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Edited Transcript of HGG.L earnings conference call or presentation 4-Feb-20 1:00pm GMT

Q4 2019 Janus Henderson Group PLC Earnings Call

London Feb 10, 2020 (Thomson StreetEvents) -- Edited Transcript of Janus Henderson Group PLC earnings conference call or presentation Tuesday, February 4, 2020 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Richard MacCoy Weil

Janus Henderson Group plc - CEO & Executive Director

* Roger Martin James Thompson

Janus Henderson Group plc - Executive VP & CFO

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Conference Call Participants

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* Alexander Blostein

Goldman Sachs Group Inc., Research Division - Lead Capital Markets Analyst

* Andrei Stadnik

Morgan Stanley, Research Division - VP

* Christopher Meo Harris

Wells Fargo Securities, LLC, Research Division - Director and Senior Equity Research Analyst

* Craig William Siegenthaler

Crédit Suisse AG, Research Division - MD

* Daniel Thomas Fannon

Jefferies LLC, Research Division - Senior Equity Research Analyst

* Edmund Anthony Biddulph Henning

CLSA Limited, Research Division - Research Analyst

* Kenneth Brooks Worthington

JP Morgan Chase & Co, Research Division - MD

* Nigel Pittaway

Citigroup Inc, Research Division - MD of Insurance and Diversified Financials Equity Research and Lead Insurance Analyst

* Patrick Davitt

Autonomous Research LLP - Partner, United States Asset Managers

* Robert Andrew Lee

Keefe, Bruyette, & Woods, Inc., Research Division - MD & Analyst

* Sean Colman

Bank of America Merrill Lynch International Limited - Former Director of Fixed Income / US Short Rates Sales

* Simon Fitzgerald

Evans & Partners Pty. Ltd., Research Division - Executive Director of Diversified Financials

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Presentation

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Operator [1]

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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 Fourth Quarter and Full Year 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.

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Richard MacCoy Weil, Janus Henderson Group plc - CEO & Executive Director [2]

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Welcome, everybody, to the fourth quarter and full year 2019 earnings call for Janus Henderson Group. I'm Dick Weil, and I'm joined as usual by our CFO, Roger Thompson. In today's presentation, I'm going to touch on our full year business results, try and give a broader discussion on flows and talk a little bit about the business outlook for 2020. I'll then turn it over to Roger, who will go deeper into the quarterly results. And following our prepared remarks, we'll take questions from you as always.

So when I look back on 2019, the headline that I think will grab your eye is $27.4 billion in outflows. Now we're accountable for that result. That's the truth, and we need to own that. But it's important that we not let that mask a lot of other things going on in the business. We're seeing some very positive momentum in some very good parts of our business. Our investment performance is best in class. That's starting to show through and generating positive flow results across many regions and products primarily in our retail businesses. Now these are smaller in AUM than some of the institutional flows, but a substantially higher fee business. Financial results are strong, and our business is generating good cash flow, which we were able to return to shareholders through both dividends and a $200 million share buyback.

Let's turn to Slide 2. I think first thing I want to call your attention to is our investment performance remains very strong, with 69%, 76% and 77% of assets beating their respective benchmarks over the 1-, 3- and 5-year time periods, which is another sequential improvement from prior year and is really an excellent result.

Next, we got to face the $27.4 billion in outflows, but with the benefit of markets, it's important to note that the ending AUM is actually 14% higher than a year ago and forms a good starting point for 2020.

Next, let's turn to financial results. We generated over $460 million in cash flow, which allowed us to complete both the $200 million buyback, and also we distributed $272 million in dividends. We are also announcing today, and Roger will go into more detail on this, that our Board has approved another $200 million buyback for the next 12 months.

Moving on to Slide 3. Slide 3, I'm going to try and give you just a deeper dive into our flows. On this slide, you can see that the year reflected outflows in the 4 business areas that we previously identified to you as significant challenges for us. So in INTECH, global emerging markets, Core Plus and European equities, we saw the substantial lion's share of the outflows during the year.

Turning to INTECH. The $10.8 billion of outflows were really driven by some performance challenges they've had. INTECH has made enhancements to their investment process based on lessons learned and we're confident that this will lead over time to better performance and will help their clients and will ultimately drive their business back to a more positive frame and result, but that's going to take some time.

Next, let's turn to global emerging markets. During the year, we replaced our global EM team. And as you know, that put substantially all those assets at risk. The change in portfolio management resulted in $3.7 billion of outflow reflected in our 2019 numbers. And we're really excited about our new emerging market team. They've gotten off to a great start. They're working well in our firm, and we're really quite optimistic about that team's ability to work with the rest of us and rebuild assets in this important strategy area.

Third, let's talk about our Core Plus Fixed Income business. Outflows during 2019 were $3.1 billion. The outflows improved over the year as performance improved. Towards the end of 2019, we finalized the change in the U.S. Fixed Income leadership and portfolio management team, particularly with the hiring of Greg Wilensky. We're really happy to have Greg on board, and we're pleased about this change. But whenever we make a change like this, this obviously puts clients on notice and puts the business under some watchful eyes because of these changes.

Let me turn next to European equity. Like our Core Plus business, the $2.7 billion of outflows occurred mostly during the first half of 2019, with only $200 million of outflows in the fourth quarter. Their performance has improved and they are now outperforming benchmarks on a 1-year basis. So we're hoping that we're well on the way to moving back towards inflows in this very important business area. So again, to summarize, these 4 business areas contributed very substantially to the difficult flow result, but important steps have been taken in each area, and we're confident that with the passage of time, we can bring each of these areas back into a position of strength in our business. As I mentioned in my opening remarks, the 2019 flow is masking a bunch of good things and positive momentum in our business. And I want to just explain why I said that in a little more detail on Slide 4.

Slide 4, we broke out 2019 in 3 client types, institutional, intermediary and self-directed. And then also we further broke it down between the first half of the year and the second half of the year. Institutional is impacted primarily by the 4 areas that I just mentioned. I want to focus on the building positive momentum in our intermediary business that began to take shape, particularly over the second half of the year.

In second half 2019, we had inflows of $2.1 billion, and that reflects a 3% annualized organic growth. This represents a positive run rate in some of the most competitive retail markets in the world. The second half of the year represents an $8.4 billion net flow improvement over the first half. This improvement was spread globally across many products, and I'm excited about the prospects to build on that positive momentum as we enter 2020.

In the next slide, I outline a few of those promising elements.

Let's turn to Slide 5. As we think about what's promising entering 2020, first and obvious is investment performance. Our total company investment performance is very strong. And as I said earlier, it represents an improvement over previously very strong numbers. From a retail standpoint, we have 76% of our mutual fund AUM in the top 2 Morningstar quartiles over 1-, 3- and 5-year time periods. Also 85% of our U.S. mutual fund AUM have 4 or 5 overall Morningstar ratings. These are truly exceptional results. Our investment performance remains, in my mind, the best leading indicator for our future success in this business and will lead to flows. We are seeing this begin to play out in our intermediary business over the second half of 2019, and we believe we have a great opportunity to build on this momentum in 2020.

The second element after investment performance I want to talk about is that we're actually already winning new business. I've talked about this momentum in our intermediary business. In North America, we're capturing market share. The organic growth rate in the second half of 2019 for our equity products was 5 points above the industry average. Our Fixed Income growth rate was 14 points better than industry average. In the fourth quarter, Continental Europe had a $700 million net inflow, which is our best result since the merger. Latin American flows were positive, and we see lots of opportunity there. Our product mix is more diversified than ever, and we're excited about the prospects for that business.

On the product side, we've seen substantial growth in a number of strategic products across equities, fixed income and multiasset. Our balanced strategy had $4.2 billion of net inflows. Our multisector income strategy had $1.6 billion. Our global strategic Fixed Income had $1.4 billion in net inflows. In addition, on the institutional side, our business is working to rebuild its pipeline. We are seeing encouraging early signs in the U.S., in EMEA, in Australia across a diversified set of products, including equities, fixed, ETFs and INTECH. So look, right now, on the flow side, what we're seeing is good news in retail. But we are starting to see prospectively, early signs of pipeline growing in institutional, which leads us to be optimistic that with the passage of time, we can get that business back to a much better place.

Third thing I would like to call your attention to is the progress we're making on our team with our people. During the year, we made several key additions. We bolstered our investment in our leadership teams, including a new Global Head of Distribution, a new head of U.S. Fixed Income, a new global emerging market team and a new Global Head of Enterprise Risk, just to name a few.

Finally, let me call attention again to our financial strength. We continue to generate strong cash flow, which is supporting ongoing investments in our business and of course, it's supporting the $272 million in dividends that we paid out last year and the $200 million buyback that we completed.

With that, I want to just turn it back over to Roger to do a deeper look into the quarterly results.

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Roger Martin James Thompson, Janus Henderson Group plc - Executive VP & CFO [3]

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Thank you, Dick. Thanks, everyone, for joining us.

Diving straight into the fourth quarter results. Investment performance over the 3-year time period remains strong and consistent with the third quarter level, with 76% of firm-wide assets beating their respective benchmarks as of the 31st of December. Net outflows increased to $6.7 billion in the quarter as a result of an increase in redemptions primarily from our institutional clients, which were partially offset by an increase in gross sales. Despite these outflows, ending AUM increased 5% due to strong markets and favorable FX. Lastly, the financial results were better than the prior quarter, with EPS of $0.65 compared to $0.64 a quarter ago.

Turning to Slide 8, if I look at investment performance. Overall investment performance related to benchmarks remained strong. We saw continued strength in performance across all of our capabilities across the 1-, 3- and 5-year time periods, with the exception of quantitative equities. At INTECH, while performance did improve from prior years across the 1-, 3- and 5-year time periods, the results are not where they need to be. And as Dick mentioned, the teams have implemented some enhancements to the process, which should benefit clients in the long run.

On the right-hand side of the slide, you can see the relative performance compared to peers is very strong, with at least 76% of AUM represented in the top 2 Morningstar quartiles on a 1-, 3- and 5-year basis.

Now turning to total company flows. For the quarter, outflows were $6.7 billion compared to outflows of $3.5 billion last quarter. Despite the higher net outflows, we did see an important and further improvements in intermediary net inflows during the quarter. And as Dick has already mentioned, we continue to see momentum building in this channel, which we're very encouraged by. As Dick's already talked about the 2019 flow results in some details, I won't spend too much time on Slide 10. We provided this view of the flows one final time, as we indicated we would in last quarter's call.

Before moving on to the financial results, I wanted to give an update on net outflows and asset dispositions for the first quarter of 2020. In terms of dispositions, in the fourth quarter, we entered into an agreement to sell Geneva Capital Management. The sale is anticipated to close during the first quarter of 2020. The assets under management are approximately $5 billion and will be shown as a disposition of assets in our reporting. This transaction aligns with one of our strategic priorities of focus and simplification while Geneva Management fulfilled their desire to operate independently.

And in flows, first, in global emerging markets, we have the previously notified $1.2 billion redemption, after which the remaining $400 million of assets under management will almost entirely be in retail. Second, the change in portfolio management leadership on the Core Plus Fixed Income strategy year-end influenced a mandate loss in January of approximately $5 billion. This mandate was at very low fee, and therefore, will have a minimal impact on our P&L.

Despite these known outflows in Q1 2020, the fact that the vast majority of our AUM is strongly performing for clients and the momentum we're seeing means that we're pleased to see an improving institutional pipeline and a confidence in the opportunity to continue the momentum we're seeing in the retail business into 2020.

Slide 11 is our standard presentation of the U.S. GAAP statement of income.

Moving to Slide 12 for a look at the summary financial results. First, looking at the full year's results. We began the year at a significantly lower AUM level due to the market declines in December 2018. Whilst AUM did recover, the full year results reflect the impact of that lower starting point. Average AUM was down 3% over the prior year which, along with a lower net management fee margin drove lower management fees and led to a 6% decrease in the adjusted total revenue for the year. But as we move into 2020, AUM is 14% better than it was a year ago.

Full year adjusted operating margin continues to be strong at 35.8%. Adjusted diluted EPS for the year was $2.47 compared to $2.74 in 2018. The 10% decrease in adjusted EPS was driven primarily by the reduction in revenue.

Now looking at the quarter-to-quarter comparison. Our fourth quarter adjusted financial results primarily reflect good market conditions and high performance fees during the quarter. Average AUM increased 1% over the third quarter, driven by positive market and currency movements, partially offset by outflows. Higher average assets and the seasonality and performance fees resulted in a 7% increase in total adjusted revenues from the prior quarter, which flowed through to adjusted operating income of $171 million, up compared to the third quarter. Fourth quarter adjusted operating margin was 36.9%, almost identical to the 37% in the prior quarter.

Finally, adjusted diluted EPS was $0.65 for the quarter compared to $0.64 for the third quarter.

On Slide 13, we've outlined the revenue drivers for the quarter and also the full year. Before discussing the revenue drivers, I wanted to walk through a small change we've made in how we reported our revenue line items. Previously, we showed distribution expenses as a separate line in the table to calculate total adjusted revenue. We will now net the portion of distribution expenses against the revenue line item, which it applies either management fees, shareholder servicing fees or other revenue. We've also adjusted the prior quarters for comparability. The total adjusted revenue amount obviously does not change. More accurately, allocating distribution expenses has resulted in the increase in the net management fee margin. We're happy to talk you through this off-line for anyone who wants any more details.

Now moving into the quarterly change in adjusted total revenue. Higher average assets and seasonal performance fees were the biggest drivers of the quarterly change, resulting in a 7% increase in total revenue. Net management fee margin for the fourth quarter was 44.9 basis points, which was up from 44.4 basis points in the third quarter, but down from 46.1 basis points a year ago. The quarterly increase is welcomed that is primarily due to a mix shift resulting from stronger markets and also positive flows in our higher-yielding intermediary business and outflows from the lower-yielding assets. While we still expect net management fee compression over the longer term, the current trends we're seeing in our business should support us stabilizing or even improving net management fee margin in the near term.

We provided the 2019 net management fee margin by capability in the appendix. We will continue to disclose this metric on an annual basis and I hope you find it useful.

Moving to performance fees, which were $18 million compared to $1 million in the third quarter. The fourth quarter result was driven primarily by segregated accounts within our Global Life Sciences and Global Technology strategies. U.S. Mutual Fund performance fees were relatively flat to Q3 at negative $1 million, but improved significantly from the negative $11.5 million a year ago. Whilst we can't predict what future performance fees will be like, there are a few positive items to note as we begin the year. First, the U.K. Absolute Return strategy, after underperformance in 2018, outperformed its benchmark meaningfully in 2019. And as of the 31st of December, the OEIC was back above its high watermark, which would enable the strategy to begin to earn a performance fee in 2020. Whilst the SICAV range was just slightly under its high watermark.

Secondly, the European equity funds within the SICAV range also performed well during 2019 and are on track to add a performance fee in their next measurement period during the second quarter of 2020.

Third, our U.S. Mutual Fund token fees seeks potential for further improvements in 2020. But as with all performance fees, that, of course, is dependent on future performance.

And finally, I wanted to point out that the amount of AUM subject to performance fees, and hence, the opportunity for the firm to earn performance fees in the future has not significantly changed.

Turning to operating expenses on Slide 14. Adjusted operating expenses in the fourth quarter were $292 million, up 7% from the prior quarter. Adjusted employee compensation, which includes fixed and variable costs, was up 10% compared to the prior quarter primarily as a result of higher pre-bonus profits and the impact of year-end adjustments to our cash/noncash payout mix.

Adjusted LTI was up 5% from the third quarter, largely due to mark-to-market adjustments. In the appendix, we provided further detail on the expected future amortization of existing grants along with an estimated range for the 2020 grants for you to use in your models. The fourth quarter adjusted comp-to-revenue ratio was 43.5%. And for the full year, the total comp-to-revenue ratio was 44%. Adjusted noncomp operating expenses increased 3% quarter-over-quarter from various factors including higher seasonal marketing expenses and higher run rate costs in investment administration, coupled with a few onetime costs, which were partially offset by a onetime $5.5 million credit in G&A related to the successful appeal to the legal outcome that occurred in 2018.

Finally, our recurring effective tax rate for the fourth quarter was 24.4% and for the full year, the firm's effective tax rate was 24.0%.

Looking forward to 2020, I want to take a few minutes to provide some insight into what we anticipate in our expense base. As a management team, we're focused on balancing the appropriate amount of investment that is required to grow our business and maximize profits over the medium term with sound financial discipline and an awareness of margin pressure. But it's important to note that we run the business with an emphasis on the long term versus quarter-to-quarter margin results.

With that said, let's walk through a few points for 2020. First, looking at compensation. We don't anticipate a significant change in the adjusted comp ratio, which should continue to be at the high end of the low 40s. Second, the noncompensation expenses, we'd expect to see an increase of low to mid-single digits. And finally, the firm's statutory tax rate is expected to be similar to 2019 at 23% to 25%. The effective rate will obviously be impacted by various differences, which arise quarter to quarter.

Turning to Slide 15, and then look at our balance sheet. As at the end of December, Janus Henderson had consolidated cash and investment securities of $2 billion, of which $700 million were third-party assets, which were consolidated onto the balance sheet. The increase quarter-on-quarter resulted from a $100 million short-term investment we made into our seed book which caused an entire fund to be consolidated onto the balance sheet, including third-party money in this fund.

And lastly, on Slide 16, let's have a look at our capital management. We remain committed to returning excess cash to shareholders. In 2019, we were able to fund $472 million of dividends and buybacks, which represents 102% of the cash flow from operations that were generated during the year.

During the fourth quarter, we paid $66 million in dividends to shareholders. Additionally, in the quarter, we completed the remaining $13 million of the fully accretive $200 million authorization, purchasing 511,000 shares. The completed authorization totaled 9.4 million shares that were repurchased during 2019, resulting in a 5% reduction in the share count. I'd take reference to the beginning of the call, that we're pleased to announce that the Board has authorized an additional on-market accretive share buyback of up to $200 million through April 2021.

With that, I'll turn it back to Dick for some concluding thoughts before the Q&A.

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Richard MacCoy Weil, Janus Henderson Group plc - CEO & Executive Director [4]

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Thank you, Roger. We start 2020 14% ahead of where we started last year. That makes me excited. We have great opportunities in front of us. We know that our path to success remains the same. We have to deliver simple excellence across all that we're doing for our clients, for our owners and our employees. And if we can remain consistent and firm, driving down that path, we have terrific opportunities. Our investment performance is excellent, and we're beginning to see that investment performance drive better flows across particularly our intermediary business, where, frankly, our fees are substantially better. We have the breadth of product to meet client demand in many, many interesting ways.

And finally, our financial foundation is solid, allowing investment in the business and also returning capital to our shareholders in the form of buybacks and dividends. I firmly believe we are a better company today than we were a year ago. I'm excited about the path that we're on to deliver for our clients, owners and employees.

Now I'd like to turn it back over to the operator for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Ken Worthington from JPMorgan.

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Kenneth Brooks Worthington, JP Morgan Chase & Co, Research Division - MD [2]

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Maybe first on Fixed Income, more elevated fixed income outflows, it looks like there is maybe $1 billion-plus that came out of the Australian business this quarter. Can you give us some background on this? Is this related at all to the $5 billion that I think you said was coming out in January? And how is the performance of these Australian products that look like at least one had some elevated outflows?

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Roger Martin James Thompson, Janus Henderson Group plc - Executive VP & CFO [3]

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Ken, it's Roger. Yes, I think there's 2 pieces in the Fixed Income numbers from the flow point of view which are probably worth noting. The first, as you said, is we had one mandate within Australia from the Aussie fixed business. That's a business that's been growing very well over the last 3 or 4 years. We have one client who have insourced some money. So that's the money that's been taken away from us. But overall, that business is in very good shape and continues to win money, particularly on the retail side.

The second piece is an outflow from a client, again, which is reallocated money away, but a very strong client relationship we have, and we're very happy that we've been able to work with them and have reallocated money from fixed into equity. So this is a gross-up, if you like, on flows from a client move out of fixed into equity.

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Kenneth Brooks Worthington, JP Morgan Chase & Co, Research Division - MD [4]

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Okay. Great. And then just Dai-ichi. Can you just level set us, where does that relationship stand today in terms of the AUM contributed either in Janus from subsidiaries or related companies to Dai-ichi? And are there opportunities in 2020 to further expand that relationship?

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Richard MacCoy Weil, Janus Henderson Group plc - CEO & Executive Director [5]

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Ken, it's Dick. It looks like the Dai-ichi relationship at December totaled about $12.8 billion, broken out as the Dai-ichi general account, a little over $3 billion; it's affiliate asset management, one which is really third-party money, at $6.6 billion; affiliate TAL and Asteron down in Australia, $2.7 billion and then $300 million out of Protective Life in the U.S., which is another Dai-ichi affiliate totaling about $12.8 billion. That's the relationship. In terms of opportunity to continue to grow it, of course, there are opportunities to continue to grow it. But it's fair to say that if you're in the life insurance business in Japan, you're probably not swimming in excess capital.

And so it's very competitive, it's tight. They do a very professional job of allocating their funds, and we're in there competing for additional business, both from them and their affiliates and also through their auspices and good relationship with Asset Management One to other third parties in Japan. That flow of new business has slowed down a little bit of late, and we're obviously optimistic that we can get that engine running better again with some new assets, but it's likely to be lumpy and hard to predict on a quarter-to-quarter basis.

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Operator [6]

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And I'll take our next question from Andrei Stadnik with Morgan Stanley.

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Andrei Stadnik, Morgan Stanley, Research Division - VP [7]

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Just wanted to ask 2 questions. Firstly, on institutional flow update for the first quarter '20. Can I just confirm the Fixed Income $5 billion mandate being switched into equities, is that being switched with you or not with you into equities? And then kind of part B of that question, would it be right to assume that there is no update in INTECH. In other words, the run rate on INTECH seems to be better than what it was to start the fourth quarter?

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Richard MacCoy Weil, Janus Henderson Group plc - CEO & Executive Director [8]

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This is Dick. Let me just -- I think we haven't communicated as clear as we would like. The $5 billion out in Fixed Income in the first quarter is not related to the flows that Roger was just describing in the fourth quarter of last year in Fixed Income. And so those are separate things. And so the switch that Roger referred to related to some of the fourth quarter fixed income flows for last year, which was a client that moved out of fixed into equities. What Roger said about the first quarter flow anticipated of this year of $5 billion out of fixed was that in changing the lead PM and team leadership in our North American Fixed Income business that manages our Core and Core Plus Fixed Income, that caused the client to pull money we received notice and Roger explained that that money was coming out in the first quarter. And we're not aware that where that's going. That's just coming out of us. Anything to add, go ahead.

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Roger Martin James Thompson, Janus Henderson Group plc - Executive VP & CFO [9]

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Nothing. And yes, I mean there was nothing else to add on, Andrei -- sorry, on INTECH, Andrei. I mean it is -- there's no new news, nothing we're aware of for the first quarter.

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Andrei Stadnik, Morgan Stanley, Research Division - VP [10]

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And my second question, just thinking about the low to mid-single-digit noncomp growth guidance, what is that being driven by? Because underlying inflation is very benign, very low all around the world, call it, almost 0. So is that growth being driven by currency movements? Or are those deliberate investments that you're making into the business?

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Roger Martin James Thompson, Janus Henderson Group plc - Executive VP & CFO [11]

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They're primarily -- let me say, it's inflationary rising that there's a little bit of FX in there as the dollar weakened a little bit into the fourth quarter. But primarily, these are investments in our platform. We're continuing to invest to ensure that we've got a world-class platform, and if there is some more spend to be done there.

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Operator [12]

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And we'll take our next question from Dan Fannon from Jefferies.

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Daniel Thomas Fannon, Jefferies LLC, Research Division - Senior Equity Research Analyst [13]

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So I guess a follow-up on the U.S. credit. So curious how much in that core? What is left that's institutional, that's being managed out of those strategies, that's now has a new leader?

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Richard MacCoy Weil, Janus Henderson Group plc - CEO & Executive Director [14]

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This is Dick. I don't have the breakdown of retail versus institutional in that business. So I don't think I could give you a good description. We might be able to go into some more detail in a future quarter, but apologies that...

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Roger Martin James Thompson, Janus Henderson Group plc - Executive VP & CFO [15]

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We'll follow up with you off-line down in exactly what we've got in there. It's a multibillion-dollar franchise.

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Daniel Thomas Fannon, Jefferies LLC, Research Division - Senior Equity Research Analyst [16]

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But predominantly retail?

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Roger Martin James Thompson, Janus Henderson Group plc - Executive VP & CFO [17]

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Yes.

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Richard MacCoy Weil, Janus Henderson Group plc - CEO & Executive Director [18]

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Yes, predominantly retail.

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Daniel Thomas Fannon, Jefferies LLC, Research Division - Senior Equity Research Analyst [19]

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Okay. Great. And then just to clarify, I believe you said there was a $5.5 million benefit to G&A in the quarter. So just curious what the starting point of the kind of low to mid-single-digit growth is for the noncomp expense? And then also how we should think about any P&L impact from the sale or the pending sale of Geneva in terms of what comes out of the income statement or AUM levels? You said, I think, $5 billion in AUM. But just curious about other kind of flow-throughs from that.

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Roger Martin James Thompson, Janus Henderson Group plc - Executive VP & CFO [20]

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Sure, Dan. Yes, as I said, yes, you're quite right, there was a $5.5 billion one-off gain in the fourth quarter on a legal appeal. There's a couple of other things, one-off going the other way. They want to talk about low to mid-single-digit comp rise. I'm talking about on the full year 2019 figure. And then in terms of Geneva, the $5.5 billion business that we're selling that will come out of both the revenue and the expense line. There is -- there are some approvals that need to come through from the clients in that business. They will hopefully come through near the end of this month. And hopefully, the deal will close in March. In which case, the revenue and expense of that business will drop out of our P&L. I mean it's a smaller part of the business, so it's relatively insignificant.

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Operator [21]

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We'll take our next question from Patrick Davitt from Autonomous Research.

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Patrick Davitt, Autonomous Research LLP - Partner, United States Asset Managers [22]

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Just to quickly follow up on the expense question, could you confirm if that includes or excludes distribution? And when you say full year 2019, should we use that base that includes kind of the noncash items you've been calling out over the year?

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Roger Martin James Thompson, Janus Henderson Group plc - Executive VP & CFO [23]

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So that excludes distribution and sorry, the second part of your question, Patrick?

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Patrick Davitt, Autonomous Research LLP - Partner, United States Asset Managers [24]

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Should we adjust for severance and noncash items like the charge you took in the fourth quarter?

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Roger Martin James Thompson, Janus Henderson Group plc - Executive VP & CFO [25]

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So no, just on a net basis, against our full year 2019, we're going to be -- I'd expect to be up low to mid-single digits on the overall number.

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Patrick Davitt, Autonomous Research LLP - Partner, United States Asset Managers [26]

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Okay. Fair enough. So we know about obviously the issue with the legacy EM book leaving. Is there an opportunity I guess given that the new team came from somewhere else for the same thing to happen to benefit you in terms of the money that they used to manage?

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Richard MacCoy Weil, Janus Henderson Group plc - CEO & Executive Director [27]

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We don't expect to get a big crossover of the money that they used to manage it. A client who was with them at their old firm would be unlikely to come across, I think, given what we know about the structure of their business at the old firm. So it could happen in small numbers, but we don't expect a significant transfer of assets, but you never know.

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Roger Martin James Thompson, Janus Henderson Group plc - Executive VP & CFO [28]

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Yes, we are seeing, and you can see in the public data, we're seeing positive flows in retail in emerging markets, which, given the team has only been with us for a number -- a small number of months is a great start.

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Richard MacCoy Weil, Janus Henderson Group plc - CEO & Executive Director [29]

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Yes.

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Roger Martin James Thompson, Janus Henderson Group plc - Executive VP & CFO [30]

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But the more exciting piece will be when we start to win institutional business. That obviously will take a little bit longer. But the team is off to a great start and working very well with -- across with other investment teams, but also -- and building great links with the distribution teams around the world, which obviously we can bring to that too.

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Operator [31]

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Our next question comes from Alex Blostein with Goldman Sachs.

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Alexander Blostein, Goldman Sachs Group Inc., Research Division - Lead Capital Markets Analyst [32]

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So to Dick, encouraging comments on flows into 2020. So I was wondering that outside of the $5 billion of sort of known fixed income outflows, maybe give us a sense of where net flows stand so far in the first quarter. And then bigger picture, intermediary channel. Obviously, you've seen pretty good momentum. Can you spend a couple of minutes on just which geographies and which products in particular are driving better net flows in that channel?

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Richard MacCoy Weil, Janus Henderson Group plc - CEO & Executive Director [33]

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Yes. First, on the known outflows in the first quarter, Roger called attention to two. So there's $1.2 billion that's going out left, the last big piece of the old EM equity business, and then there's a $5 billion out in fixed income that Roger called attention to. In terms of flows coming in, it's not just one product. It's -- the current flows are predominantly driven by the retail segments of our business. And that's geographically diverse, it's also product diverse, more diverse than it's been in the past. And so the lead product has, for the last little while, been our balanced fund, managed by Marc Pinto and just a terrific product that has led in a number of markets around the world and has been our most successful product, but we have a lot of different -- it's a very diverse set, and it varies geographic region by region. So I couldn't do a good job of summarizing it on a global basis.

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Alexander Blostein, Goldman Sachs Group Inc., Research Division - Lead Capital Markets Analyst [34]

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Okay. Fair enough. But no explicit commentary on that net flow so far in the first quarter outside of the 2 known redemptions?

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Richard MacCoy Weil, Janus Henderson Group plc - CEO & Executive Director [35]

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No. We think that we have an opportunity to grow on this momentum that we've shown you in the deck. And that's what we're planning on doing. And we think the investment performance supports that. We think the energy from our new Global Head of Distribution supports that. And so we're optimistic about how those things develop. But this is something we win over time. It's not an explosive change in direction.

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Alexander Blostein, Goldman Sachs Group Inc., Research Division - Lead Capital Markets Analyst [36]

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That makes sense. And my second question around the quan business. I was hoping to better frame the path for this business. So 20 basis points net fee rate obviously below the blended, which is good news. I was hoping you could help us frame the net operating margin in that part of the model relative to the 36-ish percent or so net operating margin for Janus Henderson as a whole.

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Roger Martin James Thompson, Janus Henderson Group plc - Executive VP & CFO [37]

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I mean we don't give overall, but it's a successful business. It's profitable. It's still $47 billion of assets. I think the number is $45 billion. So yes, it's a business that we're looking to grow, but it's a profitable business.

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Operator [38]

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

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Craig William Siegenthaler, Crédit Suisse AG, Research Division - MD [39]

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So first, just starting with your impressive overall investment performance. Our worry here is that despite really good performance pretty much in every business at INTECH, you're still seeing large net outflows, which will continue in 1Q '20, just given the items you highlighted. So if overall performance does normalize over the next year, why would this not pressure total flows at current levels?

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Richard MacCoy Weil, Janus Henderson Group plc - CEO & Executive Director [40]

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I think if our performance softens, you will see -- the predictable effects of that is you would see some slowdown on the retail side where we're currently seeing gathering momentum.

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Roger Martin James Thompson, Janus Henderson Group plc - Executive VP & CFO [41]

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Over a period of time.

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Richard MacCoy Weil, Janus Henderson Group plc - CEO & Executive Director [42]

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Over a period of time.

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Roger Martin James Thompson, Janus Henderson Group plc - Executive VP & CFO [43]

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And it tends to last.

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Richard MacCoy Weil, Janus Henderson Group plc - CEO & Executive Director [44]

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And you would, if it persists, see that the pipeline that we're starting to build on the institutional side, that wouldn't come through as actual flows as well. I mean we're in a performance business. We're always in the performance business, and we have to perform. It's something we're doing quite well now, and we need to convert that into more positive flow momentum. The other thing that the flow number misses, which we've talked about previously as not all flows come in the same sort of quality of business, if you will. Sometimes, some of these big flows that are very eye-catching are driven by the largest sort of institutional accounts that, by their nature, coming in a huge size, come in an extremely competitive fees.

And when they go out or come in, it makes a difference. It makes a big eye-catching splash on the AUM and flow line rather less on the revenues and profit line. And so we're dealing with some of that. We're winning in some places where the fees are good, and we're losing some accounts in big institutional places where the fees are not quite as beneficial to us. So the AUM line and the full line tells part of the story, but obviously, the goal of this company is to build profitable business, and we're doing that in particularly in retail businesses all over the world.

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Roger Martin James Thompson, Janus Henderson Group plc - Executive VP & CFO [45]

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And I think you are starting to see intermediary tends to move a little earlier. And you are starting to see that performance. Yes, if you asked the same question a year ago, we were starting -- we'd had a good year or so of performance and flows weren't really turning in intermediary. They now have. And if we can continue that trend, that's the excitement we've got on intermediary. As Dick said, we're starting to rebuild the pipeline in institutional. Let's hope that comes through. But I think you are now starting to see that performance starting to come through in flows.

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Richard MacCoy Weil, Janus Henderson Group plc - CEO & Executive Director [46]

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We're a performance business, and without it, we won't succeed the way we need to.

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Craig William Siegenthaler, Crédit Suisse AG, Research Division - MD [47]

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My follow-up on Brexit. Can you articulate, if you continue to think this could be a positive catalyst for your European equity business? And you've seen a real indication that cash is getting ready to move off the sidelines of investors, especially in the U.K. regress?

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Roger Martin James Thompson, Janus Henderson Group plc - Executive VP & CFO [48]

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I The U.K. -- I mean as Dick pointed out, we're positive in intermediary flows in the U.S. on the continent in Latin America, small in Asia the one place that we are still negative, although less negative than we were, is the U.K., and we're certainly not allowed in that. The U.K. remains -- the cork is still in the bottle. It didn't go off last Friday. Money is still sitting on the sidelines. I think it may start to come, but I don't think we'd be calling that as like the last Friday doesn't -- is only the beginning, not the end. And there are other challenges in the U.K. market. So the U.K. is probably the area across the industry, which is the most difficult at the moment, and we're no different than that. It's the one area where we're not positive intermediary, although, as I said, it's slightly improved.

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Operator [49]

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And our next question comes from Simon Fitzgerald from Evans & Partners.

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Simon Fitzgerald, Evans & Partners Pty. Ltd., Research Division - Executive Director of Diversified Financials [50]

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Well, I got a similar question to the last one just asked in regards to the U.K. and European equity strategies. I'm more interested to know a little bit more about whether you feel that your European equity strategies performance is up to scratch to be able to pick up a bit more of a flow, if we did see a turnaround in flowing those strategies in particular.

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Richard MacCoy Weil, Janus Henderson Group plc - CEO & Executive Director [51]

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Yes, it's Dick Weil. I think it's the European equity strategies, broadly speaking, had a pretty tough couple of years leading into the second half of last year. In the second half of last year, they really picked up and...

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Roger Martin James Thompson, Janus Henderson Group plc - Executive VP & CFO [52]

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About whole of last year.

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Richard MacCoy Weil, Janus Henderson Group plc - CEO & Executive Director [53]

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Roger's saying really all of last year, they picked up and delivered improved performance, and given their sort of long-term success and strength, we think they're pretty close to being able to get back to gathering positive assets and being in a good position to participate, but there's more work to be done. I mean they aren't yet at that point where they have a really healthy track record, well-established and consistent and would be the natural winners in the battle. They put themselves much closer to that point, but they still have a little ways to go after improvements last year. So...

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Roger Martin James Thompson, Janus Henderson Group plc - Executive VP & CFO [54]

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But they're pretty -- they're at least 100 basis points ahead across just about, I think, all strategies over 1 year, at least 100 ahead. They're certainly, second quartile, possibly bumping into first over 1 year in a couple of places. And as Dick pointed out, outflows were still negative in Q4, but only $200 million, which compared to where they were at the beginning of the year is a pretty significant improvement. So yes, we have that opportunity, Simon, should European equity be in favor everywhere, then we're back in the game.

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Richard MacCoy Weil, Janus Henderson Group plc - CEO & Executive Director [55]

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Historically, Henderson has been a terrific leader in that space, and we're looking forward to getting back there, and we have that opportunity.

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Simon Fitzgerald, Evans & Partners Pty. Ltd., Research Division - Executive Director of Diversified Financials [56]

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Okay. I also want to explore a little bit more about this intermediary channel, particularly in the U.S. that some started to improve. Many other investment managers at the moment have been calling a turnaround in retail net flows. So you're not alone in that regard. But wondering about what changes you might have made in terms of distribution and channels in terms of staffing more on the distribution side or anything you can point to there that's also attributable to the improvement there.

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Roger Martin James Thompson, Janus Henderson Group plc - Executive VP & CFO [57]

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I think it's more a consistency story there, Simon, than anything else. Yes, we're winning. Yes, we've got a growing SMA business. We're doing more in the RIA channel. But we're winning in the big channels in the wirehouses, et cetera. So -- but as Dick said, it's a market share gain. And we're seeing, in the fourth quarter, we -- again, this is public data, you can see in Simfund, we're seeing significant market share gains in very competitive markets, U.S. equity being the most competitive. And as we've always said, may or may not grow overall, but there's a significant amount of market share that we can win and grow our business, which in the pure intermediary space, we are doing. But it's not that we're doing something fundamentally different. As Dick said, Suzanne has come in and is working pretty hard with the distribution teams globally. And we hope to do more and deliver more, but it's nothing new.

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Richard MacCoy Weil, Janus Henderson Group plc - CEO & Executive Director [58]

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The new stuff that Suzanne is doing hasn't been on the table long enough to dramatically change the trajectory yet. But she's doing some reorganization and change around the staff a little bit. We're optimistic that her changes will compound the momentum that we're seeing for the reasons that Roger has described, but it's still fairly early days (inaudible) quarter yet.

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Roger Martin James Thompson, Janus Henderson Group plc - Executive VP & CFO [59]

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Yes, one of the other things is, we've talked about client experience as one of the things for the organization. There's a couple of things where we are recognized that the PCS portal is something that has been viewed extremely positively. The work we do in our Janus Henderson labs, working with clients is viewed very positively. So these things look as if they're starting to bear fruit.

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Operator [60]

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Our next question comes from Chris Harris from Wells Fargo.

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Christopher Meo Harris, Wells Fargo Securities, LLC, Research Division - Director and Senior Equity Research Analyst [61]

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Just 1 question related to your operating margins. AUM ended the year on a high note, up 14%. Fee rate, sounds like it will be flattish, maybe up a little bit. You've got favorable mix happening underlying the businesses. But at the same time, you're also making investments. So if we put all that together, how should we be thinking about your margin for 2020? Is flattish kind of the goal? Or do you think you might be able to do a little bit better than that?

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Roger Martin James Thompson, Janus Henderson Group plc - Executive VP & CFO [62]

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No. I mean we've reiterated an intention for the margin to be in the high 30s. We did 35.7%, I think it was for the full year this year. If markets continue to be strong, and we deliver performance fees, then that higher 30s is certainly possible, but it requires strong markets and...

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Richard MacCoy Weil, Janus Henderson Group plc - CEO & Executive Director [63]

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And some performance fees.

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Roger Martin James Thompson, Janus Henderson Group plc - Executive VP & CFO [64]

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And some performance fees. But that's baked into the guidance I've given on -- so the guidance is on what the comp ratio is, what the noncomp is and what the overall margin is. But we're at 35.7%. And as you say, we start the year with a higher AUM figure than the average for last year. So some of that should flow through to the bottom line.

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Operator [65]

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Our next question comes from Ed Henning from CLSA Brokerage House.

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Edmund Anthony Biddulph Henning, CLSA Limited, Research Division - Research Analyst [66]

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Just firstly, a clarity on the Geneva sale. You talked about obviously the revenue and the cost dropping out. Will there be a gain on sale coming through? And is that going to hopefully finalize in the first quarter?

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Roger Martin James Thompson, Janus Henderson Group plc - Executive VP & CFO [67]

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Yes, there will be a -- we're selling the business. We'll treat that as nonop. So it'll be -- we'll strip it out from the operating earnings. We want to show you what the business is earning on an ongoing basis. So that will show as nonrecurring.

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Richard MacCoy Weil, Janus Henderson Group plc - CEO & Executive Director [68]

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But yes, there will be a cash flow.

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Edmund Anthony Biddulph Henning, CLSA Limited, Research Division - Research Analyst [69]

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How much, sorry?

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Richard MacCoy Weil, Janus Henderson Group plc - CEO & Executive Director [70]

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I didn't say how much. I said there will be some cash coming through the door, yes.

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Edmund Anthony Biddulph Henning, CLSA Limited, Research Division - Research Analyst [71]

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Okay. Just the next one. Just thinking about obviously Geneva buying out, the EM team leaving, is this making you want to kind of revisit compensation ratios or something you guys continue to think about? Or is just 2 teams kind of leaving is just an ongoing part of the business as you're a large business?

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Richard MacCoy Weil, Janus Henderson Group plc - CEO & Executive Director [72]

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Yes. This is Dick. I don't think those 2 things are related at all in our mind. I think the EM team that departed was extremely well paid. And the issues were not compensation so much as they were culture. And we were, in the end, really not suited for each other, and we wish them well as they move on to a place that maybe is more suited for them. But we're happy with that. And I don't think that was comp-related. And the Geneva thing was also similarly not in any way comp-related. But Geneva was a strategic decision made by legacy Henderson at a point when they didn't have so much of a U.S. business, and they added this small-cap growth manager in the U.S. and started trying to build their way into the U.S. retail business.

After the merger with Janus, we had tremendously strong and well-established small- and mid- and SMID Cap Growth teams operating, and it was no longer so sensible for the sales team to try and have multiple versions of that under the same brand going out all over the markets. And so they didn't fit anywhere near as well the combined Janus Henderson company as they had previously at Henderson. And I think that was recognized by them and by us. And again, I don't think any of that has anything to do with comp levels. We pay our people well. We pay our people fairly. They're accountable. When things don't go well, there's also accountability for that. But at the moment, we don't see a need to change that system.

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Operator [73]

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We'll take our next question from Mike Carrier with Bank of America.

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Sean Colman, Bank of America Merrill Lynch International Limited - Former Director of Fixed Income / US Short Rates Sales [74]

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This is actually Sean Colman on for Mike. You mentioned some of the new things that Suzanne wants to put in place that haven't been put in place yet. Can you talk about what the shift in strategy is going to be for distribution?

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Richard MacCoy Weil, Janus Henderson Group plc - CEO & Executive Director [75]

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I don't think I can be more specific than say, she's made a series of changes, and she has made them already, it's just too soon to see them coming through in terms of driving different flow patterns than what might have otherwise been. But she's shifting -- has shifted and continues to shift resources around through a strategic review that she's done, trying to make sure that our people are aligned against the right opportunity set with the clients. And so I think she found opportunities to reallocate resources between different parts of the business to better align with where we have our best opportunities. She's also driving additional focus and accountability from the sales force on a smaller number of focused products across the organization, which I think makes sense.

Focuses and simplicity are keys for us strategically and what we're trying to do. She's very bought into that, and she's driving that through her team as well. So that's not going to be something that you'll see sort of the quarter after she starts implementing those changes. It takes time to come through. And in the fullness of time, well, I think our sales force will be more effective. But there's nothing dramatic or to use a word from the prior call -- from earlier in the call, explosive, there's nothing like that that we're talking about. This is just good management by a good manager. And we're optimistic that over time -- she's inherited a really terrific team, and we think they'll be doing more moving ahead.

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Sean Colman, Bank of America Merrill Lynch International Limited - Former Director of Fixed Income / US Short Rates Sales [76]

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Okay. Great. And then there's been an increasing focus around ESG for clients in the industry. Can you provide an update on your ESG strategy?

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Richard MacCoy Weil, Janus Henderson Group plc - CEO & Executive Director [77]

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Yes, we're addressing ESG at a number of levels. First, at the investment level, we have, for a long time, had really excellent product strategies dedicated to various versions of ESG, and so we feel like we have some specialty products that fit investors where they want specialty ESG kinds of approaches to investing.

Second, when you look at our entire investment process, we're working with our analysts and our investors to make sure that across all of our investing, we look at each of the ESG factors, specifically as risk and return factors. So integrated into our investment analysis across all of our investing, we're looking at making sure that we're taking good account of E and S and G factors as part of both investment opportunities and risks both from a technical perspective that you can see the world's flows maybe going more in that direction. The more Larry Fink talks, maybe the more people put money in that direction. And that's something to count and also in substance in terms of in-company operations and things, ESG factors are representing significant risks and opportunities that our investors and analysts are taking into account.

And third, we think about it on a company basis. Our employees want to work at a company that makes them proud, that reflects their values. As we operate our company, we're trying to make sure that we're reducing our carbon footprint. We've adjusted our facilities and are taking steps to reduce our carbon emissions per person across the company, and we're doing a lot of things in terms of diversity, in terms of other things to make sure that we are reflecting as a company our shared values and where we want to stand as people operating the company. And so on all 3 of those levels, we're quite active and making progress.

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Operator [78]

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Our next question comes from Robert Lee with KBW.

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Robert Andrew Lee, Keefe, Bruyette, & Woods, Inc., Research Division - MD & Analyst [79]

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I guess my first question is, I mean it's great that the momentum in intermediary and Dick, as you mentioned, it's a market share game in a lot of ways. So with that in mind, I'm sure you -- part of the goal is to be -- have a bigger presence in more healthier growing parts of the industry. So can you, with that in mind, talk a little bit about what some of your strategic priorities are in terms of new products, new distribution channels outside of kind of the core business? And to what extent would M&A, if at all, play a role in some of those initiatives?

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Richard MacCoy Weil, Janus Henderson Group plc - CEO & Executive Director [80]

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Sure. So our strategy right now is called Simple Excellence. And what we're focused on is delivering in our business, and I think there's a page in here that outlines it, in the ways that we've described. And as you look at strategies and you characterize them as either do what you're doing more effectively or do something different, this is more the first than the second. So it's less reliant on new products and new markets, and it's more reliant on getting the maximum potential out of the stuff we're already doing. If you talk to the external consultants and the wise heads around the business, most folks say that private assets, private equity and those sorts of things are a fast-growing part of the business.

They'll point to China as being a fast-growing part of the business. And not so many other parts maybe that are super fast-growing parts of the business. And we're obviously not really well represented in either one of those 2 spaces. We think about that. But the opportunities to do those things really well are rare. And first, on our agenda, before too many -- getting too far down the road of new adventures, is to make sure that we deliver across the set of things that we're already doing. And so our focus is really much more on completing the work that we began with the merger of Janus Henderson and delivering on the potential across what we're already doing.

Then it is on taking further steps in private assets or in new geographies. But we keep those questions open. We analyze them, we study what the opportunities are. And if we were to come across something that we thought was a terrific opportunity in a growing marketplace, we would sure take a hard look at it. But it's really not our top priority, as indicated by our Simple Excellence in our strategy.

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Robert Andrew Lee, Keefe, Bruyette, & Woods, Inc., Research Division - MD & Analyst [81]

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Okay. And then maybe the follow-up on INTECH. I mean you've talked about some -- making some changes there. I just wanted to make sure I understood. I know there's been some changes over time there. I don't know if there were more recent changes that you have put in place at INTECH to try to, I guess, we call it, right the ship a bit. And given that that likely seems set to be a drain on new business for a while to come, given performance, any color on if the underlying possibility of INTECH is similar or greater or less than kind of the broader Janus franchise, if there's any kind of disproportionate economic impact from those -- from that?

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Richard MacCoy Weil, Janus Henderson Group plc - CEO & Executive Director [82]

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No, they tend to run -- well, first, like all of us, they run a business in a lot of different channels and formats. And so their fees are a range of things. But their large institutional accounts that tend to make the big motion on the AUM side tend to be very low-fee accounts. Offsetting that, they tend to run a very -- like a lot of quantitative managers, they tend to run a very efficient investment platform. And as a consequence, their profitability is similar to the rest of the company. And so I wouldn't expect anything surprising from INTECH. I would just say that when, and if, you see really large flows in or out from individual big institutional accounts on the way in or the way out, those are probably not the highest fee levels. They're probably much closer to the lowest fee levels in our range.

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Operator [83]

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And we have time for one more question coming from Nigel Pittaway from Citi.

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Nigel Pittaway, Citigroup Inc, Research Division - MD of Insurance and Diversified Financials Equity Research and Lead Insurance Analyst [84]

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A couple of questions. Just the first one, actually, still on INTECH. If you do look at the sort of relative performance in the top 2 Morningstar quartiles, I mean I think at end of September, it was 97%, 57%, 97%. And then as you're showing there on Slide 8, it's gone to 22%, 22%, 19%. So it does suggest that in the December quarter, there was a relatively significant underperformance versus peers. So is that not at all concerning in sort of your ability? I realize it's only 1 quarter, but is that not at all concerning in your ability to sort of be able to recover and reinvent that business?

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Richard MacCoy Weil, Janus Henderson Group plc - CEO & Executive Director [85]

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Well, as you say, it's 1 quarter. And as you would, no doubt, have surmised from the data, going from a little bit above the median to a little bit below the median can move the statistics that we talk about, but that's not necessarily -- that's not a measurement of how far away from the median they are. It's just a statement as to whether they're above or below. So modest changes can move the numbers around as they did in the fourth quarter.

Are we concerned? Sure. We're always concerned, but 1 quarter is a pretty small data set. And over long periods of time, INTECH has done this job pretty darn well. And so that's what we focus on.

In terms of the changes that they've made, they've learned some lessons. Some risk factors that have historically been treated as residual and largely irrelevant in the INTECH investment process, I think with the advent of a lot more factor, investing those factors have become both more crowded and more volatile. And so it became sort of a painful lesson through INTECH's last few years of history that rather than leave those things to sort of zero out in the long run, they have to risk-manage them a little bit more along the way. And so they -- as they have through their whole history, they've been a learning organization, and they've adapted their execution to lessons learned, and this is the latest chapter in that process.

So I think they've made some good changes to reflect the fact that some of the factors are more crowded and more volatile and can't just be left alone as residual, but you have to manage the risk of them a bit more, which they are now doing. That should bear fruit in terms of reducing volatility and some of the worst episodes in the future. And so that leads us to be more optimistic in a long-term sense, but in a short-term sense, won't make that big of a difference. The last thing I'll notice, they have had historic periods of underperformance in the past in their records. And they tend to come back well, and we're optimistic they can do that again.

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Nigel Pittaway, Citigroup Inc, Research Division - MD of Insurance and Diversified Financials Equity Research and Lead Insurance Analyst [86]

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Okay. Then maybe just finally, I mean the market FX movement was pretty significant in the quarter. And correct me if I'm wrong, it doesn't seem like consensus was very good at forecasting it. Is there anything sort of particular to call out in that movement that's different to just market moves? Or is it just basic market moves, and obviously, it's just hard externally to forecast exactly what's going on?

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Roger Martin James Thompson, Janus Henderson Group plc - Executive VP & CFO [87]

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Are you talking about nonoperating income, Nigel?

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Nigel Pittaway, Citigroup Inc, Research Division - MD of Insurance and Diversified Financials Equity Research and Lead Insurance Analyst [88]

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No, just the AUM. The market FX moves in AUM.

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Roger Martin James Thompson, Janus Henderson Group plc - Executive VP & CFO [89]

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Okay. No, I mean there's nothing unusual in there. I mean it's -- the -- I guess in the fourth quarter, markets were strong, and the U.S. dollar softened slightly. So actually, it softened quite a lot. I think Sterling moved 7%, Aussie dollar moved 3% or 4%, euro moved 3% or 4%. So you've got some pretty big currency moves driving our AUM and also therefore, driving our revenue line and a bit of cost line as well. So there's nothing in there. We've obviously got a lot of equity. You've also got performance in there. When you're strongly performing, we're adding out for on top of those market moves. So we're pleased to have entered 2019 at $3.28 billion and be leaving 2019 at $3.75 billion. But yes, that's market-driven.

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Operator [90]

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