Janus Henderson Group - Earnings Call - Q4 2020

Transcript

Speaker 0

Good morning. My name is Andrew, and I will be your conference facilitator today. Thank you for standing by, and welcome to the Janus Henderson Group Fourth Quarter and Full Year twenty twenty Results Briefing. 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 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.

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 fourth quarter and full year twenty twenty earnings call for the Janus Henderson Group. As usual, I'm Dick Weil, CEO. I'm joined by our CFO, Roger Thompson. Let me start by saying I hope all of you and your loved ones are having a safe and healthy start to 2021. In today's presentation, I'll give a brief summary of our 2020 results.

I'll then touch on progress we're making in delivery of our strategy of simple excellence and a bit on how the business is starting out 2021. I'll also provide an update on our relationship with our strategic partner, Daiichi. And then I'll hand it over to Roger, as usual, who'll go through the results with some more precision. And following our prepared remarks, we'll take your questions. So let's turn to Slide three, which takes a high level look at our 2020 results.

Investment performance is solid and has held up well despite really difficult market conditions in 2020, particularly in first half of the year. 68%, 6572% of our assets beat their respective benchmarks over the one, three and five year time period. Our fixed income teams did extremely well with at least 90% of our AUM beating respective benchmarks over the same time periods. We had more mixed results in some of our equity strategies. In particular, mid and SMID cap growth U.

S. Strategies managed out of Denver faced some really tough times in the first half of the year. But overall, our teams have been terrific. They've been resilient and they're doing their jobs. And we're proud of their results.

Next, despite disappointing outflows, particularly in the first half of the year, with the benefit of markets, our AUM ended up over $400,000,000,000 and we're pleased with that mark. This is up seven percent on last year. It's up over 35% from the market sell off from the bottom in the first quarter. And so that's a good mark for us we're pleased with. The headline flow result for the year masks a really important trend of progress building through the year.

We had a really tough first half, but we've seen strong and growing momentum in our flows and are optimistic as we enter 2021 that we can continue on that better path. The first half net outflows of $20,000,000,000 over 80% of the net outflows of the year. The back half was much better. It reduced to $4,000,000,000 of net outflows in the second half. And so that's the momentum I was talking about, which even got better in the fourth quarter as U.

Dollars 1,000,000,000 of net outflows were the mark in the fourth quarter. We were basically flat or positive across all of our capabilities except for our quants equity capability, which as we've previously talked about, is going to take some more time to heal. Finally, our financial results for the full year were very strong. Our adjusted EPS increased 22% over last year. We generated over $600,000,000 in cash, which allowed us to return $394,000,000 in dividends and buybacks to shareholders.

If you turn to Slide four, it's a reminder of our strategy, which is simple excellence. Despite the unprecedented events of this past year, I'm delighted that we've continued to make significant progress on delivering our strategy across each of strategic pillars, building a strong and resilient foundation for our future. Our path to achieving simple excellence is founded on five planks referenced on this page. I've previously said that delivering on simple excellence builds relationships, which will drive organic growth as well as increasing profitability. Looking ahead, Simple Excellence forms a very strong foundation for a stable and resilient business, and it supports sustained growth in the long run.

This means organically scaling operations and profitability across our existing core franchise, delivering on the benefits of operating leverage. But it also means, in time, it would enable us to remain alert to inorganic opportunities, which would complement our strategy and operating model. We're taking the right steps as a firm to create value for all of our key stakeholders, for our clients, our employees and our shareholders, and we're entering this new year with a lot of optimism. Slide five takes a look at some of the progress we've made in the strategic priorities across investments and distribution. Despite the market volatility and challenging conditions, which we've already talked about for our investment team, our near term investment performance has strengthened throughout the year.

We've seen some mixed pockets of performance since the market sell down in the first quarter, but our investment teams have done a really good job. They've remained disciplined and true to their promises to the clients investment strategies. We've taken steps also to strengthen our investment teams during the year. We've recruited some excellent talent and filled key roles. We filled a new U.

S. Head of fixed Income. We added a new Director of Research early last year. Those are crucial, crucial seats for us, and we're really pleased with the talent that we were able to attract. More recently, it was exciting to fill a new Head of ESG for our investment team, who'll be leading our ESG approach across all of our investment capabilities.

We've also continued to invest in our technology for our investment teams. We're doing a major upgrade to our OMS and portfolio risk systems, And these are really important investments to enable our teams to set our business up for future growth. On the distribution side, we finished the year with real momentum. The global distribution roadmap from our Head of Global Distribution, Suzanne Kane, brought real energy and focus to our efforts. We saw double digit growth across our global focus products, which is our list of products where we see the best competitive positioning and high growth potential.

And that program is working really well for us. We also strengthened senior leadership across distribution, client relations, product team, including appointing new global heads of consultant relations of product and product strategy and ESG, which will further support our articulation and delivery of our ESG solutions to our clients. In line with our conviction on the importance of data across our firm underpinning everything we do, we've significantly expanded our distribution intelligence analytics capabilities. Next, let's turn to Slide six and let me talk you through some of the accomplishments in the year delivering on Simple Excellence. We continue to make significant progress in the execution of our strategy.

During the year, we completed some major projects that simplify the way we operate our business and that also serve to free up capacity so we can add energy and resources not only to delivering BAU, but also to delivering generational steps forward In addition to those things, we've also done good work targeting new growth initiatives. During the year, we extended some of our strongest product capabilities to new regions and vehicles. We launched new products like a biotech hedge fund, a multi strategy fund, a European focused asset backed security strategy as well as a number of new ETFs that are doing well in North America and Australia. We've expanded our presence in key growth areas, including in Latin America. This list of achievements underlines the progress we're making to continuously improve our firm.

We feel like simple excellence is working, we're proud of the progress we're making. Let me turn last on this page just briefly to cost control. We owe you an update, as we've mentioned from prior quarterly calls, on cost control. Roger is going to take you through that cost management in more detail. But I just want to set a framework from my perspective.

As we think about cost control, it's really important, and we want to be as efficient as we possibly can. But there are boundaries to that. Even more important than that efficiency is we have to make sure that we're delivering excellence. And we have to deliver the growth that we've promised as well, both in terms of AUM and in profitability. So for us, that creates sort of a hierarchy.

We need to be as efficient as we can without sacrificing that simple excellence and that growth. And so that boundary is important. And while Roger will take you through the cost savings that we found, and they're important and material, we've also found that we need to make some continued investments in our infrastructure in order to deliver that simple excellence and growth. So what we're doing as a management team is living in that framework and in that balance. And Roger will talk to you more about that a bit later.

Let me turn to Slide seven. One last thing I want to cover before I hand it back over to Roger. I need to give you an update on our relationship with our strategic partner, Daiichi. Daiichi has made a strategic decision to separate its operational partnership with Janus Henderson from its Board and capital positions. It's decided that it needs to focus its capital on its global insurance business.

And so while they continue to be an exceptional partner for us, they're going to change the capital relationship. They are going to sell their position and step off the board. Now we're disappointed because they've been a wonderful board member. But we're also pleased. We have a new cooperation agreement that underpins what we believe will be a strong and growing operational relationship into the future.

And so while disappointed that we won't have the benefit of their participation in our shareholder register and on our Board. To us, the most important thing is that the wonderful operational relationship that we've developed is going to continue and grow, and we look forward to that going ahead. As a result of this, we have today announced the commencement of a secondary offering of common stock through which Daiichi intends to exit its investment in Janus Henderson through an underwritten public secondary offering. We've agreed that Janice Henderson will participate in the offering and will purchase up to $230,000,000 of stock using cash. Our participation is expected to be immediately accretive to our shareholders.

We're pleased to demonstrate our ongoing commitment, returning excess capital to our shareholders and delivering on this commitment in an accelerated and disciplined manner. Just as a little background to that, we currently manage about $10,000,000,000 on behalf of Daiichi and its subsidiaries and affiliates. This was $2,000,000,000 at the onset of our relationship back in 2012. It's grown nicely to $10,000,000,000 today, and we're looking for opportunities to continue to support that and even grow it further in the future. And we look forward to collaborating on the development of new investment products as well.

Our relationship will also continue to be supported by an exchange of human resources. We remain absolutely committed to expanding in Japan. We look forward to welcoming a senior Daiichi executive to share in the leadership of our Japanese business going forward. Daiichi has been our largest shareholder for eight years. And while we're disappointed to lose their involvement in that regard, we really do understand the competing needs and the pressure on their capital, and we look forward to continuing our strong operating partnership and growing it in the future.

Today's news will reshape our share register. It doesn't change the path we're on with simple excellence and across our business. So with that, let me turn it over to Roger to give you some more precision in the results.

Speaker 2

Thank you, Dick, and thanks to everyone for joining us. Starting on Slide nine with the fourth quarter results. As Dick's already discussed, our solid investment performance and our strong AUM at the end of the year, I'll touch briefly on flows and on EPS. Net outflows continue to trend better at $1,100,000,000 in the quarter as a result of net inflows into intermediary and strong gross sales in Institutional. The financial results were exceptionally good with EPS of 1.04 compared to $0.70 a quarter ago.

The significant increase was primarily due to higher average assets, very strong seasonal average annual performance fees and investment gains on our seed capital. Moving to Slide 10 and investment performance. Investment performance remained solid with 68%, 6572% of firm wide assets beating their respective benchmarks on a one, three and five year basis as of the December 31. The one year performance improvement compared to the third quarter was primarily from The U. S.

Concentrated growth strategy within equities. Performance of fixed income, multi asset, which is dominated by balanced and alternatives, is excellent and very competitive. Additionally, we're encouraged by Intech's significantly improved one year performance. Relative performance compared to peers is strong overall with 57%, 6671% of the 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 $1,100,000,000 compared to $2,900,000,000 last quarter and continues our significantly improving quarterly flow trend. The quarterly flow number reflects the best gross sales figure since the merger. This gives 2020 our two highest gross sale quarters ever and speaks to the momentum we're seeing in the business. The flow results, whilst negative and not yet where we expect it to be, is the best quarterly number in over three years. Looking deeper, net flows were flat or positive and strengthening across all capabilities except quantitative equities, which as we said will take time to turn even with that solid one year investment performance.

Now let's move to Slide 12, which shows the breakdown of flows in the quarter by client type. Previously, we've provided this view of flows as a one off in earnings presentations. However, it is an important way in how we look at and think about our business. And as such, beginning this quarter, we'll present and discuss the flows in this manner regularly. So let's look at the quarterly detail.

Intermediary net inflows for the quarter were $1,000,000,000 Across regions, net flows in EMEA, Latin America and Asia Pacific were all positive, spread across fixed income, multi asset and equity strategies. These inflows were partially offset in the strategies experiencing short term underperformance. The Intermediate result shows our breadth of product and our global distribution footprint. Institutional net outflows for the fourth quarter were $1,200,000,000 which included some strong wins in The UK and EMEA, offset by net outflows in quantitative equities of $3,400,000,000 Gross sales of $8,800,000,000 were the best result since the merger and reflects converting some of the strong that's been building in Institutional. Finally, net outflows for the self directed channel, which includes direct and supermarket investors, was $900,000,000 in the quarter.

Slide 13 shows the breakdown of flows in the quarter by capability. Equity net flows for the fourth quarter were virtually flat compared to €5,100,000,000 of outflows in the prior quarter. The improvement in quarterly outflows included a $2,100,000,000 funding from a large insurance client in The UK into our UK enhanced index strategy as well as positive non U. S. Retail flows led by European small cap, global life sciences and global sustainable equity, which is one of our dedicated ESG strategies.

Flows into fixed income were positive 1,200,000,000 in the quarter. Fixed income continues to see positive flows in retail across a wide range strategies, including our short duration ETF, Vanilla, P and L A, our developed world bond, European investment grade credit and global high yield. Total inflows for multi assets were $1,200,000,000 driven by inflows into the balanced strategy. Quantitative equity outflows declined in the fourth quarter to $3,400,000,000 We're pleased with Intech's improving short term performance, but as we said previously, it will take time for flows to turn. Finally, alternative flows will breakeven.

Slide 14 is our standard presentation of The U. S. GAAP statement of income. Moving to Slide 15 for a look at the summary financial results. In summary, adjusted revenue, operating income, margin and EPS are all up strongly quarter on quarter and year on year.

First, quickly looking at the full year's result. Despite the extreme market drop due to COVID in the first quarter, the market recovery and strong cost control thereafter enabled increases across our adjusted financial metrics even with a 1% drop in average AUM compared to 2019. Although average AUM was down over the prior year, a higher net management fee margin and better performance fees led to a 5% increase in adjusted total revenue for the year. Full year adjusted operating margin improved 2.2 percentage points over 2019 to 38%. And adjusted diluted EPS for the year was $3.1 compared to $2.47 in 2019.

Now looking at the quarter on quarter comparison. Our fourth quarter adjusted financial results primarily reflect good market conditions and exceptional seasonal performance fees during the quarter. Average AUM increased 6% over the third quarter driven by positive markets and currency movements. Higher average assets and seasonal performance fees resulted in 18% increase in total adjusted revenues from the prior quarter. Adjusted operating income of $232,000,000 was up 43% compared to the third quarter as a result of the higher revenues and our continued strong cost discipline.

Fourth quarter adjusted operating margin was 43.8% compared to 36% in the prior quarter. And finally, adjusted diluted EPS was $1.04 for the quarter compared to $0.70 for the third quarter. On Slide 16, we've outlined the revenue drivers for the quarter. Higher average assets and particularly high seasonal performance fees were the biggest drivers of the quarterly change in adjusted revenue. Net management fee margin for the fourth quarter was 45.9 basis points, which is up marginally from the third quarter and up from 44.9 basis points a year ago.

This marks the fifth straight quarter of higher net management fee margins and demonstrates our resiliency during a period when provided the 2020 net management fee margin by capability in the appendix. We'll continue to disclose this metric on an annual basis, and we hope that you find it useful. Performance fees were $59,300,000 in the quarter compared to $7,000,000 in the prior quarter. The fourth quarter was exceptionally good result with many strategies outperforming and was primarily driven by annual performance fees on segregated accounts within our global life sciences and global tech strategies, but also supplemented by several smaller amounts spread across multiple strategies. For mutual fund performance fees, the fourth quarter improved to negative CHF 2,000,000 from negative CHF 5,000,000 in the third quarter.

Because the performance fees I think, are important to understand more fully, on Slide 17, we've provided some more details on the change in performance fees year over year. Performance fees in 2020 were $98,000,000 compared to €17,600,000 in 2019. In looking at the two years, 2019 was on the lower end of what we'd expect in a given year, while 2020 was one of the better years for performance fees. The biggest factors in the increase were the performance fees earned from global life sciences, global technology, core plus fixed income and INTECH in segregated mandates. The UK absolute return in The UK OIC and CCAV And global market neutral, real estate, European equity strategies also earned performance fees in the CCAV fund range.

As you can see, it was a wide range of outperforming strategies that drove the increase in performance fees, which is great to see. Turning to operating expenses on Slide 18. Adjusted operating expenses in the fourth quarter were $297,000,000 which were up 3% from the prior quarter. Adjusted employee compensation, which includes fixed and variable costs, was up 5% compared to the prior quarter, primarily as a result of higher variable costs given the higher pre bonus profits, partially offset by the impact of year end adjustments in our cash and noncash payout mix. Adjusted LTI was up 5% from the third quarter, largely due to mark to market.

In the appendix, we've provided further detail on the expected future amortization of existing grants along with an estimated range for the 2021 grants for you to use in your models. The fourth quarter adjusted comp to revenue ratio was 39.2%, which reflects the leverage in our business. For the full year, the total comp to revenue ratio was 42.9%. Adjusted non comp operating expenses were flat compared to the prior quarter. For the full year, 2020 non comp operating expenses were down 1% compared to 2019, which is in line with guidance.

And finally, our recurring effective tax rate for the fourth quarter was 22.1%. And for the full year, the firm's effective tax rate was 22.9%. On Slide 19, we've given more details on our expense discipline, the specific exercise we went through in the summer and our thoughts on 2021. Our philosophy has always been to maintain strong financial discipline whilst reinvesting in the business to deliver against our strategy of simple excellence and position us for growth. This disciplined approach allowed us to take out $125,000,000 in costs post merger, which was ahead of schedule, and to keep expenses well controlled over the last three years.

However, with the onset of COVID, coupled with the passage of time since the merger, we felt like 2020 was the right time to take a fresh look at our cost base. Alongside engaging an outside consultant to help us, we took a real wire brush to our expenses and are delivering on $40,000,000 of additional cost saving opportunities, which we expect to realize over the next two years. The savings will offset the investments we're making in the business. A few examples in that of those investments are reforming our client facing technology and reporting, implementing an upgraded order management system, and streamlining our data architecture. These are all critical things for us to do.

These investments will improve our operational efficiency and support a growing business and enable us to do that cost efficiently by keeping expenses relatively flat. With all that said, I wanted to walk you through what that means for 2021 and our expectations around expenses. Given how we run our business with tight cost controls and the higher AUM entering 2021, you should expect to see increased operating leverage. At current market levels, we anticipate the adjusted compensation ratio to decline further to the low 40s. And by that, I mean in the range of 40% to 42%.

This results from a higher AUM and our ability to keep fixed comp expenses relatively flat year over year, even when considering annual pay rises and the impact of a weaker dollar entering 2021. For non compensation expense, we would expect to see an increase in the mid single digits. Note that over half of the expected increase is due to currency rates given the highest sterling to US dollar as we enter 2021 compared to the average rate over 2020. The majority of the remaining increase is from higher marketing expenses as we take the learnings from the new way of interacting with clients and potential clients that we learned in 2020 and apply that knowledge in 2021. Marketing spend will be higher than 2020, but still below 2019.

And finally, the firm's statutory tax rate is expected to remain at 23% to 25%, which is similar to 2020, but it could, of course, be affected by future changes to tax laws. And the overall tax rate will be impacted by various differences which arise quarter to quarter. Lastly, Slide 20 is a look at our balance sheet. Cash and cash equivalents were $1,100,000,000 as of the December 31, an increase of $182,000,000 resulting primarily from operating cash flow generation during the fourth quarter. The strength of our balance sheet and the cash flow generation has allowed us to complete $131,000,000 of accretive buyback in 2020 and would also allow us to repurchase the $230,000,000 of our stock in the registered secondary offering that was announced earlier today.

Assuming the successful completion of the offering, our participation effectively accelerates our buyback for the current year. Our capital philosophy is unchanged. We will provide updates on future earning calls regarding our thoughts about any future buybacks as we evaluate our cash position and cash flow generation. Turning back to the fourth quarter, we paid approximately $65,000,000 in dividends to shareholders and to today have declared a €0.36 per share dividend to be paid on the March 3 to shareholders of record as at the February 17. Now I'd like to turn it back over to Dick for a few comments before we begin Q and A.

Speaker 1

Thank you, Roger. Before handing it over to the operator for questions, let me just briefly wrap up. Most importantly, our investment teams performed over this past year with discipline and excellence across really challenging market conditions. We've improved results in many important areas that have been impacted by difficult and volatile markets. And even where we've seen difficult results, the teams are doing a really good job sticking with their discipline and their strategies.

Over the long term, we're confident that those very talented people will continue to deliver on their client promise. We've also further strengthened our global distribution and product platform. We've made really good senior new hires, and we've refreshed our product focus. We've modernized our client experience, and we're investing in the underpinning technology and data. We're seeing important improvements in flows in the second half of the year and into the fourth quarter that demonstrate the resilience and the diversification of our platform and capabilities.

We've continued to maintain our focus on cost discipline while also making the appropriate investments in significant technology and data and the operating platform enhancements needed to strengthen our future and deliver simple excellence and growth. Daiichi will continue to be a very valued long term strategic partner for us, and we look forward to continuing our tremendous relationship. Looking ahead, our focus is excellence and delivering growth using the momentum we have entering this new year to continue our progress and to deliver a strong, profitable, resilient business through our Simple Excellence strategy. We're confident we're on the right path. Simple Excellence is working.

We're going to deliver for our clients, for our owners and our employees. We're also going to continue to make positive contributions to all the communities in which we operate. As we turn to Q and A, I'd like to remind you that as we are in the market with a live secondary offering, we're subject to certain securities laws that limit our ability to discuss the Daiichi transaction. This also limits our dialogue with you outside of the earnings call during this period. So please be sure to get your questions included in this call now, and we kindly ask that they remain focused solely on our earnings today.

With that, operator, let me turn it back to you for questions.

Speaker 0

We will now begin the question and answer session. To ask a question, you may press star then one on a on your touch tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press then 2. The first question comes from Ken Worthington of JPMorgan.

Please go ahead.

Speaker 3

Hi, good morning. Thank you for taking my questions. I'll do my best to honor your comments on the Q and A. But I would like to flush out a bit more.

Speaker 4

So hopefully, I can do this in

Speaker 3

a way that allows you to answer. How much did Daiichi contribute to Janus sales in, say, 2020? As we think about the Daiichi contribution, I know some of this came from sort of those retail products, which would seem to be ongoing. So what portion of the sales are coming there versus the direct insurance company?

Speaker 1

Thanks, Ken. Roger may be able to find the precise numbers for you. The biggest sales we've made with the help of, you know, Daichi's very strong partnership More recently, we're down in Australia where their subsidiary, TAL, an insurance company in Australia, partnered with our fixed income business. And we manage 3,000,000,000 or $4,000,000,000 of assets down there for TAL, which is a Daiichi affiliate. And that's the biggest change most recently.

And again, that was fixed income assets. We also have some, more retail products sold through their insurance company in Tokyo. That's much smaller numbers, but sort of a steady drumbeat coming in through that way. And so they've helped us in both those ways and probably other ways that aren't right on the top of my head, but they've been a terrific partner. But if you look across the size of our gross sales, you know, with the exception of a lumpy towel, commitment in a quarter, it's not a regular feature that it would be big enough to stand out from, the rest of the business.

As we've said, we started in 2012 with about $2,000,000,000 of their assets that we managed, and it's grown to over I think it's about 10,400,000,000.0 now. So it's grown very nicely. They've also obviously been a supportive partner in lots of other ways, but that's the basic frame. Roger, can you fill in?

Speaker 2

No, I think you summarized it perfectly. I mean it's grown $8,000,000,000 over the eight years, and Tau will be the biggest contributor in the last couple of years.

Speaker 3

Okay. Great. And then your equity sales improved significantly. Can you help us understand and you called out like a number of funds that are doing better. As we think about this quarter versus maybe quarters last year, so ignoring the weak first half of this year, to what extent are the improvements seen in this quarter due to kind of lumpy, kind of one off versus really things that you think are sustainable?

Thank you.

Speaker 2

Let me start on that one and then and then, perhaps, you can add to it. As I said, there was there was one large institutional mandate in The UK, which was $2,100,000,000 of flows. And then a very long tail of funds performing well through Europe, our European small cap growing well, life sciences, including a biotech hedge fund. So it's a pretty broad suite. On the other side, we've seen some outflows from our U.

S. Mid and SMID cap capabilities, which we talked about in terms of its short term performance challenges this year. Obviously, it had a very long standing and excellent record there. So again, we're concerned about that in any way, that's the other side of the equation.

Speaker 3

Okay. Thanks very much.

Speaker 0

The next question comes from Ed Henning of CLSA.

Speaker 5

And I pretty much follow on from before. Firstly, can I just start with Daiichi? You mentioned you're managing about $10,000,000,000 The new agreement has a minimum of $2,000,000,000 for a period of three years. In the old agreement, was there any minimum? And and why the 2,000,000,000?

Obviously, it's well below the 10, is the first question.

Speaker 1

Yes. The 2,000,000,000 was the same numbers in the old agreement, and and it's never really bounded our relationship in the past. And that that number got carried forward into the new into the new agreement. But but, you know, we have the opportunity to to continue to grow the relationship with Aetna if we do a really good job, but it's not guaranteed. But the operating relationship remains strong.

Speaker 5

Okay. Now that's good. And the second one is also on equities, just follow-up. Can you just run through, one, on the gross sales side? You obviously Roger, you talked about there was a number of funds that contributed to the performance there.

Can you just touch on some of the capacities in those funds that are doing well? And then on the outflows, you touched on The U. S. And SMID cap contributed to the outflows there. Can you just touch on how much of the outflows came from those two strategies?

Speaker 2

So in terms of we've got as you know, we've a very broad range of funds. We've got a couple of funds that are still soft closed. So Triton, for example, is soft closed. And we've obviously got significant capacity in our large cap capabilities like the 40,000 research in The U. S.

And global. Our European strategies have got strong capacity as well. Something like life sciences has grown very significantly. So at some point, that will run out that will get tighter. But we've got good capacity across equities to continue to grow.

In terms of the mid and mid, in terms of the outflows there, it's about $2,000,000,000 in the quarter. You can see in terms from the fund flow data.

Speaker 4

Okay. Thank you.

Speaker 0

The next question comes from Dan Fannon of Jefferies. Please go ahead.

Speaker 6

Thanks. Good morning. So just thinking about the simple excellence and some of the evaluation you guys have been putting forth across your business. Vic, you did mention kind of inorganic growth potential. So just thinking about in the backdrop of the consolidating industry, how you think about the plans you've put forward through outlook and the scale across the various, you know, kind of businesses you ran.

Speaker 1

Sure. So so, I think we've been very, clear and consistent. Scale for us isn't really an answer. The answer is excellence. So if you're a below average asset manager, the proper price for you in a world where passive is available at basically no cost is is, you know, low to zero.

Right? So the first goal isn't scale. The first goal is excellence. And then if you do that job, that'll be confirmed through, AUM growth and profit growth. And so that's our plan.

And so when you think about simple excellence, it's about delivering on the Janus Henderson merger. It's about delivering for our clients. And it's about delivering the AUM and profit growth that will be the confirmation of of the success of of driving that that strategy. But if you think about it in a slightly grander timescale, that builds a company with an extremely strong foundation. And that company with that foundation is potentially a better, participant in inorganic ideas, because you're building on a very strong foundation.

So right after the Janus Henderson merger, we said, we really want to make sure we build the right foundation. We're not looking to add more complexity until we get the foundation right. And simple excellence is getting that foundation right. And then as you do that, I think you become a more capable, participant in in potentially adding complexity. But when we think about those ideas, we're humble about it because we think Janice Henderson is a really good merger, and it's taking years and a lot of hard work to deliver on that potential.

Nobody should think these things can be done without that sort of commitment even when they are the right partners. And so, we have a real, humility and caution about thinking about inorganic ideas. But if you look across our business, we've had success adding our ETF business through an inorganic transaction. We've added fixed income assets. We've added other pieces of alternatives and things in London.

If you look at the history of both Janus and Henderson and now Janus Henderson, we've had success doing transactions inorganically of different sizes, and we certainly haven't turned our back on that. But establishing establishing simple excellence builds the right foundation, which, you know, when that's well done, that gives you more options to think about more things.

Speaker 6

Got it. And then, Roger, just with regards to the cost efficiencies that you announced and I think the concept of keeping things flat or, you know, balancing spend versus the efficiencies coming out. So over what time period should we are we talking about the $40,000,000 coming out?

Speaker 7

And then again, could you be

Speaker 6

a bit more specific around where those efficiencies might be coming from?

Speaker 2

Sure. That's over two years. And we looked across the whole of the business. The majority of it is non comp. Part of that is things that we've learned during the year.

So an expectation that our T and E spend continues to be lower. I talked about marketing, consolidation of our TPAs and other examples there of where we've been improving our structure there and there's some cost efficiency of it. So across the organization, the bulk is in the noncompliance and delivery over two years.

Speaker 4

Great. Thank you.

Speaker 0

The next question comes from Nigel Pitoway of Citi. Please go ahead.

Speaker 7

Thank you very much. Just first of all, to follow-up on that cost saving. I mean, you're saying most of it is on the noncompliance. But if you do look at LTIP, you have revenue up this year, LTIP down in 2020. It looks like if we take your sort of guidance in what's going to happen in 2021, literally, the same thing could happen again.

So can you just explain exactly why we're seeing that trend in LTIP over

Speaker 2

this period? That's because comp has been lower the last couple of years. So that's following through. Effectively, you've got a three year amortization of that comp coming down over the last couple of years with comp levels hopefully improving in the future. The LTIP will end up coming as well.

I guess that's a separate thing, but it's relatively formulaic off the variable comp we pay over the three years previously. And as we've laid out in the appendix, you've got the current expectation of what LTIP is off those various grants over the vesting period going forward. Is that how much of it?

Speaker 1

Put another way, Nigel, the cost savings that Roger is talking about are not a reframing of the compensation or the LTIP that we've been doing. Those programs are continuing consistently within the past with the past. That's that's not not part of of how we how we are, saving the money.

Speaker 7

Yes. Okay. Fair enough. And then, changing tack, but perhaps going back to some of the earlier questions. I mean, obviously, as part of your sort of strategy, you've got this return to consistent net inflow as the target.

I mean, if you were to sort of roll out Intech, how close do you think you are to achieving that goal? I mean, do we I mean, it looks like we still have to expect some volatility moving forward. But but how far do you think you are away from consistent net inflow?

Speaker 1

I think when you're pretty close to the line, it's really hard. You know, the world assigns a huge importance to being a little above the zero line or a little below the zero line. And and when you're pretty close to that line, it's pretty hard to predict. Now we have lots of parts of our company that are doing really well and gathering momentum when we see opportunities. There are other parts of our company that are challenging, and it's always, you know, the the net combination of those two things that that gives you the net result.

And, you know, it's really hard to predict. We're we're very close, maybe on the upside, maybe at zero, maybe a little bit on the downside ex ex Intech. You know, we we put up a quarter which was positive ex Intech. Hopefully, we'll do that consistently, but I I wouldn't wanna guarantee it. It's not something we know for sure, but it's what we aspire to.

We've said previously, and we believe, the path to organic growth for us is first organic growth ex Intech, and then Intech is going to take a little more time to continue its healing process. And then we'll get to organic growth with no asterisks about any part of it. And that's the plan. We think we're on the plan. We think we're making progress.

But quarterly, you know, monthly and quarterly outcomes are, there's a lot of noise in that data and it's not linear or perfectly predictable.

Speaker 4

Okay. Thank you.

Speaker 0

The next question comes from Patrick Davitt of Autonomous Research. Please go ahead.

Speaker 8

Hey, good morning, guys. So it's a pretty big lumpiness in Intech again. You mentioned, I think, last quarter there were five mandates that made up 60% of the assets. Is that still the case? Or did one of those come out to drive the outsized outflow number as we kind think about, you know, what could come out this year?

Speaker 1

No, that's still the case, Patrick.

Speaker 8

Okay. And then, I guess, more broadly through that lens, any known, big wins or losses in the pipeline coming through this quarter?

Speaker 2

Nothing to tell you about this quarter. We again, we don't normally guide intra quarter, but there's nothing major that we need to tell you about today.

Speaker 6

Okay. Fair

Speaker 2

enough. On either side.

Speaker 8

Yep. On the expense guide, how how should we view that as how how locked in should we view that, you know, vis a vis markets? You know, what how much would markets have to move up or down for for that guide to change meaningfully in your view?

Speaker 2

Yes. I mean it is very market dependent. I mean that's the biggest determinant on our revenue line is the market in the short run. The guidance I've given you today is at market levels at the beginning of this year. Should markets come up with a 14% higher average 14% higher AUM level than the average of last year.

So you got a little bit to play with before you get to a lower number than this year. But as we stand at the moment, that's why I'm giving the low 40s on the comp ratio. And as I said, I've guided to that or clarified that as 40% to 42% at current market levels.

Speaker 8

And the G and A,

Speaker 4

I imagine, could be more sticky? Yes, correct. Yes, yes. Great. Got it.

Thank you.

Speaker 1

Let me just, Roger, let me just jump in and go back just to one more comment on Intech. Make sure I get these numbers right, Roger. But just so you all can size it, Intech is something like 10% of our AUM, but it's something a little less than 5% of our revenues. So that's just to give you a sense of the scale, that we're talking about when we talk about that part of our business.

Speaker 0

Okay. The next question comes from Andre Stavnik of Morgan Stanley. Please go ahead.

Speaker 4

Good morning. Good afternoon. I wanted to ask two questions. Firstly, just on the operating margin for this fourth quarter. It seems particularly strong, and it doesn't seem to be just performance fees because despite much stronger performance fees and good base fees, staff costs were almost flat versus several prior quarters.

So is there anything else happening in this quarter that supported the operating margin? REPRESENTATIVE:]

Speaker 2

No, not really. I mean it strong is management fee. I mean our assets obviously increased significantly. As I talked about, our management fee margin is up slightly on Q3 and is the fifth consistent rise in management fees. In part, that's obviously due to the strength in equity markets coming through and moving the average upwards of our fee rates.

In part, it's also what we're selling. As I always say, we talk about assets on this call, but that actually is not the important measure. It's revenue and it's profit. And we're selling some interesting products at prices that clients are very happy to be paying for interesting product. So our fee mix continues to improve slightly.

So that comes through that management fee and performance fees we've talked about. On the cost side, no, it's we're flat quarter on quarter. I don't think there's anything really in there. I don't think there's anything else. Below the line, we've got strong investment gains.

That's really you've got to net that against the NCI in terms of what's actually ours. So you should look at those numbers net. But net, there is a strong gain and that's partly because of some strong gains on our CCAP portfolio in terms of some of that, which is less perfectly hedged that has come through with some very strong gains.

Speaker 4

Thank Thank you for that. And my second question, just wanted to ask a more strategic question about ESG. Are you happy with your ESG progress at the moment? And with the new ESG head coming on, what are some of the new targets that you're you're setting for them?

Speaker 1

Yeah. We're really excited to have the new head of ESG on the investment side, and and we've appointed one on the on the product and distribution side as well. And the two of those folks will partner together to to strengthen our response to ESG. Are we happy? No.

I mean, we've got a ton of work. We want to go faster. We're impatient. There's more data, to pull together and articulate what we've actually been doing for a long period of time. So, you know, the first step is to be clear about all the good work we're doing and communicate it better.

And the second step is to strengthen the processes across the firm and be accountable and transparent in better way to our clients about all the different social values and things that they care about, and how those play into our investing. So we're going to offer more choice in the future. We're going to offer more transparency and better data in the future. There's a lot of work to do to get there. We think we have some great new people to help us get there.

But mostly, our sense is impatience. We want to go faster.

Speaker 2

I guess if I just add some color on some of those things that Dick said. We have a very long established specific equity global sustainable fund at $2,700,000,000 of AUM now. That was a UK and European fund only. We launched that in The U. S.

In 2020. So that's now established. And obviously, we hope to see that grow. And Andre will launch that I would imagine we'll be launching that in Australia in 2021 as well. But that's and we hope to see that continue to grow.

It's a fantastic product. It's been managed by the same manager for more than a decade. I think it's been in existence for something like fifteen years. But that's only a tip of the iceberg around what ESG means across $4.00 $2,000,000,000 in tech product. Our fixed income business is pretty strongly Jim Siminski, who runs our fixed income business, is incredibly passionate about how ESG is.

Across the organization, we've been involved for a very long period of time. We're a founding member of UNPRI. As a corporation, we've been carbon neutral since 02/2007. We've got a very long established diversity and inclusion strategy. We've had a foundation set up for multiple years.

We're a supporter of SASB. We will work to look at more things like TCFD. So on the investment side, what Paul de Coursier has come in to do is critically important in terms of articulating what we do as we continue to develop it. But I think it's very important to understand that this is an evolution of where we are as opposed to starting something afresh.

Speaker 4

Thank you. Thank you.

Speaker 0

The next question comes from Mike Carrier of Bank of America. Please go ahead.

Speaker 9

Hi, guys. This is actually Sean Cowman on for Mike. Just a couple of quick ones on Daiichi. So have they provided you guys with seed capital for new investments in the past? And if so, is that expected to continue in the future?

Yes. So they

Speaker 2

do provide Sorry. Sorry, Dave, go ahead. Or did you want to say that?

Speaker 1

No. You can go ahead, Roger. Apologies.

Speaker 2

Hey, Sean. Yes. They do provide some seed capital for products. Again, that's where there's been some very good partnership over the years in terms of them providing some seed. We'd expect that to continue, but obviously, we're going to have to see how that works out over time.

Perhaps there may be a little less going forward. We don't know that. But that's not big change to our business. If that does if there is a lower number, that very strong balance sheet that we've got will allow us to seed more if that's a requirement for us. No concern at all.

In terms of preferred fees, No. They paid the correct price for the size of the product and the type of the product that they invested.

Speaker 3

Okay. Thank you. The

Speaker 1

next question comes from Simon Fitzgerald of Evans Partners. Please go ahead.

Speaker 10

Two really quick ones. On the performance fees, Roger, you gave a breakdown in terms of the delta, and I think you mentioned four funds. I was interested to know what the largest one out of that delta was of the $42,000,000 I'm talking about the change between '19 and '20.

Speaker 1

Two of

Speaker 2

the funds the name Yes. As I said, in Global Life Sciences and Technology have been two very successful areas for us. They dominated the performance fees in Q4. But there were also more than €5,000,000 in terms of performance fees from our European small cap and our UK absolute return. So there is depth and some sizable numbers across the board that dominated by small by Life Sciences and Club Technology.

Speaker 10

Okay. Second question then, in related to the project spend or at least the investment spend that will offset the $40,000,000 of cost savings. Can you elaborate a little bit in terms of what some of those projects are trying to achieve? Or is it related to people costs?

Speaker 2

Do you want to pick up on the investments that we're making? Then perhaps I can just actually, why don't I start? In terms of what we're talking about, and I think the important message from a financials point of view is those costs are embedded in the guidance that I've given. So as we've said, our job is primarily about being excellent and growing this business profitably, but also doing that efficiently. And the cost savings we're talking about allow us to continue to invest in the business and that's as we invest in the business hopefully grow the business, that will continue to provide that leverage that we've talked about today.

So again, I just want to make sure that people are aware that when we're talking about investing in the business, that included in the guidance that we're giving. Dick, do to you talk about the types of things that we're doing?

Speaker 1

Sure. So I think we've talked about previously the fact that, when we brought, Janice and Henderson together, we took two infrastructures and tried to knit them together to make a single global infrastructure. Sadly, we couldn't go straight to stage two, which is that really upgrade that global infrastructure to make it, simple and excellent. And so we had to two step it. And so we're now hard at work on the second step, which is upgrading and trying to reach for that standard of simple excellence.

That includes a major new OMS order management system, which is the heartbeat of our portfolio management side. It includes risk engines attached to that for portfolio risk management and attribution and those sorts of things. It includes new data groups, new data governance and data architecture. It includes a whole rewrite of the way we're doing technology and cloud based technology on the distribution side to make sure that we're efficient and accurate and excellent in how we're communicating with our clients and prospects. So it's a lot of very unglamorous plumbing projects all across the firm that cost tens of millions of dollars and will go on for years.

And we're making really good progress against those things, but it costs some dough. And that's why it's really important that we've made the savings that we've made so that we can continue to afford to properly invest in the business and the excellence and the growth and and still give, you know, good margins and and returns to our owners.

Speaker 10

Thank you.

Speaker 0

The next question comes from Craig Siegenthaler of Credit Suisse. Please go ahead.

Speaker 9

Thank you. This is actually Karim Afifi filling in for Craig this morning. My first question is on scale. You have nearly $4.00 $2,000,000,000 in AUM. Do you believe you have enough scale today to compete with other large asset managers?

And would you see a large global distribution effort as helpful to your organic growth?

Speaker 1

So I think I I think excellence is the challenge, not scale. And so, you know, scale is only helpful if it comes with excellence. And if you can have scale with excellence, more of it's better, but it's a rare thing. In terms of do we have enough scale and excellence to compete? Well, if you look at our results, I think they say we do.

I think we're doing a really good job taking care of our best clients, we do have a strong global distribution team. And, so I I think we we I think the results are unequivocal that we do have the scale to compete. But it's it's a constant challenge. And as we continue to have to invest to fund excellence and fund global distribution and there's continued business pressures, you know, we're gonna we're gonna keep grinding on becoming more efficient so that that we can keep answering this question in the affirmative going forward. But as you look at today, there's no question we're I think we're on the right path and making progress.

Speaker 9

Got it. Thank you. And then for my follow-up, I believe it's a follow-up for one of the questions that was asked earlier. It's on capacity. So you have some very large funds that run with high active share, including concentrated growth and mid cap growth.

Besides,

Speaker 3

I believe, like

Speaker 9

the trend fund, could you remind us what other funds are closed? And if we could see additional fund closed if the AUM keeps growing?

Speaker 2

I think our only two funds that are closed are Triton and Venture. And as I said earlier, there is plenty of capacity the vast bulk of our funds. So it's a nice problem to have if we do get to the level where we need to soft close funds. We've got heaps of capacity across the firm.

Speaker 9

All right. Thank you for taking my questions.

Speaker 0

The next question comes from John Donne of Evercore. Please go ahead.

Speaker 1

Thank you. You guys talked about almost $9,000,000,000 of sales in the institutional channel. Can you give us kind of a flavor of what strategies are driving that? And maybe could you characterize like where the institutional pipeline stands at this point?

Speaker 2

Yes. So as I said, the biggest the biggest sale in in q in q four was this was the significant insurance client in The UK, which was a 2,000,000,000 $2,100,000,000, UK enhanced index mandate. So that's the one sort of significant deal there. There's a long tail of others. Think the biggest seller is about $1,000,000,000 We disclose exactly what the pipeline is, but we talked about that increasing in the past.

And I guess there was some frustration that, that wasn't coming through. So we're pleased to see that pipeline starting to come through in Q4. We've got plenty of opportunities to hopefully continue to build that pipeline as we go forward.

Speaker 1

Got you. And then The other

Speaker 2

thing on institutional, Dick mentioned it earlier is, that's an area that we've got institutional and we've got a great team working on it. We've continued to add and strengthen that team and strengthen the understanding between that team and investments. So this quarter, we've hired a global Head of Consultant Relations, which is an important position to hire in addition to make some other investments in the team. So we continue to hopefully expect that our institutional business gets bigger over time.

Speaker 1

Got it. And then you guys got to mutual flows in all this quarter. So what's the outlook for that business? And what kind of products could maybe push you into positive territory in 2021?

Speaker 2

I guess, there's probably some outflows before we have some inflows. Some you when someone know we have a property fund in The UK, which has been which has been gated for the sort of eleven months post the dislocations in the property market with COVID coming in March. We announced recently that, that fund will reopen, having raised liquidity over the last year in a very controlled and pleasing way. The fund is actually performing very well. But we have clients locked up for eleven months.

So we know and expect that when that fund reopens, which I think is the February 24, that we'll see some outflows there. So that will come through in the alts number. The biggest there are several other things in there. The biggest strategy in there is The UK absolute return fund, which again has performed well in 2020. It had had some outflows for the first time in a long time at the beginning of last year, think.

But it's pleasing to see that going back into small inflows in Q4. So hopefully, will continue to grow going forward.

Speaker 3

Great. Thank you very much. And

Speaker 0

the last question today will come from Liz Milajas of Jarden. Please go ahead. Liz Meliadis, your line is open. Is your phone muted accidentally? Please go ahead with your question.

Speaker 11

Hi. Can you hear me?

Speaker 1

Yes. Yes. Yes. Yes.

Speaker 11

About that. My first question is on the cost cost efficiencies and associated investments you'll make using those efficiencies, is there any timing differences with sort of the inflows and the outflows there? Is the is the cost savings sort of front loaded and and the spending back loaded? Or should we assume sort of spread across the two years?

Speaker 2

They're pretty spread across the two years.

Speaker 11

Okay. Great. And then a follow on question on cost as well. You made a comment earlier that some of the savings will be T and E. Obviously, you know, COVID impacts that, quite significantly.

You know, beyond the two years, should we expect some of that T and E to sort of come back, or have is it have you sort of adjusted your numbers, I suppose, and your your efficiency there for a new way of doing business in a in a post COVID bowl?

Speaker 2

Yeah. It's it's it's it's the latter. So we've built in an assumption that that that we spend more than we spent last year, but not as much as we as we used to spend, you know, pre the learnings that we've had over the last year. Obviously, we're all we're all learning as we go through this, but we expect that our T and E budget will be lower going forward than it was in 2019. But we have but we're not saying that it will remain as low as it was in 2020.

It will come up a little bit from there, obviously.

Speaker 11

Alright. Okay. Cool. Thank you.

Speaker 0

This concludes our question and answer session. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.