty much the same as what you were saying on the other costs, basically flat AUM from here? Or is there anything else you can tell us about what's been assumed behind that flex down that we're observing there?

Speaker 2

That's that's based on flat markets from the March, Nigel.

Speaker 6

Yes. Okay. Okay.

Speaker 9

And then just a second question, just on performance fees. I mean, obviously, I think it surprised most people at how good the performance fees were in the first quarter. Can you give us sort of any kind of guidance as to how we should think about those for the remainder of the year? I mean, presumably, we've got to look at sort of relative benchmarks now. And, yeah, is there any color you can provide on that as to what the potential is moving forward?

Speaker 2

Since we take it in in in the the regular pieces, if you like, The US The US fulcrum fees, q two twenty seventeen that rolls off was actually quite a good a good quarter. So we'll have to add a bit in order to to to stay at the sort of 2,000,000 negative level where we were. But then we then we run into the the sort of bad year of performance dropping off. So, again, you you can model that. You know, if you model flat if you model flat performance for the year, then you get to sort of $5,000,000 of negative fees for the year compared to $15,000,000 last year.

So I can't tell you what future performance will be, but assuming no no no alpha, it's minus five for the year. In our mutual funds, we obviously we have, the the European funds have their their calendar period is is June 30. There are some funds in those that are and, again, you can track this stuff public. There are there are some funds in there that are currently above high watermarks. So that there's as we stand here today, there's a little bit uncrystallized, but, again, that can change.

The UK absolute return fund is slightly ahead now. So, again, more around the opportunity for the future rather than something that's in the bag today. But if the team there can continue to add, you know, small positives, then there there's some performance fees that could could occur there. I think the last piece is segregated accounts. Yeah.

In the first quarter, we had a couple of segregated accounts that were that were quite large. One of those is one off. It's an account we don't have anymore, but there are some seg accounts that we would expect to have performance fees on for the remainder of the year, including in q two.

Speaker 9

Okay. That's great. Thank you very much.

Speaker 0

And we'll move on to Ryan Bailey from Goldman Sachs.

Speaker 10

Good morning and thanks for taking our questions. My first question was on The UK property funds that gated. I was just wondering if you could give us an update about the timing. Did you think that that might change and any broader implications that you you think could hook up for that fund.

Speaker 2

Yeah. I mean, that that's that's gated as as as the entire industry is in that sector because the because the the valuers put what they call a material uncertainty clause on valuations. So if you can't value a fund, you know, there's no real choice other than to suspend it. So we suspended, and I think everyone else suspended a day after us just about. The fund is positioned very well.

It has a strong cash balance. Its mix has less retailing than most people. It's actually got some things like logistics warehouses in that I would have thought are doing rather well at the moment. So, yeah, we can't I can't tell you when it will reopen. It'll be when the surveyors decide they can take off that material uncertainty clause, and I doubt that will really happen until there's some until there's some transactions in the marketplace.

But, again, we're we're communicating well with clients, and I think we've been viewed quite strongly in terms of how we have communicated. So, yeah, you never like to go to product, but, yes, it's a little bit easier when when an entire sector is is positioned the same way.

Speaker 10

Understood. Thank you. And just another question on on buyback activity, and thank you for the incremental color on the balance sheet strength and cash flows. I'm just wondering how we should be thinking about maybe as target payout of EPS or cash flow. You think in the current environment, it's better to be prudent, maybe not push towards cash flow or given the stock price, do you think you have the opportunity to be a bit more aggressive?

Speaker 1

This is Dick. Thanks for that question. Yep. I guess our commitment to the dividend is is the first way that we return capital and the strongest commitment. The buyback is then an incremental piece when, we don't have to invest that money in the core of the business.

And it's how our investors have told us they like to get that incremental, return of capital. So, you know, at these levels, we're generating, you know, good free cash flow as Roger said, and we're gonna continue to be in the market, as Roger said earlier, buying back. If the levels, of the market change significantly, we'll have a conversation with the board and reflect on on whether that remains true. But, but that's the piece that is, I would say, you know, more you know, it's on top of the dividend, and that would be the first thing where we'd look to adjust if the market levels changed, significantly.

Speaker 10

Understood. Thank you.

Speaker 0

And we'll take our question from John Dunn with Evercore ISI.

Speaker 11

Thank you, guys. You talked about being wanna be a winner coming out of this this location, and you talked about what on the gross sales side is working. But are there any areas that maybe haven't been doing great that are maybe teed up or close to maybe flipping to, being contributors?

Speaker 1

You know, we have a list of focused products that we think have good client demand and good performance. We have a a tracking process where we take a look at things that are in the wings that we think are, maybe because of length of time that we've been running the strategy, or maybe it's just AUM in the strategy, or it could be, performance, bubbles moving through, you know, that we think will be more appealing on a go forward basis, and we track all those things. But there's nothing that we'd want to publicly call your attention to, along those lines. That's a sort of an internal process. And frankly, most of those pieces are are are smaller.

You know, our our results tend to be the aggregation of a lot of of individual pieces, and and we hesitate to to call any one individual piece out, too often, because it it the nature of our company is diverse geographically and diverse product wise, diverse across asset classes. And so the the things that really drive our results tend to be, aggregations rather than individual specific things.

Speaker 11

Gotcha. And then, on the investment, were there in in the quarter, were there any investment strategies that stood out as, causing kinda, you know, the deterioration in investment performance? And anyone that I know it's super early days, but maybe that a position to inflect back and get you back to where you were in that kind of top quartile overall performance?

Speaker 1

Yeah. I mean, I don't think I wanna participate in a naming and shaming exercise on this call. But, yeah, we had a few products that that dramatically, suffered in the three weeks the bad three weeks in March. We had some very good products that lost, that lost, you know, years of outperformance that they carried into March and gave significant parts of that back. And we had some other pieces, absolute return and and other things that that delivered well through the, you know, through the period of volatility.

But honestly, we're less concerned about what's just happened in the last three months and more concerned about what happens from here. You know, I don't think success or failure is driven by how you wrote through these last three weeks. I think success or failure is driven by how well we find value in this disrupted market from here going forward. And so, we're we're not gonna overreact to short term performance changes in the last month or two. What we're gonna do is try and keep everybody very focused on the idea that there's a huge range of mispriced opportunity out there, and this is where we do our jobs well and succeed over the next three and five years.

Speaker 11

Thank you very much.

Speaker 1

With that, maybe, let me just thank everybody for your time and attention today. I hope we've done a good job answering your questions. Feel free free to follow-up with us afterwards if there's more we can do. But we appreciate your time and attention today, and we look forward to speaking with you next quarter.

Speaker 0

And once again, ladies and gentlemen, that does conclude today's conference. We appreciate your participation today.