Janus Henderson Group plc
Q1 2019 Earnings Call Transcript

Published: 4 May 2019

[Operator:]

Good morning. My name is Nicole and I will be your conference facilitator today. Thank you for standing by and welcome to the Janus Henderson Group First Quarter 2019 Earnings Conference Call. [Operator Instructions] 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. 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.

[Dick Weil:]

Welcome everyone to the first quarter 2019 earnings call for Janus Henderson Group. I am joined by Roger Thompson, our CFO today. Roger will be taking you through the results for the quarter, after which I will make a few concluding comments and then we will be happy to take your questions. As you know, we take a long-term view of our business versus the short-term view that is inherent in our quarterly reporting. To that extent and similar to last year, Roger will be providing you with updates on the quarterly flow, performance and financial results. We will use the second and fourth quarter calls to address these same items along with a more robust discussion on the business and on our strategy. We believe this setup will help better align our calls with how we manage our business. With that said, let me turn it over to our CFO, Roger Thompson to walk you through the quarter’s results.

[Roger Thompson:]

Thanks, Dick and thank you everyone for joining us. The first quarter’s results can be characterized by three points

[Dick Weil:]

Thanks, Roger. Before getting into Q&A, I want to address one big question that you all probably have. Why isn’t our strong investment performance that we have talked about translating into better flows? The real answer is that despite some recent improvement, we continue to face pockets of longer term underperformance in a number of material areas in our business, including European equity, U.S. flexible bond and our INTECH business, which are each driving meaningful net outflows. The better performance we have experienced year-to-date must be sustained for longer periods of time before it will begin to gain client attention and materially impact their behavior and flows. In addition to these, we have made a series of business decisions and have faced a number of special events, which have resulted in and are expected to result in additional outflows over the next couple of quarters. The sum of these factors accounted for roughly 80% of the outflows in the first quarter. This result is disappointing, and we own that. But it does mask a number of encouraging results across areas in our business. For example, we continue to take market share in our U.S. retail channel in our U.S. equity strategies. Our multi-asset capabilities are growing well. Our Fixed Income teams in the UK and in Australia continue to prosper. And our UK Absolute Return strategy has returned to above-benchmark performance year-to-date. However, there are no quick solutions. We are focused on building the right firm for the future. We retain our focus and our discipline through shorter-term challenges. Thinking on a tactical level, the effects of our business decisions in some of these special events will pass in a relatively short time. And the best leading indicator of our long-term success is our investment returns. Today, overall performance at our firm is strong. Thinking more strategically, we have great people and we are focused on taking the right steps to build the right culture based on putting clients at the heart of everything we do, succeeding as a team and acting like owners. Going forward, we will continue to prioritize our investments and our focus on producing dependable investment outcomes, delivering excellence in client experience, building a simpler and more efficient infrastructure and maintaining a proactive risk environment, and finally developing our small slate of new growth efforts. By keeping these things in focus and not getting too distracted by some of the shorter-term challenges and quarterly results, I am confident that we will deliver success for our clients, for our owners and for our employees. With that said, I would like to turn it back to you, operator, for questions.

[Operator:]

Thank you. [Operator Instructions] Our first question will come to us from Dan Fannon from Jefferies.

[Unidentified Analyst:]

This is James filling in for Dan. You mentioned some sort of controlled outflows related to the EM team departing and Bill Gross’ departure, I think the number was $1.8 billion. Just hope that you can maybe add a little more color to that, and what the extent of outflows we might expect related to some of these events in subsequent quarters is.

[Roger Thompson:]

James, it’s Roger. Yes. I think the number I gave was $1.9 billion. So yes, there’s there are a number of things that we regard as one-off in the business in the first quarter and one that carries on into the second and third quarters probably. So that $1.9 billion, we closed our Australian equity business in the first quarter, which we talked about on the last call. That resulted in about $500 million of outflows. In addition to that, we redeemed some cash mandates in the UK and we also closed the retirement of Bill Gross, and we talked about the beginning of some flows we expect to see from emerging market. So that adds up to the $1.9 billion. In total, the emerging markets franchise is about $5 billion of AUM. As we said, that’s a franchise that we are committed to. And we’re looking as to how to replace that team, but we do expect to see significant risk of outflows into Q2 and Q3.

[Unidentified Analyst:]

Okay thanks. And then maybe just any color on INTECH and the institutional backlog there?

[Roger Thompson:]

Yes. I mean INTECH, INTECH had some tough numbers at the back end of ‘16 and the back end of ‘19. As I said, investment performance in the first quarter has been strong, but that’s a very short time period. INTECH flows will be lumpy, so we had $1 billion of outflows in the first quarter. We are obviously watching that very, very carefully. It is an area of risk in our business, but we’re obviously pleased to see the strong investment performance in the first quarter.

[Operator:]

Our next question comes from Ken Worthington with JPMorgan

[Ken Worthington:]

Hi good morning. Maybe to follow up with the departures, there have been a number of departures and also retirements out of Henderson. You mentioned the EM team and there have been others. Can you talk about maybe the catalyst that you see driving this turnover? And maybe while numbers might not be higher than the industry average, there’s definitely some higher profile managers that have left or retired. And then, where are we in the seasoning of whatever the catalyst is for these departures? And maybe I’ll leave it there.

[Dick Weil:]

Sure. Thanks, Ken. Yes. Since the merger, I think we’ve had a lot of stability on our investment teams, but recently we’ve seen a little pickup in obviously the high-profile one we’re talking about most at this point is the EM team that Roger mentioned. In terms of the catalysts, look, Bill Gross retiring is a completely separate and unrelated catalyst to what the EM team is deciding and so I don’t think I can sum a reasonable description of catalysts because they’re all pretty different. They are all pretty unique circumstances. We don’t overall, we see a very stable investment team and we don’t have any other departures to disclose. But people do get older, they do retire. We do have folks who decide they want to build their own firm and make other life choices. We’ll continue to face that in an ongoing basis, but I don’t think there’s a special description underpinning these they’re just sort of individually unique decisions. And we feel overall that the investment team remains pretty darn stable.

[Ken Worthington:]

Yes, that’s all for me.

[Operator:]

Our next question comes from Nigel Pittaway from Citi.

[Nigel Pittaway:]

Hi guys. Just first of all, a question on the margins by asset class, there have been quite significant movements if you do look now compared to 12 months ago, but most notably in Fixed Income, where it’s come down from 31 basis points to 26. Presumably that’s a mix within Fixed Income, but I’m just wondering whether you can elaborate a little bit more on why that’s occurred.

[Roger Thompson:]

You are quite, right, Nigel. On – I think it’s Slide 14 of the deck, we’ve given you those margins, which we said we’ll give every year, split out by capability and the biggest change, as Nigel’s pointing out, is Fixed Income. There are 2 big pieces in there. We’ve lost some retail fixed income money we highlighted on the call in the remarks earlier. The outflows from the flex bond fund, retail outflows at higher fees. And we’ve also got some institutional fee pressure in Fixed Income particularly.

[Nigel Pittaway:]

Right, okay, okay. And then maybe just secondly on the dividend, you previously talked about sort of wanting a progressive dividend policy. And obviously, it is flat and presumably now, stays flat for the next 4 quarters. I appreciate you are doing a buyback as well, but can you sort of maybe just give us some color behind why I guess we didn’t get progressive this time around?

[Roger Thompson:]

It is exactly to say, Nigel, we are talking about a progressive dividend. We have got earnings which are flat to slightly down on last year. We have got a dividend yield, which is in the top quartile of our peer group. We don’t, as you know, we don’t target a payout, but at $0.36, I think we’re a little bit above 50% payout. So, the combination of those I guess got the board to a position that $0.36 was a very good number. And in addition to that, we will continue to return excess cash to shareholders through the buyback. The intention of a progressive dividend is to grow over time. And as we see earnings grow, we’d want to be pushing that up.

[Operator:]

And our next question comes from Patrick Davitt with Autonomous Research.

[Patrick Davitt:]

Just one quick follow-up on the flexible bond fund, it does look like there may have been one very large redemption there, there is about $5 billion left. Are there a lot of chunkier mandates in there, even though it’s kind of a retail mutual fund, it’s surprising to see that big of a redemption in one month?

[Roger Thompson:]

You are right. There were two big decisions made in the month of March. There was a little more coming out in April. And you will see that when the sim fund data gets released this month. That’s the end of one of those decisions. They are the biggest single decision-makers in that fund, so there was as you said it’s a very sizable fund. It’s a very important fund for us and has been stable and strong fund, and we expect it to continue that way. But there are a lot of smaller decision-makers after that, so no more as such large single decision.

[Patrick Davitt:]

Great. And my follow-up on LTIP compensation, you called out the $15 million mark-to-market, but it looks like from your guidance that it’s still kind of mid-40s per quarter for the year. So why wouldn’t that come back down after the mark-to-market?

[Roger Thompson:]

Yes, the $15 million is the move quarter-on-quarter. So last quarter, we were low in LTI, as that number was effectively marked down; with the awards being worth less this quarter, it’s up. So, the actual numbers in this quarter is, I think, about 5 or 6. So yes, you’re right. In the appendix, we’ve given the guidance for the rest of the year. It’s a slightly lower number than Q1.

[Operator:]

And Michael Carrier from Bank of America has our next question.

[Michael Carrier:]

Just a question on the sales. I think when we look at the redemptions that improved in the quarter, still looks a little bit muted. I think you talked about some of the products that are pressuring the net flows. But I just wanted to get a sense on what you’re thinking you shift that over time. And then, just any update on the head of distribution as well because that may have some impact on the sales side.

[Dick Weil:]

Alright, thanks. Taking the second one first, we don’t have anything to say on the head of distribution at this time, but we will soon. And on your first question around the flow picture, I’m trying to think of what’s a reasonable answer. Roger, I don’t think I understood his question perfectly.

[Roger Thompson:]

I think I’ll, say I think what you’re saying, Michael, is looking at gross flows. Gross flows are down compared to the first quarter of last year, and I think there is probably two or three areas to highlight there. First is European equities, which is a story we have talked about, about performance. And although we’ve got some short-term performance improvements there, the performance that came through over the last year has meant we’ve got lower gross sales this year over last year. The economic environment is obviously also part of that, particularly in the UK. We are seeing improving sales on the continent. The second is in Fixed Income. We had a sizable win in Australia, the first part of which funded in Q1 last year. The institutional business obviously will get a little bit lumpier. And I guess offsetting those is the continued sales in multi-assets, so our balanced fund continues to be very strong. But on the downside of gross flows, I’d probably point to intermediary sales in Europe driven by equity and in institutional in fixed income.

[Operator:]

And we will take our next question from Simon Fitzgerald from Evans & Partners.

[Simon Fitzgerald:]

Good morning, everyone and thanks for taking my question. Just first one, I wanted to talk about the trajectory in management fees. It looks since the first quarter of 2018, management fees are down about 12%. Your costs have been fairly stable, down around 2.4% over that period of time. Just wanted to know why a more aggressive cost approach hasn’t been considered, if it has at all?

[Roger Thompson:]

I guess we are taking a long-term view of the business, Simon. We are here to grow this business. We are – and we have obviously delivered all of the merger cost savings that we talked about. We expect, as I have said previously, to continue to look for efficiencies in the business. I don’t think we’re fully done yet. Equally, there are things we want to do to continue to grow this business. So, we are investing in the business and we will continue to do that. So, we think we managed the cost on this business pretty carefully. We’ll continue to do that. We’ll continue to drive out costs where we can, but you would also expect us – you would also expect and I hope want us to continue to invest to grow the business.

[Simon Fitzgerald:]

Good, thank you. And just the final question, I just want you to clarify on the emerging markets. Did I hear you right that you’re saying that there’s been $2 billion worth of redemptions that will fall through in April, was it?

[Roger Thompson:]

We’ve been notified of $2 billion, so, they – that will come out over – yes, as the clients redeem.

[Simon Fitzgerald:]

Alright. Thanks, Roger.

[Operator:]

And our next question comes from Craig Siegenthaler with Credit Suisse.

[Craig Siegenthaler:]

Thank you. Just a follow-up on the elevated turnover on the investment side of the business, but there’s also a Bloomberg article out I think about 2 hours ago where it mentions that 2 of your credit managers are also departing and I think the strategy internally is to replace them with quants. I’m just wondering if you can provide us a little color on this situation, which I think is separate from the EM departures?

[Roger Thompson:]

Yes, Craig, it’s Roger. That’s just a change that Jim, who is Head of Fixed Income team has made. We’re looking at the overall credit team. We’ve reduced in one area and increased in another area. So, yes, that’s Jim really looking at that Fixed Income team and continuing to build and improve it.

[Craig Siegenthaler:]

And then just as my follow-up, the backdrop for the industry is more on the challenging side here, industry consolidation is going on, but I’m just wondering, have you thought about any changes to your retention and compensation strategy on the investment side of the business?

[Dick Weil:]

This is Dick. Thanks for the question. No, we haven’t. We’re happy with our retention and compensation strategies. Fundamentally, we don’t believe people stay for retention packages and trying to create economic hostages generates a fair amount of friction. So, we don’t – we have a sort of a normal amount of deferred compensation as part of our regular compensation, but other than that, we don’t have a big retention program. We think people should stay because they like the work, they like the people and they are optimistic about the success. And frankly, if they’re not in that camp, they probably shouldn’t stay. So, we see particularly on the investment team, we see that we’ve got some changes, yes, and we’ll probably always have some changes, but overall, we feel pretty darn stable. And as Roger highlighted numerous times in his comments, overall, the investment performance is quite good and over time, that will be an increasingly defining feature of our success. So, we’ve got some stuff to work through and we will work through it. But longer term, we think the strong investment performance is the best indicator of where we’re heading, and we have terrific people on our investment teams. And we feel just fine about where we are, we don’t feel the need to make changes.

[Operator:]

And we’ll take our next question from Alex Blostein with Goldman Sachs.

[Alex Blostein:]

Hi, good morning. I guess, if you guys talk on the EM strategy, I think the U.S. lead is a little bit over 100 basis points in management fees. I’m not sure if it’s the exact same, but can you help us on what the blended fee rate is in that $5 billion that the team has managed?

[Roger Thompson:]

Sorry, Alex, you were very muffled there. I think you were asking what the blended fee rate is on EM. I think you said something about 100 basis points, which sounds very high. We’re probably talking – again, I don’t think we’ve disclosed it overall, but I’m happy to say it’s probably in the mid-60s.

[Alex Blostein:]

Got it. Mid-60s, okay. And then the balanced product continues to grow really nicely for you guys, it’s one of the strong areas of growth obviously. Can you just remind us on what capacity is for that product both on the fund size and across other vehicles?

[Dick Weil:]

Yes, this is Dick. That product invests in the most liquid markets in equities and fixed income, so it’s not seriously capacity constrained. You can see some other competitors in balanced space are even larger, substantially larger. So, we are nowhere near close to a capacity limit in that product.

[Operator:]

Next question comes from Andrei Stadnik with Morgan Stanley. Please go ahead, sir. We are unable to hear you.

[Andrei Stadnik:]

Can you hear me okay?

[Operator:]

Yes, thank you.

[Roger Thompson:]

Yes, we can hear now, Andrei.

[Andrei Stadnik:]

Good morning, sorry about that. Just wanted to ask in terms of the situation in Europe and UK around Brexit, do you think some kind of resolution on Brexit would lift client sentiment and help lift industry-wide flows in – from Europe and UK?

[Roger Thompson:]

Yes, without a doubt, particularly in the UK. As I said, we are seeing some improved numbers coming through on the continent, but the UK remains a challenged industry. The data that came out yesterday for m arch, I think it was yesterday for March showed a continued significant industry outflow. So that yes, the investment sentiment is pretty low in the UK. So yes, any – I think any resolution would be viewed positively.

[Andrei Stadnik:]

Thank you. And my second question around any flows you’ve seen in Japan, any flows you saw in the quarter, and how that Dai-ichi relationship is progressing?

[Roger Thompson:]

No flows, no notable flows in the quarter from Dai-ichi. Dai-ichi remains an incredibly important partner and a very valued partner. The relationship continues to build, whether that be around – obviously own 15 and a bit percent of the stock. But on top of that, we’ve got the business that’s continuing to grow in Japan. We had somewhere in the second quarter, Dai-ichi will launch in a new area for us, so, in Dai-ichi Insurance, the adaptive asset allocation product, that could be quite sizable. We’ll see over time, so we’re pleased with that. We’ve got a continuing developing relationship in Australia with TAL, the affiliate of Dai-ichi down there. So, we’re very pleased with that relationship and the team down there are doing a great job in building that relationship. So, we hope to see more money come through there in the future as well. So, there’s a number of areas where we expect to see growth, but nothing to talk about specifically in number terms in Q1.

[Operator:]

And our next question comes from Robert Lee with KBW.

[Robert Lee:]

Great, thanks. Thank you and thanks for taking my questions. Can you maybe just give an update on kind of what you’re seeing out of the Dai-ichi relationship in Japan? And then maybe as a second part, can you maybe drill down a little bit in the U.S. intermediary business, maybe where some of the emphasis for investment may be there? Do you feel like you have the right product structures, whether it’s SMAs or CITs, just kind of how you’re thinking about more deeply penetrating at least U.S. intermediary? Thank you.

[Roger Thompson:]

Let me – Robert, yes, you must have just missed it. We just did the question on Dai-ichi, so I’m happy to pick up with that – or John can pick up with you on Dai-ichi after. But Dick, do you want to pick up on U.S. intermediary?

[Dick Weil:]

Yes. So, on U.S. intermediary, the opportunity that we have is we have some really strong investment performance. And then as you think about how you convert that into increasingly positive business flows, I think the area we look at for investment is really around technology and data. The smarter you can take your limited resources and apply them to opportunities, the more progress you can make. And our team in the U.S. is very focused on increasing the effectiveness and efficiency of their activities through the use of data and targeting their activities. We have invested substantially in increasing their tools to do that in the past and probably, we’ll continue to do that as opportunities arise. I think that’s the best way that we know of to convert the very strong performance in our U.S. equity platform into increasing flows.

[Operator:]

And we’ll take our next question from Brendan Carrig with Macquarie.

[Brendan Carrig:]

Got it. My questions have been answered, so I’m over. Thank you.

[Operator:]

Thank you. Our final question will come to us from Ed Henning with CLSA.

[Ed Henning:]

Thanks guys. Just a quick one from me. Can you just run through and talk about your channel mix and where you’re seeing your gains and losses from there?

[Dick Weil:]

Yes, you’ve got us looking for the right page. What we’re seeing is hard to describe in global channel space. We pretty much have to break it down regionally as we’ve tried to indicate. We’re doing well in U.S. intermediary particularly in balanced and equities. We’re doing – we’re suffering along with the market in UK retail and we’ve had some ups and downs in institutional in various places, but the exposure that we have due to some performance challenges at Intech and in Fixed Income has driven some negative flows. So, it’s a little bit of a complex story, a little hard to summarize, but we’ve tried to give you a sense that the U.S. is doing well in intermediary. There are some challenges in other places and institutional is hard to describe in the aggregate. It’s a lot of sort of lumpy individual decisions moving in different directions quarter-on-quarter. So, I don’t know that I can do better.

[Ed Henning:]

Are you saying the channel mix be a headwind for you at the moment or because of the growth in U.S. intermediary and also retail is hopefully a little bit of tailwind for you going forward?

[Dick Weil:]

Well, I mean, I think we’ve talked about the pain of the mix is, we’re losing some high-fee retail assets with the global EM team departure, that affects our mix somewhat. There’s been pressure as Roger mentioned earlier on the call in institutional Fixed Income in particular and that has had some affects. And so do we – I don’t think we see a continuous story going forward in one direction or the other. It’s not a question of huge long-term waves, but that’s what we’ve seen. Roger, do want to –

[Roger Thompson:]

No, I mean, in terms of fee pressure, it is – we talked about it being a continuous grind of a basis point also a year. We saw 2 basis points in the last year. If you go back over the previous years before that, it’s significantly less. So – it’s slightly higher this quarter. There’s a number of – and the biggest changes are – is actually the business is coming in the door and going out of the door. So, we’ve won some business at lower fees and lost some business at higher fees. I mean, the underlying fee pressure in our business remains there. We built our business expecting it to remain there. And I think the other thing is that we got to remember is all business is – not all business is the same. So, we’re very happy to look at business at lower fees. The institutional business has a longer duration. So, you’ve got to look at the sort of net present value of a piece of business. So, it’s not – it’s not all – certainly all about assets, sometimes it’s not purely about the margin and the ultimate revenue on those assets as well, you’ve got to look at the duration and the NPV.

[Operator:]

Thank you. And ladies and gentlemen, that does conclude today’s question-and-answer session, as well as today’s Janus Henderson first quarter 2019 results conference call. We do appreciate your participation today. Have a good day. You may now disconnect.