Janus Henderson Group - Earnings Call - Q3 2019

Transcript

Speaker 0

Thank you for standing by, and welcome to the Janus Henderson Group Third Quarter twenty nineteen Earnings Conference Call. Actual results could differ materially from 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 most recent Form 10 ks and other more recent filings made with the SEC. Janus Henderson assumes no obligation to update any forward looking statements made during the call. Thank you. And now it is my pleasure to introduce Dick Weil, Chief Executive Officer of Janus Henderson.

Mr. Weil, you may begin your conference.

Speaker 1

Welcome, everyone, to the third quarter twenty nineteen earnings call for Janus Henderson Group. Roger Thompson and I will be taking you through the results for the quarter today, after which we'll be happy to take your questions. As I think you already know, we try and keep a long term focus on our business, which is slightly different than the view implied by quarterly reporting. To that extent, on the first and third quarter calls, Roger provides you with updates on the business, and we use the second and fourth quarter calls to address these same items, but also include a more robust discussion of the business and the strategy. We believe that setup, better aligns our calls with the way we manage our business, though I hope that works for you.

With that said, let me turn it over to our CFO, Roger Thompson, to walk you through the third quarter results.

Speaker 2

Thank you, Dick, and thanks everyone for joining us. The third quarter's results can be characterized by three points. First, investment performance remains very strong, with at least 70% of assets beating their respective benchmarks over the one-, three- and five year time periods. Second, total company net outflows improved to $3,500,000,000 resulting in assets under management decline of 1% compared to the prior quarter. And third, the financial results were better than the prior quarter with EPS of $0.64 compared to $0.61 a quarter ago.

Turning to slide three for a deeper look at investment performance results. Overall, investment performance relative to benchmarks remained strong. We saw continued strength in the performance of our equity, fixed income and multi asset capabilities across the one, three and five year time periods and short term improvements in our alternative and Intech capabilities. Year to date performance at Intech has been encouraging, but the weakness in longer term performance means we still have business at risk. The other notable movement in the quarter was alternatives.

The UK absolute return strategy, which had switched to underperforming at the June, returned to outperformance as of the September. However, the strategy remains modestly behind its high watermark. On the right hand side of the slide, you can see that our relative performance compared to peers is very strong, with more than 70% of AUM represented in the top two Morningstar quartiles on a one, three and five year basis. Now turning to total company flows. For the quarter, net outflows were $3,500,000,000 compared to outflows of $9,800,000,000 last quarter.

The improvement was driven by lower gross redemptions, primarily from the four known areas of concern that we've previously highlighted. While we're pleased with this improvement and it's a step in the right direction, we're far more satisfied with the result and much work remains in front of us. Similar to last quarter, we wanted to spend a few minutes breaking down the flow result between known area of concern to the remaining area of the business. Last quarter, we introduced slide five in an effort to help you better understand where we're seeing major headwinds in the business. We did this because the current concentration of outflows is masking some really great work across the major cross sections of our business.

Given the improving trends in the areas of concern, next quarter will likely be the final time we break out the flow results in this manner. First, let's take a look at Intech. Intech had net outflows of $2,400,000,000 in the quarter, which is an improvement from the prior quarter. However, given the weakness in the longer term investment performance and the low sales pipeline, the business remains a key area of concern. Given these concerns and the lumpy nature of Intech's predominantly institutional business, we wanted to provide an update on the fourth quarter flows to date.

Thus far in the fourth quarter, Intech has experienced $1,400,000,000 of outflows, which is a disappointing result. Global Emerging Markets outflows totaled $200,000,000 in the quarter compared to $2,500,000,000 in the second quarter. Last quarter, I told you we remained fully committed to the emerging markets asset class, and we were very pleased to announce during the third quarter that we'd hire what we believe will be an exceptional gem team filling a key gap for us. This will now allow us to compete for assets in this category going forward, and we're very pleased with the new team. The remaining assets in this strategy are still at risk as clients continue to evaluate their positions.

We're obviously keen to retain as much as possible. That said, thus far in the fourth quarter, we've seen £400,000,000 of redemptions in the strategy, which leaves £1,900,000,000 of assets at risk. Outflows in core plus fixed income, which includes flexible bond fund, were $300,000,000 in the quarter compared to $1,000,000,000 in the second quarter. The result continues the trend of improved outflows as the year has progressed. Performance has also improved in 2019 relative to Benchmark and peers, which is also encouraging.

And finally, European equity outflows were $500,000,000 in the quarter compared to $800,000,000 in the second quarter. Whilst negative, this represents continued improvement for this area of the business. While demand across the industry for European equity remains weak, investment performance across our strategies continues to improve and relative to peers all are in the top two quartiles over the one and three year time periods. The remaining part of

Speaker 3

the business continued its upward trend in the third quarter. I'd

Speaker 2

remind you that the reason why this is so important is because this area of the business accounts for 80% of the firm's total AUM. As you can see in the second bar chart on the right of this slide, this area of our business had $100,000,000 of net outflows in the third quarter compared to $1,400,000,000 of net outflows in the second quarter, a much better result, but still one that's below where we aspire and expect to be. The improvement over the prior quarter really reflects the continuation of the trends we spoke about last quarter. We're seeing inflows into fixed income across a diverse set of strategies, most significantly during the quarter into European investment grade credit, strategic income and multi sector income. We're seeing market share gains in our intermediary business with positive net flows during the quarter in The U.

S. And Europe and in Latin America. We're seeing ongoing improvements across a number of US equity funds and continued organic growth globally in the balanced fund. While net flows have improved during the quarter and we're winning new business and gaining market share across a number of regions and capabilities, we do continue to see risk across the four areas I highlighted earlier, but we remain cautious about the flow outlook in the near term. Slide six is our standard presentation of The U.

S. GAAP statement of income. Moving to slide seven for a look at our summary financial results. Adjusted third quarter results compare favorably versus last quarter, primarily as a result of lower expenses. Average AUM in the third quarter was flat compared to the prior quarter as market gains were offset by outflows and a negative FX impact.

Total adjusted revenues in the quarter remain unchanged compared to the second quarter. Adjusted operating income in the third quarter of $160,000,000 was up 5% over the prior quarter driven by lower expenses. Third quarter adjusted operating margin was 37% compared to 35% in the prior quarter and 38.5 a year ago when we had a higher average AUM. Finishing up the financial results. Adjusted diluted EPS was $0.64 in the third quarter compared to $0.61 for the prior quarter and $0.69 a year ago.

On slide eight, we've outlined the revenue drivers for the quarter. Management fees decreased slightly from the prior quarter as higher AUM and one additional calendar day was offset by lower net management fee margin. The margin for the quarter was 41.6 basis points, which was down compared to the second quarter, driven by mix shift in the business primarily from outflows in high fee equity products. Performance fees remained positive at 1,000,000 compared to $4,000,000 in the second quarter. Regarding US mutual fund performance fees, the third quarter improved to a negative $1,000,000 from negative $4,000,000 in the second quarter and negative $11,000,000 a year ago.

If we're successful in continuing to outperform benchmarks in the fourth quarter of twenty nineteen, we will further improve these performance fees. Under this scenario, we'd see positive performance fees in this area in the fourth quarter. Turning to operating expenses on slide nine. Adjusted operating expenses in the third quarter were $273,000,000 which were down 3% from the prior quarter. Adjusted LTI was down 14% from the second quarter, largely due to social security taxes on vestings in The UK that occurred in the previous quarter.

In the appendix, we've provided the usual further detail on the expected future amortization of existing grants, which hasn't changed significantly compared to the prior quarter. The third quarter adjusted comp to revenue ratio was 42.7, which is in line with the guidance which we communicated previously. Adjusted non comp operating expenses decreased 2% quarter over quarter, primarily from the lower seasonal marketing expenses. With nine months of results in the books, the guidance on 2019 non comp expenses, which is flat to 2018 excluding the $12,000,000 legal outcome in 2018, is still applicable. Finally, the firm's recurring effective tax rate for the third quarter was 23.8%.

For the full year, the firm's effective tax rate is still expected to be 23% to 25%. Lastly, slide 10 is a look at our capital management. As you can see on this slide, our strong balance sheet and our commitment to returning excess cash to shareholders has enabled us to fund $513,000,000 of dividends and buybacks over the last twelve months, which represents approximately 100% of the cash flow from operations that was generated in the period. During the third quarter, we paid $68,000,000 in dividends to shareholders and declared $0.36 per share dividend to be paid on the November 25 to shareholders of record as at the November 11. Additionally, we purchased 4,200,000.0 shares in the quarter for $81,000,000 This takes our year to date accretive share repurchase program total to $187,000,000 or 8,900,000.0 shares.

We anticipate the remaining $13,000,000 of the $200,000,000 authorization to be completed in the fourth quarter. After the completion of this program, we would have reduced the total shares outstanding by nearly 7% since we began buying shares in August 2018. Looking forward, any consideration of a new buyback authorization will occur during our annual capital planning process with the Board in early twenty twenty. We'll provide an update during the full year earnings call in February. Now with that, I would like to turn back 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. If you would like to ask a question, please press star one on your phone now, and you will be placed in the queue in the order received. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment.

Questions. You. And we'll take our first question from Simon Fitzgerald with Evans and Partners.

Speaker 3

I'll just refer you to Slide 19, where we can see that there two strategies that are in inflow at the moment being fixed income and equities. Roger, you talked a little bit about some of the strategies in terms of fixed income that have been more popular than others or at least are seeing some of those inflows. Could you elaborate in terms of which sort of jurisdictions you're seeing that sort of come through in terms of client demand?

Speaker 2

Yeah. Hi, Simon. I think it's one of the strengths of the franchise and it's also one of the strengths of the cross selling we're starting to see. So there is a number of areas. I'd I'd look to what's called strategic bond in The UK, developed bond developed world bond, it's called, in The US.

That's the same London team, which is selling very well, in in The U in The US. Our absolute return income funds, that's the the team, the Capstream team in Australia, which is something we've talked about over the last six to twelve months, I guess, in terms of globalizing that and selling that product globally, getting the right products in the right place. We're starting to see that come through. And some institutional wins in fixed income as well. So it's pretty broad.

On the multi asset side, it's the continued strength of the balanced fund. We've talked about performance of that fund. It is, you know, well in the top decile over overall time periods, and it continues again to be a to be a great strength of the of the combined firm. It's selling in The US. It's selling in Europe.

It sells a little bit in Asia.

Speaker 4

Mhmm.

Speaker 2

So that's what's driving multi asset. There are other things which we're which we're, you know, confident about for the future. But the flows you're seeing in multi asset are certainly driven by the balanced fund at the moment.

Speaker 3

Excellent. Thank you. Second question relates to market share. There were some comments in the media statement and also mentioned on the call just now that you're seeing some increases in market share. Just wanting to know a little bit, is that sort of something anecdotally that you sort of think about in terms of your flows versus others?

Or are you seeing some statistics and data that you could share with us in terms of how that market share is unfolding?

Speaker 2

Yes, certainly. I mean, we look at the I think the best data for that is the SIM fund data Mhmm. Which comes out monthly. And you'll see again, you you gotta look at that, you know, in in terms of what we do. So when we look at and I guess the one that's we've talked about, again, consistently is is sales of U.

S. Equity. We're excited by our U. S. Equity franchise.

It's a great franchise with some fantastic numbers. And if you look at it, those numbers continue to be exceptionally strong. And we should be taking market share. The good news is we are. And what we've said is we can, despite that market in active equity not growing, it is a shrinking market.

We know that. We understand that. But we can take market share. We are taking market share and we're actually seeing, you know, we are seeing actual growth in U. S.

Equity. But it's the it's the Symfund data you're looking at. You know, I think the the other thing that's that's notable over the last over the last couple of months is that we're back in inflow in intermediary in Europe and Latin America. Obviously, that's been a strong growth area for the firm a few years ago. It's it's had a tough couple of years, but we're starting to see positive flows consistently.

And I think that, again, is an important, an important, fact. It's not one month. We're starting to see consistent flows in in, in cons on the continent, and in LatAm.

Speaker 0

And we'll move on to our next question from Andre Stadnik with Morgan Stanley.

Speaker 5

Good morning. Can you hear me okay?

Speaker 2

Yes. Hi, Simon. Hi, Andre.

Speaker 5

I know I know all us Australians here. Yeah. Something. But I I wanted to ask two two questions. One question is around, you know, what kind of flows, you know, you've seen for from Japan and or from Daichi?

And the other question kind of high level, you know, it it seems that the organization, the combined organization is clicking together, you know, better than ever in terms of, you know, some of the cross sales and also, you know, fewer, you know, PM departures or turnover from what we can see publicly. So are you getting the sense that you're starting to really move ahead with what you envisioned from the combined entity?

Speaker 1

Andre, it's Dick Weil. I think generally, answer is yes, but it's it's it's progress, and we're nowhere close to what we believe we we can and will accomplish. So there there's there's still, as Roger said earlier in his comments, there's still a lot of work in front of us. And frankly, we still we still face in the in the four areas we've called out, some continuing real challenges, which is why Roger expressed, some shorter term caution. So, you know, the the in the broad sweep of time, yes, we're making a lot of progress.

The firm is coming together. We're building the right right culture. The the talent is is applying itself well, and we're and we're starting to produce, you know, improved results. That's the positive side. The the cautious side is, hey, InTech is still, facing some challenges.

In EM equity, we still have a bunch of, assets that are that are challenged by the changes there. European equities is improving, but let's face it, it's still not a healthy external environment and it's not a we haven't finished strengthening the internal record. And in core plus fixed income, we continue to to to face some some challenges. So we're on the right track, and we're we're getting through it, but there's there's still substantially more to go in front of us before before we feel like we've we've approached our potential.

Speaker 2

I think specifically in terms of Japan, flows were flattish. I think basically flat in the quarter. We continue to look at new business with Daiichi and Asset Management One. We talked over the last couple of quarters about the new fund that we'd launched, the Adaptive Asset Allocation product that we'd launched in Japan. That's seeing that's continuing to see some some, some small inflows.

So, again, that's doing exactly what it's supposed to do, and the relationship with Daiichi remains incredibly strong. Dick, the other part of the question was around fewer departures. We yeah. Yeah. Yeah.

We're we're in good place,

Speaker 5

I think.

Speaker 1

Yeah. I I I feel like we have you know, every day is a challenge, of course. You don't wanna take it for granted, but we have really wonderful people, and and we feel quite good about the stability of our team.

Speaker 5

Thank you.

Speaker 0

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

Speaker 6

Hi. Thanks for taking my questions. Just firstly on Intech, there's been a bit of talk about that on the call today. And last quarter, you kind of touched on some potential structural headwinds the quant funds are kind of facing. Are you still seeing those industry headwinds continue to play out for Intech as a headwind for them beyond performance?

Speaker 1

This is Dick. Intech continues to face difficult market conditions. It's in a lot of different market spaces and so generalizations are tough. But large cap equities in institutional U. S.

Continues to face tremendous competition and and the trend to barbelling of portfolios. And Intech's portfolios tend to be well controlled on the risk front. And so people who believe that what the right investment strategy is is to either take a lot of risk or to index, that can can be a challenging trend for InTech to be held out in the middle. They've done an awful lot of product innovation, process improvement, and other things. And and and we believe, you know, over the long term, they'll come through that and start growing again even in The US.

But it's a long road from where they are to there. And right now as Roger mentioned, their sales pipeline doesn't look terrific and they continue to face some challenges. So the recent volatility of the last three years has put them a little bit on the back foot and that continues.

Speaker 6

Okay. And just the second one, you've touched on last period, you talked about strategic pillars and one of those being some new growth initiatives. Today, you've talked a little bit about some good growth in fixed income and multi asset. Can you just touch a little bit more on some of the growth initiatives you've got going on with some new products?

Speaker 1

Sure. So the growth initiatives that we identified internally were that we wanted to strengthen our efforts in Asia ex Japan. We wanted to further invest and build out in our ETF franchise. And we're making progress on both of those, but both of those are sort of longer term initiatives. So in Asia ex Japan, we have retooled the team, and brought in a lot of new talent.

But, you know, most of that is distribution sales talent, and it takes a while for folks to acclimate to a new firm and then drive sales. So we're confident that the investments we've made in some people and talent will move us forward in that region. And frankly, that's one of the really important sources of growth for asset management in the industry and that's available to the industry. And so we've just got to be more successful in that space. We think we're on the right track, but it's too early to talk about big results.

The third area was multi asset. And we had mentioned previously that we'd hired Michael Ho to lead the effort and that we were trying to push forward there. We've seen some encouraging signs with some new wins and substantial client interest. There's a lot more to do there. A lot of what we're doing there tends to be using alternative tools to enhance some basic indices and we need to get also moving forward with some higher discretion, higher fee part of the product lineup as well if we're going to achieve our aspiration.

So there's plenty to do there, but we are seeing progress and particularly the team in London is seeing some real substantial institutional interest that we hope will bear fruit.

Speaker 0

And we'll take our next question from Ken Worthington with JPMorgan.

Speaker 7

Hi. Good morning. Maybe first, US performance fees are about at breakeven. I think that's the best result since 2011. Given that fulcrum fees are back to that almost breakeven level, is there an appetite to restructure the performance fees?

And is this something you think might be feasible to either correct the flaws in the structure or maybe outright work with the fund boards to eliminate them?

Speaker 1

Hi, Ken. It's Dick. Thanks for the question. I have said previously that I am not the largest fan of this particular fee structure. And the real reason is because it's a three year lagging analysis.

It it looks over the last three years and then sets the fee based on performance. The trouble is folks in a retail mutual fund who may have a three year time horizon in terms of the length of their duration of their investment are generally always paying for somebody else's investment returns. And that lack of alignment, I find really inappropriate and troubling. And coupled with that, a lot of the distributors find the the variability of the fee a bit hard to deal with because they're they have trouble explaining what the fee is gonna be on an ongoing basis. And so our key partners in distribution in this business, the the the big networks, don't particularly love that fee structure.

So if, you know, you could press a button and amend the fee structure to something, you know, more stable, we would probably do that. But the fact remains, there's an awful lot of, hurdles set out to change that fee structure. There are very expensive and complicated investor votes. There's a big, complicated SEC approval process. And so we're not on the cusp of sort of pushing down that road.

The the the cost and and challenge and disruption of transit of the transition of the fee structure is is, in our view, substantial. So, you know, in a frictionless world, the answer to your question would be no. In in the practical world in which we live, given the hurdles, the answer is we're we're we're gonna stick with this for a while longer. But we continue to talk to the trustees who are really in charge of this. They're aware of our thoughts about the fee structure.

And, if it becomes appropriate, you know, to to amend it, we would be a willing partner in in that discussion, but that's not imminent.

Speaker 7

Thank you. And then on EM, with, I think you said the new PM, does a track record need to be built from scratch here? Or is it does it take a year, multiple years to sort of rebuild the track record so that you're in a better position for sales? And then I think last quarter you received notifications on 800,000,000 of redemptions that you thought would hit in 3Q. It looks like 200,000,000 max hit.

Did those notifications get canceled or maybe just postponed to this coming quarter?

Speaker 1

They're postponed to taking your second question first, they're postponed and we still expect them to come in the third quarter. And obviously, there could as we mentioned in Roger's comments, we're cautious about it because, we think there's a high risk that it that you could get substantially more notifications. There's one big concentrated client in the remaining mix that is Roger what's A billion 3. A billion 3. And and that could that's certainly at at high risk also.

So we don't see and we're trying to be clear in our communications. We see that remaining emerging market asset base as substantially challenged in the short term as we've gone through the transition. Turning back to the your question about the new team. It's a hard question to answer. It's a good question.

We ask ourselves that question. They're obviously a well known team with a strong track record from their prior employ. How much credit the client base gives to that and how quickly they're willing to to sort of take a a, on an institutional basis, take a a consistent view of their track record over time is something that we don't know for sure yet. We're optimistic that because a substantial part of that team came over including analysts that that continuity makes the case very strong, and therefore shrinks the sort of the waiting period. We don't yet have enough evidence to know how well that's gonna play going forward.

The the thing we really know is they're a very good team. They're already contributing to research and understanding on a broader basis. They're integrating well in the firm, which is kind of an amazing thing to say when they're based in Boston, and they've only been here in such a short period of time. But they've made it their business and gone far out of their way to start the process of connecting and integrating. They're great people, great professionals.

We're thrilled to have them. And I can't give you a precise read on how the clients how fast they'll adopt it, but but we're we're confident that in the medium term, there'll be a lot of adoption of what they do.

Speaker 0

And we'll take our next question from Mike Carrier with Bank of America Merrill Lynch.

Speaker 4

Alright. Great. Thanks for taking the question. First, you're seeing good improvement in the performance even on the redemption side, that's heading lower. But it seems like on the sales side, it's still a bit muted and realize some of this stuff is industry challenges.

But with the improved performance,

Speaker 2

can you give us

Speaker 4

some color on how you're working with the distribution teams to try to drive sales going forward?

Speaker 1

Yeah. Sure. This is Dick again. First and foremost on the distribution team, the biggest news is that, we recently hired Suzanne Kane to be the Global Head of Distribution. And she is a terrific new talent and addition to our team.

She's doing a good job of trying to review the existing distribution and marketing resources and making sure that we're facing off against the opportunities in the right way. And and we're excited for the for the leadership that she's providing, and we're optimistic that that we'll get more bang for our our assets in distribution and marketing going forward. The second point I would make is that flows generally lag investment performance. So when you have improvement and good investment performance, I think the first thing that you see is the redemption slowed down. And and probably the second thing you see is is that continues for a long period of time.

You then pick up on the sales. And obviously, have a lot of different products we're talking about. So we're being sort of inaccurately general. But but that's sort of the path we see. So we see that we are gaining momentum in our strong product areas, and we think we can continue to do so and drive more

Speaker 2

sales.

Speaker 1

That said, there there are parts of the industry that are really challenged. The UK is obviously still going through Brexit chaos, and it's really tough to make a huge amount of progress in that market environment. And you put that together with some of our performance challenges in the European equities. That's made that one tough. But again, we are gaining market share in the intermediary business with positive flows in The U.

S, Europe and Latin America, that's a good lead indicator for us that we're on the right track.

Speaker 4

All right. That's helpful. And then maybe as a follow-up, Roger. Just with the performance improving, can you provide, I guess, just a general update on the performance fees, meaning like what is the average or like max potential that you can actually see in a year versus maybe the more muted recent trends just to have an idea of what the potential is over time.

Speaker 2

Yes. Well, let's just say, it's there's two pieces. We've talked about The U. S. Mutual Funds, and we're obviously in a much better place there than we were, and we'd like to see that becoming a positive number.

We have about $126,000,000,000 ex the U. S. Mutual funds with performance fee capabilities. So that's stayed about the same. We've grown some things.

We've some other things have shrunk, but about $62,000,000,000 has performance fees, and it's very broad. Dick mentioned, there's a bit of a risk generalizing on things. But we've got a portfolio of assets with performance fees. They are spread through the year. Q4 and Q2 are the two biggest quarters for those as we've talked about before.

So we didn't expect and you shouldn't have expected much in Q3. You should expect a bit more in Q4. Most of those are three year institutional accounts with three year performance fees on them. So we've got thirty three months in the bank. But you don't count anything until it's done.

So there will be some performance fees in Q4. We're not talking about the levels that the combined firms had in 2014, 2015. The capability is still there. We need to get we need continue to build that performance in the areas which have got the performance fees on them.

Speaker 1

But there will be some performance fees in Q4. And you mentioned UK absolute return.

Speaker 2

Yeah, UK absolute return, guess, is the other swing factor that fund sizable fund, which you can track, which pays quarterly performance fees quarterly. It's been a very strong long term performer for its for the clients in it and has generated significant performance fees in the past. It's had a tougher last eighteen months. And as I talked about the last twelve months, it's got back above its benchmark. It's still slightly behind its high watermark.

So there's a little bit more work to go before that starts to generate Pfeas again, hopefully it will.

Speaker 0

And we'll take our next question from Craig Siegenthaler with Credit Suisse AG.

Speaker 8

Thank you. Just wanted to start on the macro actually on Brexit given your large European operations. But what is your view of investor cash on the sidelines in Europe and pent up demand for risky assets with the resolution? And also how does a hard versus soft Brexit scenario change your view?

Speaker 1

Hi. This is Dick. I'll start and then hand it over to Roger. Roger has led our Brexit preparations across the firm, so he's exactly the right guy to address this. Let me just say regarding the uninvested assets.

I think Europe, you know, with negative rates is driving assets out of the banking system. Ideally, a lot of those would come to us. We don't see that really happening yet. There are, the banks themselves are getting products sort of in the middle. Insurance companies are getting products in the middle.

And some of the the fear, that the Brexit process is generating probably stands in the way of a big wall of uninvested cash, coming forward into the active asset management industry. So, you know, we're not yet, really reaping the major benefits from that possibility. But we still see it hanging out there in the future. And frankly, not just in Europe, there's tons of uninvested cash in a lot of other markets as well. And that's one of the reasons that we're sort of strategically optimistic about our opportunities in this business.

But particularly in Europe with negative rates, over time that will drive a whole lot of the money out of the traditional bank deposits and it's gonna have to find somewhere to go. And if we do a great job, you know, we're optimistic that once sort of the Brexit noise calms down, which hopefully it it it will do post UK election, etcetera, that'll represent a real opportunity for us.

Speaker 2

And, Craig, you know, technically, hard versus soft, technically, we are built for a hard Brexit. We've enhanced our structure. We've got 17 people in Luxembourg now. We used to have five. We've done the work to move our branches to be branches of the Luxembourg company rather than The UK company.

We've launched some products in or some funds that weren't in our CCAV range where some Europeans were buying the OICs and potentially might not be able to. So we've technically Brexit proofed our business. So the issue isn't the technical side. As you say, it's much more the macro side. The flows in The UK have slightly improved.

Outflows are slightly less, nothing to write home about. An improved yes, so we got time to wait yet. The UK is a tough market to be doing business in. Teams are doing a great job, but it's a pretty ugly market out there.

Speaker 8

Thanks, Roger. And just a follow-up here on expenses. What would it take for Janice to take a more proactive stance on reducing expenses? And really, do you have this lever available after the significant cost you took out of the business post the merger?

Speaker 2

Craig, you've always got that lever available. But I think the most important thing is what are we trying to do? Again, hope we've been pretty consistent with this, that we put together this combination to grow this business, and we've invested in it to grow this business. And we continue to do that. We will try and do that as efficiently as possible.

There are natural levers in the business. Our variable comp is at the total company level is just about fully formulaic, so that will flex up and down with earnings. And we continue to look for efficiencies in the business. There's things we're doing to take costs out. There are also things we're doing to invest in the business.

So are we running I think the most we're running the business to grow. That's because we believe we can grow this business, and we expect to grow this business. Should that not be the case, you'd run a different expense base.

Speaker 0

And we'll take our final question from Alex Blostein with Goldman Sachs.

Speaker 4

Good morning. This is actually Ryan Bailey on for Alex. I was wondering if we could spend a moment on specifically the management fee rate. It looked like it declined another 0.6 basis points this quarter. So as you kind of think through the puts and takes of the key areas of risk that you highlighted, can you give us some sort of near term guidance of what that sort of pressure would ultimately result in for the fee rate?

Speaker 2

Sure. Ryan, I don't think anything's changed from what we've said consistently. There is fee pressure in the business. We see fee pressure the same as others, but we do have high quality products and that probably protects us a little bit more in some areas. So the biggest impact is flow mix.

The and you've got an move in rates. That sort of you got to look at what happened in both Q2 and Q3 in terms of the assets we lost. So we've lost some higher fee product in equity, in emerging market equity, some of the alts capabilities, but we've also lost some lower fee product in Intech. Going forward, it will depend on the mix of product, I guess is the answer. We've told you that we continue to see risk within tech.

That's at the lower end. We got risk in emerging markets. That's at the higher end. Should we see continued growth in intermediary? That's obviously good news for the fee rate.

It will be driven by the mix of business, but there is no fundamental change in that fee pressure that the industry sees and we see. And that comes back to Craig's prior question around expenses. We need to continue to be efficient in how we run our business because we're running a business with the expectation that fee rates will do what they've done for the last decade, which is drift down. But it's not a fundamental change that we're seeing or expect to see.

Speaker 4

Got it. And maybe just one more on Intech. You gave us some really helpful color on the EM concentration. Do you mind giving us an update or a reminder on concentration at Intech in terms of key clients?

Speaker 2

Yes. I mean that's a pretty concentrated business. We've got a number of multibillion dollar accounts at Intech. And that's why we say that it is the most difficult to predict. There opportunities.

There is a little bit of pipeline. It could be something that comes in. But where we are at the moment is with a challenging performance period running through 2018. 2019 pleasingly has been much better. But we sit with three years of too much volatility.

And therefore, there is risk in that business. And if and our clients, we've talked before, we have very relationships with those clients. That team is excellent at explaining its performance and working with the clients. And they've been very patient. But you will notice it if on the asset side, you will notice it if we lose some of those assets.

There are some large concentrations.

Speaker 1

Yes. This is this is Dick. That's right. It's I think the five largest strategies at Intech make up 57% of its AUM. So you're it's a smart question.

There's a high degree of of concentration and therefore substantial risk that you could see big pieces move. The corresponding truth is those tend not to be the highest revenue pieces, but, but it's a good question you've asked.

Speaker 0

And ladies and gentlemen, that does conclude today's conference. We appreciate your participation. You may now disconnect.