Janus Henderson Group plc
Q1 2021 Earnings Call Transcript

Published: 1 May 2021

[Operator:]

Good morning and welcome to the Janus Henderson Results Briefing Conference Call. I would now like to turn the conference over to Mr. Dick Weil, CEO. Please go ahead.

[Dick Weil:]

Welcome everyone to the first quarter 2021 earnings call for Janus Henderson Group. I'm Dick Weil and as usual, I'm joined by our CFO, Roger Thompson. As we've said on previous calls, we take a long-term view of our business versus the short-term view that's inherent in our quarterly reporting. To that extent, we use the first and third quarter calls to run through quarterly results and we use the second and fourth quarter calls to give you a deeper update on business and strategy. In line with this thinking in today's presentation, I'll start by giving a brief summary of the quarter and then I'll hand it over to Roger, who will take you through the results in more detail. As always, following our prepared remarks, we'll take your questions.

[Roger Thompson:]

Thank you, Dick, and thanks everyone for joining us. Turning to Slide 4 for a deeper look at investment performance. Investment performance remain solid with 67%, 62% and 70% of firmwide assets beating their respective benchmarks on a one, three and five-year basis as of 31st March. Relative performance compared to peers reflects 37%, 67%, 68% of AUM represented in the top two Morningstar quartiles on a one, three and five-year basis.

[Operator:]

Thank you. I would like to remind you that 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-K and other more recent filings made with the SEC.

[Kenneth Worthington:]

Thank you for taking my question. Maybe first on your comments on performance fees, they've ramped, and while investors tend not to ascribe a lot of value to them, cash flow is cash flow. So how do you think about leveraging this increasing from its fees and driving the greatest shareholder - greatest value for shareholders from this rising revenue stream?

[Roger Thompson:]

Ken, it's Roger. Thanks for the question. I think the important thing is the diversity of performance fees that we've got that we saw a very strong performance fees in Q4. In Q2, it's largely the SICAV that come through. And the other thing is we're adding, we've got - with some of the business we're winning, we're adding with performance fees on it. So the opportunity for performance fees is broad and I think - yes, I agree with you, yes, it doesn't merit the same multiple, probably as the management fees. But with that diversity, I think come strength and I think it is to be valued. We do expect to have performance fees on a regular basis of a decent level. In Q2, we would expect to see some stronger performance fees. Investment performance, as I said, hasn't - obviously we haven't got final numbers for Q2 yet, but we look - as we sit here today, we would expect to see some quite significantly improved performance fees over the prior three years. And as you know from looking back that's sort of where we were in the years before that need to beat some strong numbers for Janus Henderson in the past.

[Kenneth Worthington:]

And then just self-directed has been a stable source of maybe outflows for some time and you guys have taken the step of opening the distribution channel to new investors, what are the next steps that you think you could take here to improve the results in this channel? It may be slow the pace of outflows further and possibly even turn that channel back to inflows.

[Roger Thompson:]

Yes, we have been - we've reopened that early in the summer last year. And I think primarily it is exactly as you say. It is to add some flow and therefore stem that outflow. It's a sizable book of business and it's a very strong business that something that we've got a brand for. So we have got ideas around that. We have started some advertising, for example, for that channel, but I think it's still very early days Ken and the bigger drivers of growth, they're going to come through Intermediary and Institutional.

[Operator:]

Your next question comes from Dan Fannon from Jefferies. Please go ahead.

[James Steele:]

This is actually James Steele on for Dan. Thanks for taking our question. So just firstly, following on the divestment of Dai-ichi, I was just curious if there is any impact this quarter on flows or anywhere else? I know that they provided some seed for you.

[Roger Thompson:]

Hi, James. Thanks for the question. I think the - I guess, the first thing is, yes, the divestiture was, I think, we've got it as a success and we were pleased to welcome some new shareholders onto the register. As we said on the call, Dai-ichi is an important of the prior - let's just say, Dai-ichi is an important client for us and exactly that we don't divulge any individual clients holdings. But I can't say that - our Japanese business, which is about $19 billion, is slightly up on the quarter.

[James Steele:]

Okay, thanks. And then just kind of wanted to dig into your goal of getting to net flow positive ex-quant. I know that you've done a few things, the investment performance has improved, you've hired a Head of ESG doing some stuff with technology. So just curious, what is - which initiative do you think is most likely to bring you back to that net positive or what are you most excited about?

[Dick Weil:]

Yes. I think it's the combination that - this is Dick here. Thanks for that question. I think it's the combination of those things. It isn't just one sort of magic trick that will deliver the answer to that question. We need to have really strong investment performance, really good risk management in that investment performance and then excellent client experience. We've been investing, as you say, in the technology that underpins the system. Suzanne Cain and the team have been working hard on improving how they're facing off to clients and the client experience. The investment team continues to work through these volatile markets to deliver the right sort of risk adjusted investment returns. It's not one thing. The difficult part of this business is you have to deliver that suite of things and that's what really makes the difference and that's our mission in Life.

[Roger Thompson:]

And just to go into some of the sort of facts, we're pleased with another positive quarter of Intermediary. We've had some really strong flows in intermediary in Europe, the growth rates in our SICAV business and our Dublin fund range is 31% and 21% annualized for the Q1. So it's a real strength there across the range of capabilities. We've got positive flows in Australia and Asia. We've got some positives in U.S., but we are seeing some outflows, as we talked about in certain areas of U.S. Equity. So it's intermediary. The acceleration there and the continuation of what we are seeing there is hopefully already there to be seen. In Institutional, we have a good Q4 as you can see our institutional flows in Q1 were much more minimal and that's just the lumpy nature of that business. So we need all those things. As Dick said, it's a little bit of everything as opposed to one thing on its own.

[Operator:]

Your next question comes from Elizabeth Miliatis from Jarden. Please go ahead.

[Elizabeth Miliatis:]

I put a couple of specific ones on numbers. Firstly, the tax rate was much lower in the quarter than what you've indicated previously, how should we think about it for the rest of the year? And is there any sort of seasonality that might come into that? And then secondly, on the non-controlling interest, the adjustment this quarter is sort of contrary to what you previously have, so I think you're growing out a loss. Could you give us a bit of color on that because it does swing the numbers around a little? Thank you.

[Roger Thompson:]

Hi, there. Yes, the tax rates - yes, no change to our guidance on 23% to 25% whilst tax rates are where they are. So we know we've got a UK rate of tax, it's increasing in a couple of years' time. Once that comes into the statutory books, then we'll get a change in our deferred rate, but not our underlying rates. And obviously, I think I was expecting an increase in the U.S. tax rate as well. But given current - given current tax rates, our guidance of the tax rate for the year of 23% to 25% stays the same and slightly low this quarter with vestings for the Life which can move that rather a little bit in the quarter, but like I say, just stick with the same guidance. On NCI, yes, you're right. What normally happens as you get a NCI is largely clients investing in funds that we've got seeded, which we have to consolidate and then back out. So you'd normally see something going the same way of our investment guidance. You can see a reversal coming out in NCI. They both go the same way this quarter largely because of one fund, which has got a pretty significant clients investing in, which is performed incredibly well over the last 12 months. But this quarter was slightly negative in investment performance or its overall performance. So there is a reversal in NCI, but across our entire feed book, our numbers were positive. We can take you through that in more detail if you'd like Elizabeth. That's why they move in the same direction this quarter.

[Operator:]

Your next question comes from Andrei Stadnik from MS. Please go ahead.

[Andrei Stadnik:]

I wanted to ask two questions. My first question is around - is sustainable investing, it seems like JHG doesn't quite - Janus Henderson doesn't quite have as many strategies in sustainable space with some of the competitors. Is that something that's worth accelerating instead of doing additional buybacks given such an area of potential opportunity?

[Dick Weil:]

Andrei, Dick here. Yes, we are going more cautiously down the ESG road than some of our competitors to be sure. We're concerned that some of the methodology used to take sort of large existing parts of people's asset management business and convert them into qualified sort of ESG assets is some of that exclusion and methodology looks to us like it may be very likely to be challenged and may not be in the fullness of time proved to be the exact right road to take. So we are - we've hired a head of ESG investing. We are building out teams to support a better ESG research and infrastructure and data collection. We are moving some of our product line in accordance with European rules into their proper categories and you'll see that trend accelerating on a go-forward basis. We're not off to quite as quick a start as some, that's a little bit uncomfortable, but we think it's the right path because we think we want to do it at the highest possible quality level and so we're moving as aggressively as we can down that path subject to that sort of quality limiter.

[Roger Thompson:]

Yes, let me add a little bit to that, Andrei. Yes, we already - we've got one article and I don't want articulate fund to get their funds that we are very confident with. You will see adding to that during the course of the year. But again, as Dick said in a cautious way, we are interested in how some others are declaring things of ESG. As you'd expect probably from Janus Henderson, we've been, as Dick said, a little bit more cautious. We are investing across our business as well. As Dick said, Paul LaCoursiere has joined. We're building it under Paul. We're also adding ESG resource into our client space. We're working on technology and data, which is critical around this. So there are investments there and you'll see some products and product extensions over the course of the year.

[Andrei Stadnik:]

Thank you. And my second question, I wanted to ask around…

[Roger Thompson:]

No, I was going to say one piece. We do have an absolutely exceptional global sustainable product which has been in existence for 30 years. We're not new at this. That fund has just gone through $4 billion that was - sorry, the strategy has gone through $4 billion and that was $1 billion a couple of years ago. So we are growing in some specific areas as well. Sorry, Andrei.

[Andrei Stadnik:]

Thank you. That's important. I wanted to ask around Fixed Income flows, there was some positive in the quarter, but they were substantially lower than the net inflows you had in the December and September quarters. Was there anything specific or was it just the movement of rates that slow down the momentum there?

[Roger Thompson:]

Yes, nothing specific. We're still taking market share in the U.S. We've taken market share for the last year or so in Intermediary and Fixed Income, continuing to take market share, but obviously it was quite a change quarter for bonds and the overall market growth in the U.S., particularly everywhere was slow. We didn't have any substantial institutional wins in Fixed this quarter, rather. So nothing particular to write about with, as you can see our performance in Fixed Income is exceptional and we look forward to continue to grow that business.

[Operator:]

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

[Mike Carrier:]

Thanks for taking the questions. Probably just on the performance fees, can you provide some context of how the European SICAV strategy with performance fees are calculated? Just to get a sense, the magnitude or the opportunity with that quarter.

[Roger Thompson:]

Yes, I mean they're all listed and they're all public funds, so you can see it, but there is a mixture of quarterly funds and annual funds with performance fees and some of those performance fees have got higher - with carry on them. So I can say it is - it can come through over multiple years, because of those high watermark carriers but it's a mixture, let's say, of quarterly fees and annual fees and annual fees which carries from the past. Again, we can talk you through where to look for those things to help if you want to model it, but that's the short answer.

[Mike Carrier:]

Okay. And then just on the thoughts, given some of the weaker shorter-term performance mostly on the equity side, yet it sounds like you guys are noticing some rebound in the SMID cap area, just want to get your sense on how that's likely to impact maybe the trajectory or the timing, the inflows that's won given that you're still seeing the strain in Fixed Income, Multi-Asset, Intermediary, just curious how much of an impact maybe that's happening and how much performance you need to kind of recoup to get back to where you want to be?

[Dick Weil:]

Well, in terms of the timing, you're seeing that our flows, we've definitely seen some pressure in mid and SMID and small cap growth out of the U.S. after the significant under performance in those strategies during last year and particularly around the month around the COVID crisis in March, April last year. And where - the question is can we build in other places more than enough to offset that outflow and have done on the Intermediary side, but the mid cap growth strategy, in particular, run by Brian Demain has been super strong for a long time, it went through this very difficult period and now has made some significant ground back, but obviously we're sensitive to where the path goes from here and it's a little hard to predict. But right now, what we're seeing on the intermediary side is the rest of the Intermediary business has been strong enough and more than strong enough and with the exciting come back a lot of the European assets which have historically been strong, but frankly have not been over the last couple of years since the Janus Henderson merger. They're coming back now quite well and so that's given us the intermediary channel strength to more than outweigh the challenge in that U.S. mid and SMID cap growth space so far. But it's sensitive to the performance right now month by month, but that is mitigated by the fact that these are strategies that have been really superb for 20 years plus and have a strong sort of educated, successful client base that is pretty loyal. But there are limits to that and we'll just have to say it's sensitive to future performance, but overall the intermediary channel is quite strong.

[Operator:]

Your next question comes from Ed Henning from CLSA. Please go ahead.

[Ed Henning:]

Thanks for taking my questions. Firstly, do you believe continued growth in the intermediary channel can hold up or even continue to improve your margin going forward is my first question, please.

[Roger Thompson:]

Is that on management fee margin or…

[Ed Henning:]

Yes, on management fee margin.

[Roger Thompson:]

Okay. The answer is the same for both is, yes. We continue to grow the Intermediary business, our management fee margin will increase. And if we grow that business, yes, we should see that fall to the bottom line as well, so yes.

[Ed Henning:]

And you're confident you can grow Intermediary business?

[Roger Thompson:]

Yes, - sorry, a part of - yes, part of that is what we're selling as well. I mean we're selling good product at good prices. We're selling at market neutral. We're selling to distributor and we're selling strategic bond. We're selling high yield. These are - and we're selling a lot of European equity, as Dick just said. Our European equity growth in the quarter was 23% annualized. So, yes, we can grow and we can sustain or continue to increase that fee rates, which again I think is a differentiator. That is something you're seeing across this business flows and not where you want to be at. But what we are selling is very good product. So we do expect that to continue. There is fee pressure in the industry, that can be wrong. We expect to see that continue, but we are building and selling good fee product and clients are very happy with the performance and the pricing of that.

[Ed Henning:]

Thank you. And then just the second one, you talked about the progressive dividend policy. You haven't increased dividends since the first quarter of '18. Can you just remind us do you have a target payout ratio? It obviously varies a little bit from quarter just to quarter, how should we think about that?

[Roger Thompson:]

We don't have a payout ratio. That's a result as opposed to a target. As you say, we've got a progressive dividend. You should expect to see that rise with earnings rise and earnings have risen last year and we're expecting earnings to rise again this year with markets where they are used at the moment. Yes, we view it very much as part of our capital return and effectively you've got an accordion of the buyback on top of that, which as we said we've done consistently over three years. Our yield is pretty - in comparison with other stocks in our competitive set, our yield is pretty healthy. So we - I think the Board took the decision to a $0.02 increase this quarter with the right increase that is very well covered. Again we want a very conservative balance sheet very deliberately. There is enough leverage, enough beats in the stock without a lot of debt. We've talked about that in the past. And the dividend is very well covered obviously at market levels where they are, but would also be covenant at lower market levels and again one of the intentions of a progressive dividend is that you can - you would not have to cut it except in extremis. So the Board are comfortable with that $0.02 increase and we'll talk further about capital return and hopefully further increases in progressive dividend in years to come.

[Operator:]

Your next question comes from Alex Blostein from Goldman Sachs. Please go ahead.

[Ryan Bailey:]

This is actually Ryan Bailey on behalf of Alex. I was just wondering if we could come back to Institutional. Roger, I think you mentioned there was a pretty healthy pipeline and I was just wondering if you could speak to what are the products in the pipeline and sort of the fee rates associated with it. And then I guess just more broadly within Institutional what have being some of the sources of outflows recently excluding quant?

[Roger Thompson:]

See the pipeline is - let me start, my morning started this morning with a capital for our Institutional team, Nick Adam, who runs our institutional business globally. When I came out - I was actually supposed to be there 20 minutes. That's taken out half because it was just great to hear what's going on and the learnings from the past couple of years. So the pipeline is growing. It's diverse both by geography and by product. Your question around fee mix, it's a pretty broad church. There are some higher fee opportunities as well as some lower fee product we talked about in Q4. We want a big - it helps the index mandate here in the UK, which is obviously at the lower fee end. We've been adding some other areas as well. So that's Nick is looking to build with and we talked a little bit about some of the areas where we were bright made in - over the last 12 months and what we've learned from that and how we can win the last - that last phase coming second isn't something you want to do. So, yes, a really positive field, but we've got work to do. Richard Graham joined us as global consultant relations head a few months ago. We're building out those relationships with consultants. So this - but there's still work to do, but we've done overall lot in Institutional, we still got work to do. In terms of outflows, I think there is anything really specific that comes to mind, I'd say INTECH is a couple of billion dollars of outflows this quarter, which is probably the biggest driver. Outside of that, it's fairly well spread.

[Ryan Bailey:]

And then maybe just - so I understand correctly, coming back to the Perkins rightsizing; a, that sounds like it's a 2Q event, I kind of just wanted to confirm that. And then; b, of the $440 million were you able to recapture any of that into your other tuck-ins products?

[Roger Thompson:]

I guess the first part is it's both quarters. We had about $700 million out from Perkins in Q1 and this $440 million in the strategies we are closing as we rightsize those areas and focus on the real strength that we've got in the U.S. value businesses. So this $440 million that you should expect in Q2, but included in those outflows in Q1 is about $700 million from Perkins. Sorry, what was the second half of your question, Alex - sorry, Ryan?

[Ryan Bailey:]

Just if you're able to recapture any of that incremental $440 million into other products and platform?

[Dick Weil:]

I don't think, not that we're aware. We made some strategic changes around skinning that team and focusing them where we thought they could be really successful and that shift involved changing some of the personnel and caused some of the product closure and so that's the effects that Roger is talking about which spread across, started in this past quarter and you're seeing some of those results and then we'll carry on into next quarter as he described. But we weren't able to move those to different Perkins products.

[Operator:]

Your next question comes from Nigel Pittaway from Citi. Please go ahead.

[Nigel Pittaway:]

Hi guys, just first of all, I was hoping to delve a little bit further into the retention of the guidance for non-comp cost despite the 4% drop in first quarter, that basically means it's going to be sort of on average 8% higher than 1Q in the remaining three quarters. So is that all going to come through G&A and can you be any more specific about what that's being spent on?

[Roger Thompson:]

Hi, Nigel. Yes, I think that is what we're saying. Part of that is obviously our expectations of a continued unlock from COVID. So we are seeing some, particularly in the U.S., more clients - more client visits, which we view as positive, but we're starting to see some come through, which again is good. I think, again, we're not expecting to go back to 2019 levels, but we would expect to see that accelerate over the course of the year. We'd expect marketing to increase. Again we've developed better ways of communicating with clients, which again we'll be leveraging to get us to those positive flows that we've been talking about. So I think they are the biggest drivers that will drive that. But yes the - you're right in the math. For us to get to mid-single digit would mean us being about 8% higher in the Q2.

[Nigel Pittaway:]

Okay, thanks for that. And then I was just sort of - obviously, you've mentioned sort of drop down in quartile in the end, I mean that was obviously come as you sort of changing PMs on that fund. So you're still pretty comfortable that that's going to be a smooth transition with nothing much to worry about in terms of that despite the sort of drop down in the quarter level at that time?

[Dick Weil:]

I think we're confident in the team. We're confident in the process, but - and I think we've executed the transition as well as can be done, but we're still accountable for the performance and we're still subject to that accountability in the marketplace. Right now that fund continues to run ahead of index, but it's less ahead of index than many of its peers at the moment. It's probably a little more valuation sensitive in some ways than some of its peers and that hasn't always served it well in recent history. So we're confident that we've gotten through the portfolio manager transition as well as can be done. We think it's a model case for that and we're very grateful to Marc Pinto and his leadership in executing that transition. But now, look we own the performance and we're accountable and that will affect the future past.

[Roger Thompson:]

But as Dick said, that fund is ahead of benchmark over all time periods. It's three, five and 10-year numbers I think top decile across the board. So I think we're in a good space, Nigel.

[Nigel Pittaway:]

Okay. Thank you.

[Dick Weil:]

And it continues to sell well.

[Operator:]

Our final question comes from James Cordukes from Credit Suisse. Please go ahead.

[James Cordukes:]

Just a quick one circling back to Japan. Can you just talk about that the new cooperation agreement with Dai-ichi and has that - that has impacted your distribution efforts in Japan? So not so much the Dai-ichi money, but where you've worked within distributing into that region. Are you still working on new products there? Is there anything changed? Do you still view that as an opportunity?

[Dick Weil:]

Yes, we do view this as an opportunity. We had a senior executive from Dai-ichi, Mr. as a new Chairman of our Japanese office and company very recently. He has talked to our whole senior management, done a review of the product lineup and talk to us a lot about the ways we can work together to deepen the partnership that we have with Dai-ichi, but also to expand it out to other possibilities in Japan. So I would say the relationship is very healthy and it's not so much based on the written words of the agreement. It's based on the trusted relationships built between the people and the addition to our leadership team of Mr. is very welcome and he is a very honored and respected senior member of the Dai-ichi team who has come across and that's nothing but good news for us.

[Operator:]

Thank you. This concludes our conference call today. Thank you for attending today's presentation. You may now disconnect.