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Edited Transcript of JNS earnings conference call or presentation 20-Apr-17 2:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Janus Capital Group Inc Earnings Call

DENVER Apr 22, 2017 (Thomson StreetEvents) -- Edited Transcript of Janus Capital Group Inc earnings conference call or presentation Thursday, April 20, 2017 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jennifer Joyce McPeek

Janus Capital Group, Inc. - CFO and EVP

* Richard Maccoy Weil

Janus Capital Group, Inc. - CEO and Director

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Conference Call Participants

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* Alexander Blostein

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

* Christopher Meo Harris

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

* Craig William Siegenthaler

Crédit Suisse AG, Research Division - Global Research Product Head for the Asset Management Industry

* Kenneth B. Worthington

JP Morgan Chase & Co, Research Division - Senior Analyst

* M. Patrick Davitt

Autonomous Research LLP - Partner, United States Asset Managers

* Michael J. Cyprys

Morgan Stanley, Research Division - Executive Director and Senior Research Analyst

* Michael Roger Carrier

BofA Merrill Lynch, Research Division - Director

* Robert Lee

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

* William R Katz

Citigroup Inc, Research Division - MD

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Presentation

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Operator [1]

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Good morning. My name is Jennifer, and I will be your conference facilitator today. Thank you for standing by, and welcome to the Janus Capital Group First Quarter 2017 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 Capital Group assumes no obligation to update any forward-looking statements made during the call.

Thank you. Now it is my pleasure to introduce Dick Weil, Chief Executive Officer of Janus Capital Group. Mr. Weil, you may begin your conference.

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Richard Maccoy Weil, Janus Capital Group, Inc. - CEO and Director [2]

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Thank you, operator. Welcome, everyone, to the first quarter 2017 earnings presentation for the Janus Capital Group. As normal, I'll give you an executive summary from my perspective; our CFO, Jennifer McPeek, will take you through the results in some more detail, and then we'll address some special topics and lastly take questions.

So starting at the top, my perspective on the quarter really has 3 parts. First, we saw some disappointing net outflows, primarily driven by challenges at INTECH, which were not entirely surprising given the challenges in investment performance that INTECH put on in the second half of last year, which we've talked about on prior calls. However, despite the headwinds at INTECH, we continue to see growing market share among our fundamental equity strategies in the U.S. So the first element was net flows. The second element, I want to call your attention to, is improving short-term investment performance. Now I think we all have to be careful, short-term investment performance is never something we want to make too much of, but we were encouraged that investment performance during the first quarter in our largest fundamental equity strategies and at INTECH was improved. Third piece, I'd like to call your attention to, is obviously the merger with Henderson. As we prepare for Janus and Henderson shareholders meetings next week, we're more convinced than ever that the combination of these 2 firms make both of us stronger than either would be apart. We're making good progress building a single leading global active asset manager. Over the last 3 months, we've continued to do very important things with people, with process, a bunch of legal filings, making progress on the proxies. And so from a process standpoint, we're really getting there and we're anticipating success in our meetings and proxies, et cetera. And separate from that, on the people side, we're continuing to reconfirm that the folks at Henderson are really a good match for us, and that together, these firms can join and form a single new firm, which will deliver a greater strength than either one would have separately, so our level of conviction continues to rise. With that, let me take a look slightly more deeply into each piece. First looking at flows. First quarter 2017 company net flows were $4.7 billion out compared to net out of $300 million in the fourth quarter of 2016. Obviously, the biggest difference was INTECH. INTECH's net outflows in the quarter was $3.8 billion compared to $1.6 billion out in the fourth quarter, driven substantially by recent underperformance, which we've talked about. It's important to note that, that first quarter outflow was driven by 2 large mandate losses totaling $3.3 billion. I think it probably goes without saying that when you lose 2 large mandates like that, they tend to be at a lower fee rate, which is certainly true in this case and so it'll have less revenue effect than you might have thought on the AUM line. I'll talk a bit more about INTECH later in the presentation. Despite those challenges, we were encouraged that the U.S. intermediary channel had a first quarter 2017 fundamental equity net inflows of approximately $600 million, which is a 7% annualized organic growth rate comparing favorably on a relative basis to meaningful outflows across the U.S. active equity mutual fund industry. And obviously that's our most important marketplace and that's tremendously important validation of the progress we're making and the good work of our people. Perkins continues to improve with net inflows of approximately $200 million in the first quarter of 2017, which represents an annualized growth rate of 6% for them, which also compares very favorably to the industry and we're really pleased to see Perkins continuing to restore itself to strength in that part of our franchise. Moving on to performance. In fundamental equity, we were pleased to see good performance out of our fundamental equity strategies during the quarter. Again, caveat, it's a quarter, and so I don't want to make too much of it. But as you may remember, the first quarter of last year was particularly challenging for these strategies. I'm happy to report that we came out of the gates much stronger this year. At the end of March, 62% of our fundamental active equity assets were outperforming peers over the 1-year time frame compared to only 46% at the end of the fourth quarter. Additionally, this better performance also led to some modest improvement in our mutual fund performance fees during the quarter. At INTECH, while serious underperformance was present in the second half of 2016 and obviously was the major factor in their flows, in the first quarter, all but one of their relative return strategies experienced outperformance. One quarter of outperformance won't fully address the challenges they face, but it's a good start to this current year. A third and final piece of the story is the proposed merger with the Henderson Group. For the last 7 months, both organizations have been focused on preparing or launching the new Janus Henderson, and we've made significant progress. The work we've done has solidified our commitment to this transaction. We stand here today even more convinced than we were when we signed the deal that we're on a good path to creating a leading global active asset manager. We will have enhanced ability to deliver superior service to a broader range of clients. We're going to have a richer and broader investment team and we're going to be better positioned to capture operating synergies and operating leverage as a combined firm. So we should be stronger on the client side, on the investment side and financially as we face the challenges that our industry faces. With all that said, let me turn it over to Jennifer McPeek for a deeper dive into the quarter's results.

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Jennifer Joyce McPeek, Janus Capital Group, Inc. - CFO and EVP [3]

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Thank you, Dick. Let's turn to Page 7, with a summary of our financial results. Our average AUM increased 5% compared to the fourth quarter as a result of market gains, which were partially offset by total company net outflows during the quarter. First quarter average AUM of $201.4 billion is the highest quarterly average since the fourth quarter of 2007. Our first quarter revenue was $257.6 million, that's a 2.5% increase compared to the prior quarter and that is a result primarily from the net impact of those higher average assets, offset by 2 fewer calendar days in the quarter. Reported operating income was $55.3 million or $75 million when it's adjusted for almost $20 million of merger expenses. Our adjusted operating income was 6% higher than the prior quarter and 20% better than a year ago. Reported earnings per share were $0.17 for the first quarter. Excluding $0.06 of merger costs, our adjusted EPS is $0.23 compared to adjusted EPS of $0.20 in the prior quarter and $0.19 a year ago. Slide 8, investment performance. The fundamental equity performance remains strong with greater than 60% of assets in the top 2 Morningstar quartiles across 1-, 3- and 5-year basis. The 1-year results saw noticeable improvement quarter-over-quarter as the funds put up strong results. Additionally, 56% of our complex-wide mutual funds have a 4- or a 5-star Morningstar rating. Mathematical improvements, or INTECH strategies improved during the first quarter, relative to what we saw in the second half of 2016. However, it will take some additional periods of outperformance before we see those improved results reflecting in our reported performance. Dick will discuss INTECH a bit further later in the presentation. Despite some challenging relative performance for fixed income, I will note that the absolute returns are solid and are in line with our clients' expectations. Slide 9, breaks down our flows. Our first quarter total company net outflows declined to $4.7 billion of outflows. INTECH drove the majority of outflows in the quarter, primarily from 2 large mandate losses that totaled $3.3 billion. Fundamental equity outflows were $600 million for the first quarter. Perkins was a highlight, they continued to do well and had positive flows again this quarter. Despite total outflows for Janus equity, a subchannel result in our U.S. intermediary business was very positive. They actually posted their fourth consecutive quarter of positive equity net flows, which continues to capture market share and is particularly encouraging given headwinds for active equity in that channel. Decline in fixed income flows quarter-over-quarter is mainly attributable to the absence of the large mandate win, which we experienced last quarter. Now on Slide 10, we break down our revenue and our performance fees. As I noted earlier, total revenue increased 2.5% over the prior quarter. Higher management fees reflect higher average AUM offset by 2 fewer days. The weighted average management fee remained unchanged this quarter at 46.3 basis points. Performance fees on our mutual funds were slightly improved, negative $13.2 million compared to negative $14.2 million last quarter. Private account performance fees in the first quarter were negative $0.5 million, which compares to $0.1 million in the fourth quarter. Negative separate account performance fees are not a normal part of the fee structure, but it was related to an account termination at INTECH, not expected to repeat. Slide 11, operating expenses. Total operating expenses were up 7% compared to the prior quarter, however, if we exclude deal expenses, operating expenses were only up 1% compared to the fourth quarter. Some ratios, the total comp to revenue ratio for the quarter was 42.3%, which is very much in line with our historical ratios and also with previous guidance. Operating margin, when you exclude those deal-related expenses, was 29.1%, a nice improvement compared to an adjusted margin of 28.2% in the fourth quarter and 25.2% a year ago. LTI expense for the first quarter was $18.1 million compared to $19.4 million in the fourth quarter, and those deal-related costs were $19.7 million. $19.7 million has a few large chunks in it, $14.5 million was in the marketing and advertising line, that was largely related to proxy expenses for both the corporate merger and more significantly the mutual fund mergers. We had about $5 million of deal-related costs in the G&A line. That's legal, other advisory fees, some T&E. Now I'll turn to Slide 12 and look at our balance sheet and capital management activities. Total cash and investments decreased approximately 18% due to some of our seasonal compensation payments, along with the purchase of the remaining 49% interest in Kapstream. We returned roughly $20 million to shareholders via the quarterly dividend. And on April 18th, the Board approved a quarterly cash dividend of $0.11 payable in May. With that, I'll turn it back over to Dick for an update on INTECH and the progress of our merger with Henderson.

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Richard Maccoy Weil, Janus Capital Group, Inc. - CEO and Director [4]

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Thank you, Jennifer. Turning to our special topics, the first is INTECH. On Page 14, we present a chart with INTECH composites showing their 3-year performance on a quarterly basis. Each dot is a 3-year period of time measured for each quarter. And what it shows is 385 of that 589 periods, or 65% of the time across these 16 composites net of fees, INTECH has generated outperformance over that preceding 3-year period of time. You can see by looking at the distance of the blue dots and the red dots from that center line, that they've done really well in controlling risk by and large. And so, as you look at the closeness of those red dots to the diagonal line, what you can see is, even when they have faced underperformance for that 3-year period of time, that underperformance has been relatively modest. I think it's important after a really difficult last 6 months of 2016 to go back and look at the full record from INTECH's investment performance and acknowledge that while that 6 months was pretty darn painful for clients and for us, it doesn't invalidate the very long and powerful track record that they've put up across these 16 composites for many years. And so I continue to have personally a lot of confidence in the excellence of their work and I know we're going through a difficult period, but I think they will have the opportunity to continue to prove that in the years ahead and we remain optimistic about their long-term future. Turning to Slide 15. We've laid out the investment performance of INTECH's 5 largest strategies by composite. I don't want to make too much out of just 1 quarter of investment performance, and frankly the prior page is a much more significant set of time periods to look at when assessing the strengths of INTECH's investment process. But given the way our business works, I think we all know that after putting on that very difficult period over the last year, certainly the last half of last year, the first quarter took on significance, maybe outsize significance as it affected our clients. You can look at the 5 largest strategies here, and in Q1, they all demonstrated some substantial outperformance. And as noted on the bottom of the box here on Page 15, the 5 largest composites represented here accounted for 60% of the assets under management at the end of March. So as I said earlier, all but one relative return strategy at INTECH experienced outperformance in Q1. And I think that's an important signal to clients to earn the time and respect to continue to deliver outperformance and dig out of the hole that they've suffered in the last half of last year. I can't predict the future, I can't predict what the net outflow scenarios look like for INTECH. Obviously, they've gained and lost assets in a lumpy fashion and that makes it particularly challenging, I think, to assess in the short term. But I think if they can continue to put up good performance and dig out of the hole, we remain very optimistic for their ability to come back and get back to positive growth. So again, caution that it's only 1 quarter of performance, but optimistic signs coming out of that period for INTECH. Let's turn to Slide 16. Slide 16 is really about reminding ourselves why is it we're going through this very difficult and challenging merger process? Obviously, with thousands of pages of documents filed and lots and lots of people impacted in all sorts of ways, this is just a gigantic effort that has really taken extraordinary work on the part of teams at Janus and Henderson to carry off. And I think it's worthwhile going back and asking ourselves, are the premises still true? Why did we do this, and why are we convinced it's a great deal? Well, the first thing is, looking at the 2 companies and putting them together, our distribution, our client relationships are strong in different channels, in different countries, in different places, and putting them together gives us a much stronger client roster and a distribution opportunity. And I think as we've gotten to know each other through this process, we are even more convinced that that is true, and that the combined firm will have a better opportunity on the distribution side. The second thing we've been exploring in obviously even more detail, is putting the investment teams together. And as we've done that work and communicated with people and started building the single investment team coming out the other end, we are confirming our initial belief that these 2 investment teams when put together can create a broader, deeper and stronger set of investors than either one of us had on our own. And finally, we've obviously made some promises around synergies and economies of scale. And as we've worked together as 2 firms to prepare for closing day, we've become increasingly confident that we can deliver on those promises, and that the combined Janus-Henderson will have increased opportunity to deliver profitability to our clients. And so all 3 central premises of the deal, I think, have been strengthened through the process of working through the actual merger. And as I stand here today, I am more confident than I've ever been that this merger is the right step for us as Janus Capital Group, but also for both companies and that the resulting single company will be stronger than either one of them independently. Page 17 highlights some progress to date. Across both firms, we've made great progress in personnel decisions and in establishing new leadership teams in each department and across the firm. We've made progress with our U.S. mutual fund shareholders in their very, very complex proxy processes. The U.S. fund shareholders have met the requirements outlined in the merger agreement as the threshold conditioned for the deal. We're on track for combination of our mutual fund trusts, which is scheduled to be completed by early June. On the branding and promotion side, we've had teams from across the globe work together to ensure that we're ready on Day 1 of the combined organization to present a brand identity of a unified organization and deliver seamlessly to our clients. We've done a lot of other prep for Day 1 including sales teams getting training on the respective new products from each side, so that we can begin to develop the new sales processes to sell each other's products and to fulfill the promise of this combination. On the regulatory side, we've received all necessary regulatory approvals. And on the cost synergy side, we have continued to increase our confidence that we'll deliver the $110 million of synergies that we have previously described. For 7 months, both organizations have been focused on the literally thousands and thousands of to-dos, preparing for the launch of Janus-Henderson with our clients and investors. I would like to personally thank all of the Janus and Henderson employees for your tireless work, it's been a remarkable effort and you've done great work. I know you're tired, but it's really been worth it and I couldn't be more excited about our combined future together. So thank you for all you've done. With that, I'll turn it over to the operator and take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question will come from Ken Worthington with JPMorgan.

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Kenneth B. Worthington, JP Morgan Chase & Co, Research Division - Senior Analyst [2]

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I'm sure there will be a lot of questions on INTECH, but maybe just start off there. Was there a rationale given by the 2 big redeemers this quarter, and do those investors still have meaningful investments in either INTECH or Janus more broadly?

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Richard Maccoy Weil, Janus Capital Group, Inc. - CEO and Director [3]

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This is Dick. One of the 2 was a full termination and an end to the relationship and the other one was a partial redemption. Other than that, I wasn't in the meetings of direct communication. I can't tell you precisely what was said, but it's clear that the underperformance for the last half of last year played a significant role in their decision-making.

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Kenneth B. Worthington, JP Morgan Chase & Co, Research Division - Senior Analyst [4]

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As a follow-up, fixed income sales slower. It had been my impression that the Japanese, DIAM and Dai-ichi, were definitely buyers of Janus fixed income product over time. What is sort of the latest on these kind of Japanese relationships with regard to fixed income? And maybe what I'm trying to get at is, how does the fixed income sales momentum will look like from these Japanese investors? Is it sort of constant, has it deteriorated, is that why sales in fixed income may be less robust than they had been, any connection between the Japanese and fixed income?

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Richard Maccoy Weil, Janus Capital Group, Inc. - CEO and Director [5]

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Well, let me start from the top of just looking at our assets in Japan as a bucket. Across that bucket, approximately 42% of it is invested in fixed income. About 45% of it is invested with INTECH and about 13% of it is invested in fundamental equity by Janus and Perkins. So that's the breakdown. I can't tell you that I have noticed a big trend in motion there. Most recently, our very good partner, Dai-ichi Life has been focusing on making some initial investments in Henderson strategy, which we are really grateful for and it continues their history and tradition of being just outstanding partners. And so I would say the relationships in Japan are as good as they've ever been and we couldn't be more grateful. I don't think there's a big change in appetite to report for fixed income at this point.

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Operator [6]

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And next we will hear from Alex Blostein with Goldman Sachs.

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Alexander Blostein, Goldman Sachs Group Inc., Research Division - Lead Capital Markets Analyst [7]

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Question on the merger, a 2-part question, I guess, there. So I guess, 1, as you guys get closer to completing the deal and the strategies have been a little bit more aligned, wondering if you can give us any updated thoughts around kind of the organic benefits that you thought you could achieve by doing this deal, I think, it was a couple hundred basis point improvement on what you otherwise would have. And then separately, I guess, on the dissynergy front as well, anything that particularly makes you a little bit more concerned now that you guys are probably having more conversation with clients in both fronts, with Janus side and the Henderson side?

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Richard Maccoy Weil, Janus Capital Group, Inc. - CEO and Director [8]

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Well, let me start by responding to your second point about clients. The client feedback continues to be overwhelmingly positive. Of course, in a transaction like this, you are going to get some people, U.S. institutional consultants and others, who will take a measured wait-and-see attitude and that's also happening. And particularly in areas where there's overlap or there's been a bunch of change, there are going to be some clients who are just less than happy with that outcome and we're seeing a little bit of that too. But really the main client feedback -- the overwhelming client feedback has been quite positive, and that continues to be true, and it really hasn't changed since the first moments that we've announced the deal. Remind me again, what was your second question? I lost it.

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Alexander Blostein, Goldman Sachs Group Inc., Research Division - Lead Capital Markets Analyst [9]

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Just the first part about when you announced the deal, you said you thought that the organic benefit to the business is going to be improvement in organic growth rate by, I think, a couple hundred basis points versus what you would have been able to achieve and that was kind of the feedback that you got from the sales people and the distribution channel. Just wondered if there is any update to that number?

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Richard Maccoy Weil, Janus Capital Group, Inc. - CEO and Director [10]

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I don't have an update to that number. I think that, since that time we've done the good work of starting to inform the different distribution teams, they're starting to report increasing enthusiasm about having access to each other's lineups and that's a good sign. But I think it's too early to update the expectations on cross-sells of each other's products. I don't have anything more specific than sort of building process and momentum in the pipes.

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Alexander Blostein, Goldman Sachs Group Inc., Research Division - Lead Capital Markets Analyst [11]

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Got it. And then just my follow-up for Jennifer. When I look at non-comp expenses, and again, excluding all the M&A charges and excluding distribution expense, looks like you guys were around $40 million, that's the lowest, I think, it's been on a quarterly basis for several years now. So I'm just wondering if that's a decent run rate or not, or are you guys are holding back on some things because obviously there's a lot going into the merger right now and how we should think about that kind of on a Janus stand-alone basis for the remainder of the year?

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Jennifer Joyce McPeek, Janus Capital Group, Inc. - CFO and EVP [12]

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Sure. Well, first of all, the Janus stand-alone basis will only be for another couple of months. So if you're modeling it separately, I think it will start to get modeled past the merger and you should think about it as a combined. Those reductions in kind of business as usual costs, I think we'll continue to see that rate as we're going through the integration, right. I mean, there's a lot of effort going on and a lot of expenses being incurred on the deal, and you can only do so much. So yes, answer your question, I think it's a good run rate.

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Operator [13]

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And we will now hear from Patrick Davitt with Autonomous.

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M. Patrick Davitt, Autonomous Research LLP - Partner, United States Asset Managers [14]

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Another one on INTECH. Broadly, is there any kind of incremental anecdotal color you can give around how the clients -- beyond these 2 lumpy outflows, how the clients are reacting to the performance, be it redemption notices or client review or consultant reviews? And then the second question around that. I think you've talked about non-U. S. demand being pretty high for that product last year. Has the performance in the second half of last year really impacted that demand?

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Richard Maccoy Weil, Janus Capital Group, Inc. - CEO and Director [15]

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Taking your second part first. Yes, the performance has certainly impacted opportunities, including opportunities offshore. On the other hand, they do continue to gather some new assets and wins offshore as well. So it's not a 1-way flow, it's a 2-way flow. And they continue to chase really significant opportunities offshore. So -- I don't know how I could be more precise and be helpful to you. In terms of color to client reactions, the problem with trying to answer that, is it's a string of anecdotes. Every client -- these big institutional clients that have made up so much of INTECH's business, they are individuals and each one has an individual story. So if we start talking about a big Asian institution, I really can't say anything that's significantly true about one that is necessarily true about another. And I hesitate to give you points that I don't recommend you extrapolate from. And so it's hard for me to know -- to do what you're -- it's hard for me to give you anything meaningful in response to your question. I don't want to duck it. I think it's a balance. INTECH has delivered stronger results for clients over a period of 30 years, but not all the clients have experienced that 30 years. If you've only been here for a year, and the first thing that's happened to you is you've been punched in the nose, that's pretty darn disconcerting. And then every client's going to have their individual reaction to that outcome, and you can see what that reaction was primarily from 2 huge clients in the first quarter. So what do we face? We're definitely on a delicate watch with clients. That first quarter helps. But we remain unpleasantly sensitive to shorter-term results as we dig out of that hole that was created in the second half of last year. And I really can't do better than that in describing the situation.

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Jennifer Joyce McPeek, Janus Capital Group, Inc. - CFO and EVP [16]

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I have a little bit of data add to that, Patrick, if it's helpful. On a growth sales basis, the non-U. S. sales for INTECH were higher than they've been in all of 2016 on an annualized rate. So they are continuing to sell overseas.

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M. Patrick Davitt, Autonomous Research LLP - Partner, United States Asset Managers [17]

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Then it's fair to say then that you don't know of other large redemption notices right now as of today?

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Richard Maccoy Weil, Janus Capital Group, Inc. - CEO and Director [18]

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Yes, that's -- the way we handle this is, we report on the quarter looking back and we don't give current quarter update of wins or losses, so apologies. But we'll be back here next reporting period.

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Operator [19]

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And we will now hear from Robert Lee with KBW.

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Robert Lee, Keefe, Bruyette, & Woods, Inc., Research Division - MD [20]

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Maybe understanding, Dick, that it's hard to be too precise in terms of synergies from a sales perspective. But when you talk about coming out swinging when the deal closes, I'm just kind of curious if you can provide some color around which product sets do you feel like there's the most opportunity, whether it's Henderson products that you can sell in the U.S. or Janus products through the Henderson network outside the U.S., where do you feel like there's the greatest potential for some near-term traction?

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Richard Maccoy Weil, Janus Capital Group, Inc. - CEO and Director [21]

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Good question. I guess, the first thing I want to say is for us to build up really meaningful success in cross-selling is the work of years, not days. So I don't want to start with the notion that all of a sudden, there's a huge new tap that will turn on, on day 1. It's a process. It's a sales process. First, you have to complete the internal education, then you have to go out and start acquainting your clients to it and then you have to get through the sales cycle and start bringing in money. Obviously, our central great strength is our U.S. intermediary distribution and our relationships in Japan. And so in those 2 markets is where I think we can help Henderson most. I think their strength in the U.K. and in Europe are places where they can help us the most. But I wouldn't want you to think that on day 1, a huge tap is going to open in either one of those markets, both of those are competitive markets and it's going to take some time. In terms of product mix, that's going to be sensitive to which way folks are moving at which time. Our Bill Gross products, our Myron Scholes products, even our concentrated U.S. equity products, I think we have some significant opportunities in asset allocation. I think INTECH's strategies have some significant opportunities. It's a pretty broad group of things that we can offer to complement what they're currently doing. Coming back our way, clearly their equity income products, their --- will have a chance to help us. Their emerging market products will have a chance to help us. And if the world isn't so negative on U.K. and European and those kind of international strategies, they have some strength there that could certainly help us. So those are some ideas about where it can happen both in terms of markets and products. But the main thing I want you to know is it's going to be a process that takes more than a day to turn on.

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Robert Lee, Keefe, Bruyette, & Woods, Inc., Research Division - MD [22]

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And maybe as a follow-up, just maybe a refresher on how we should think about capital management post-merger. If I remember correctly, I think my general sense is that certainly Henderson has been much more dividend-focused, not so much share repurchase. Obviously, you've --- have stopped buying back stock since the merger was announced. But post deal, should --- do we --- should we think that there is any place for share repurchase or much of a place for share repurchase post-transaction or is it really -- and then also how, I guess, related to that, you feel like there's, between the 2 firms, there's enough capital dedicated towards new products and seed investments or is there any reason to think that gee, maybe that will actually pick up post deal as you look at new ways to expand?

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Jennifer Joyce McPeek, Janus Capital Group, Inc. - CFO and EVP [23]

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Our overall payout ratios are pretty similar between the 2 firms, when we think about where Janus was moving towards, and our payout ratio and where Henderson is today. But you're right, the mix is very different. And I think that's largely a product of where the investors are and what the shareholders' preferences are. So the new firm will be New York Stock Exchange-listed and the treasury and finance team together with the board will look at the best rate -- best way to return that capital. So I think it's entirely plausible, and maybe I would even go as far to say likely, that there will be share repurchases as part of the overall capital return policy. But that's not yet been discussed. It will be a matter to put to the new combined board of Janus-Henderson. Your other question on seed. We'll have a pretty healthy seed book when we put them together. So at this point, there's no reason to believe that that would be increased meaningfully in the short term.

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Operator [24]

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And we'll now hear from Chris Harris with Wells Fargo.

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Christopher Meo Harris, Wells Fargo Securities, LLC, Research Division - Director and Senior Equity Research Analyst [25]

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On INTECH's performance, is there any color you can share regarding why their first quarter was so strong and the strategy worked so well then, versus the second half of '16?

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Richard Maccoy Weil, Janus Capital Group, Inc. - CEO and Director [26]

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Yes, this is Dick. I think in the second half of '16, from INTECH's perspective, they saw some things that were really unprecedented in their long history. Effectively, the correlation amongst different tail risks bit them all at once, and they suffered 6 months in some of their strategies of 100 basis points-ish of underperformance, and they had previously seen episodes of 1 or 2 months of 100 basis points a month of underperformance, but they had never seen 6 string together. So what you're really seeing is a reversion to the long-term normal pattern in the beginning of this year, which was disrupted through a combination of Brexit and Trump last year. And the way it affected them is, things that hadn't previously been correlated as tail risks, sort of all of a sudden became correlated and bit them. Their response to that is to ask, okay, how likely is that to happen again and should we have risk management adjustments in place, so that if that happens again, we can not experience as dramatic a loss. And they're doing a whole lot of careful work on understanding that. I think intuitively, we recognize it's possible that some of these correlations may be higher in a world where passive has a bigger sort of risk on/risk off momentum effect on some parts of the market. And they're studying that issue. And as they do, they continuously look to improve their risk management complement to their main investment engine and they'll continue to study that. And I think there are some lessons to be learned about sort of tail risk and possible volatility out of that period in the second half of last year. But what they're really looking at this year is sort of a return to more normal conditions.

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Christopher Meo Harris, Wells Fargo Securities, LLC, Research Division - Director and Senior Equity Research Analyst [27]

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Got it. That's interesting. And maybe a quick one on you fee rate. If INTECH shrinks relative to everything else at Janus, fair to say that that's going to put some upward bias on the fee rate?

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Jennifer Joyce McPeek, Janus Capital Group, Inc. - CFO and EVP [28]

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Yes, that's a fair conclusion in that scenario.

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Operator [29]

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Okay, we'll move on to a question from Craig Siegenthaler with Crédit Suisse.

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Craig William Siegenthaler, Crédit Suisse AG, Research Division - Global Research Product Head for the Asset Management Industry [30]

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So on the surface, the fixed-income business is underperforming pretty broadly, but flexible bond is a big contributor here and its underperformance is pretty shallow, so I just wanted to see what is the overall reaction of your client base to the underperformance across fixed income?

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Richard Maccoy Weil, Janus Capital Group, Inc. - CEO and Director [31]

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Let's just start with some facts. The fixed-income underperformance is pretty modest, as you note. And in particular, I want to call attention and actually congratulate those folks, on a 1-year basis since Gibson Smith left at the end of the first quarter of last year, our balanced fund is 135 basis points ahead of its index, our Core Plus fund is 91 basis point ahead of its index, our short-term bond fund is 36 basis points ahead of its index. So they've done some really good work since the end of that first quarter. Sadly, that first quarter of last year was a painful period for their strategy. But I think they are doing pretty well, particularly over this last 12 months, and we're optimistic that their clients are pretty well-treated and should be satisfied with their performance. And that that 1-year period is obviously a sensitive period after a change in staffing and leadership with Gibson's departure, and they have, I think, proven their ability to perform very well in that new form. So I think that's super important. And we're looking forward as we have been. We're looking forward to a really, a bright future with that fixed income team.

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Craig William Siegenthaler, Crédit Suisse AG, Research Division - Global Research Product Head for the Asset Management Industry [32]

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And then just might follow up on Henderson. We watched sort of negative flows continue in the retail business in 2017, although they've improved a little bit. And most of their larger funds look to be underperforming. So I wanted to see how that business is performing versus your expectations, and also which of their products are you sort of most excited to sell through to the Janus pipes?

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Richard Maccoy Weil, Janus Capital Group, Inc. - CEO and Director [33]

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Yes, I guess, on that second one, I've sort of tried to address it already, apologies if I didn't hit you with the answer you wanted. But I think I've covered that. On the first one, we've all been in this business awhile. We've seen performance move around. They had a particularly good 4 or 5 years leading into the signing of this deal and we recognize that that's going to move around a little bit. I think their performance is a little bit softer than that since that point, and sort of selfishly I wish that were different. I'd like to be entering this new world, this new merger with white-hot track records. But looking at it more realistically as an adult, I think they're doing fine. What's really happened primarily on their flows is, I think they've had industry trends in the U.K. and in Europe that have not been particularly supportive, and that's ameliorated a lot, I guess, based on their comments in the most recent time period. So that seems to be getting better in listening to what Andrew was saying on their call. So I don't have any independent information outside of that. But -- we're not doing this deal for sort of today's outcome. What we're really looking at -- what I'm really looking at is, how -- are these really the good people we thought they were, and together do we really form the powerful combination that we were anticipating? And their processes are strong, their people are really good, their market opportunities are terrific. And so the more I have learned, the more it's confirmed this basic notion that fundamentally we're going to have better distribution, we're going to have better economics, we're going to have a broader and deeper investment team and that makes us a better firm. And so just increasing confidence in that and little wiggles around investment performance certainly don't change that view.

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Operator [34]

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We'll move to a question from Michael Cyprys with Morgan Stanley.

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Michael J. Cyprys, Morgan Stanley, Research Division - Executive Director and Senior Research Analyst [35]

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Just on -- coming back to INTECH, sorry to come back here, just understanding that strategies go in and out of favor at different points of the cycle [ on one end ] as you noted. I guess just broadly, how are you thinking about the persistency of the asset base here for INTECH? What changes could be put in place to help address and prove that persistency of the asset base or even the overall value proposition?

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Richard Maccoy Weil, Janus Capital Group, Inc. - CEO and Director [36]

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Well, the main investment engine of INTECH is a very specialized thing, and there's not a whole lot I can do to offer helpful advice or complementary insights to the work of Adrian and Vassilios and the team of experts at INTECH. On the other hand, in communication, in marketing, in how they position for the marketplace, we have historically been able to work together and hopefully I've been a constructive sounding board amongst many others here in terms of how they communicate, explain and market their work. And look, at a time like this when you're facing some tough performance, there's nothing more important than communication. INTECH is spending a huge amount of time and effort and energy making sure their communication is as good as humanly possible, and we're trying to help support them in that. So I would say our biggest contribution is to try and be a supportive partner and work with them to make sure those communications and explanations are as absolutely clear and transparent and strong as they can be. And we've had a lot of people here working in partnership with INTECH on those elements. Frankly, I wish I could help on the investment side, but that's not realistic.

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Michael J. Cyprys, Morgan Stanley, Research Division - Executive Director and Senior Research Analyst [37]

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Okay. Just a follow-up, changing topics here, just fundamental equities. The pace of outflows in that business looks a little bit elevated, about 28% outflow rate you noted on Page 9, and that's a bit elevated relative to the 20% to 24% that we've seen over the past few quarters. Is just any notable lumpy redemptions there on the fundamentals side? Anything -- any color around what's driving that? Was this typically seasonally a stronger quarter in the first quarter generally, for the industry?

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Richard Maccoy Weil, Janus Capital Group, Inc. - CEO and Director [38]

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No, I don't have any particular color on that. I mean, I guess, what I would do is compare it to industry trends and try and see if there's a lesson there. But other than that I don't have any -- there's nothing particular, I would call out in terms of large lumps.

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Operator [39]

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Our next question comes from Michael Carria --- Carrier, I apologize, with Bank of America Merrill Lynch. Hearing no response, we'll move on to our next caller in queue. Our next question will come from Bill Katz with Citi.

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William R Katz, Citigroup Inc, Research Division - MD [40]

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Sorry to belabor this discussion, but INTECH, I'm sort of curious -- thank you for the extra data, it's very helpful. On Page 14, you highlighted, and I think Dick, you had mentioned in your comments that if you look at the last 589 periods, you have 65% of time outperforming, what is that relative to peers if you have the same kind of data set, and then how is the product priced compared to peers?

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Richard Maccoy Weil, Janus Capital Group, Inc. - CEO and Director [41]

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I hate to give you a lawyer's answer to this, I'm struggling to find a straightforward way. It depends how you define peers, is really the answer. And I don't have specifics. Because of that, I don't have a great set of specifics. I mean, you can look at Morningstar universes, you can look at quantitative managers, you can cut this thing a lot of ways as you probably know at least as well as I do. If you look at active managers, compared to active managers as a universe, their track records are pretty strong and their fees are pretty low. If you look at quantitative managers, I don't have a really good cross-sectional set of similar data for all the quantitative managers and I really couldn't give you a perfect answer to that. But against the broad universes of active managers, their track records look pretty good and their fees look pretty low. So hopefully that's enough of an answer to point you in the right direction.

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William R Katz, Citigroup Inc, Research Division - MD [42]

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Okay, that's helpful. And then the second question I have is, you'd mentioned that you're feeling good about the traction of the combination. Is that just based on your conversations with your Henderson counterpart or are you actually starting to get that kind of feedback from the distributors, and if that is the case the latter, where geographically do you think you could see the earliest traction? I know you mentioned that nothing is sort of short-term, you are playing for a longer game, I understand that, but where are you getting the most sort of, I'd say, momentum on the third-party side?

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Richard Maccoy Weil, Janus Capital Group, Inc. - CEO and Director [43]

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Yes, I tried to answer that momentum question earlier. I'll say it again, look our biggest muscles are --- the things that are most significant than we can add are probably our U.S. retail distribution and our relationships in Japan. And that's the place that we are most focused on delivering help in size. And then we both have pretty good starts down in Australia. And I think there's work that we can both do to support each other down there as well. And then depending on what happens with Brexit in France and a bunch of other stuff, we're hopeful that the European market doesn't go the wrong way and that Henderson can help us both in U.K. retail and then across the continent. Those are the places where I think the best opportunities are. As I mentioned, we have sales training ongoing in both organizations of cross-training around each other's products. And the feedback from that is increasing enthusiasm, that's what I'm hearing from our people reported from that process and that's certainly encouraging. But again, I want to caution you that I don't read that encouraging feedback as saying on Day 1 there's a new flood starting. Sales is a process, relationships take time. This is going to take some time to introduce these new products, these new track records, these new investment teams, to existing relationships. And so it's not a Day 1 thing.

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Operator [44]

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And our last question will come from Michael Carrier with Bank of America Merrill Lynch.

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Michael Roger Carrier, BofA Merrill Lynch, Research Division - Director [45]

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Hey guys, can you hear me now?

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Richard Maccoy Weil, Janus Capital Group, Inc. - CEO and Director [46]

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Yes.

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Jennifer Joyce McPeek, Janus Capital Group, Inc. - CFO and EVP [47]

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Yes.

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Michael Roger Carrier, BofA Merrill Lynch, Research Division - Director [48]

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All right. Just 2 last questions. First, just on the sales side. I think last quarter, you had a win on the fixed income. Just wanted to see if there was anything that was kind of outsized this quarter. And, Dick, I think on the U.S. intermediary, just wondering given the strength that you saw this quarter versus the industry, if there was any changes on some of the distribution platforms in terms of the products being offered or the ratings?

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Richard Maccoy Weil, Janus Capital Group, Inc. - CEO and Director [49]

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I guess, as Jennifer pointed out, I think, in the U.S. intermediary subchannel we had -- this is the fourth quarter of taking market share in a row, and we have good muscles, that's some of our best muscles to reach clients. And they're generating strong gross sales rates as they have been. And no, I don't think it's a change. I think it's the --- sort of the continuous hard work of a really good team of people in that market segment. But I don't think I can call out any specific change this quarter compared to the past. Jennifer, I don't know if you're looking at the numbers and want to complement that with anything?

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Jennifer Joyce McPeek, Janus Capital Group, Inc. - CFO and EVP [50]

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Well, I was -- looking back at our lumpy wins in the quarter, to answer your first question, Michael. Yes, I do see a significant win in fixed income in the first quarter. I don't have any more detail that I can share with you, but that continues. The one in the fourth quarter was really, really large. But there is a couple of nice wins in Institutional fixed income.

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Michael Roger Carrier, BofA Merrill Lynch, Research Division - Director [51]

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Okay, that's helpful. And then, just as a follow-up on Kapstream, just given the remaining stake being brought in, any impact on the P&L? And it's probably too early, but just in terms of pro forma, when you think about Henderson, Jennifer, anything that we should be thinking about in terms of comp ratios and stuff like that, in terms of what you typically discuss?

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Richard Maccoy Weil, Janus Capital Group, Inc. - CEO and Director [52]

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Sure. So we have in our -- or Henderson has in their circular a reaffirmation of our synergy expectations for the transaction. And we are very confident in achieving the $110 million in cost savings. That will result in a reduction in comp ratios for the total company. That doesn't imply that we will be reducing compensation at an individual level, but more that we're just going to have fewer headcount per AUM and per revenue. I think it will probably be in the high 30s going forward. If that's helpful. And that calculation is on a gross revenue basis, the way Janus calculates it.

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Michael Roger Carrier, BofA Merrill Lynch, Research Division - Director [53]

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Got it. And then anything on Kapstream?

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Jennifer Joyce McPeek, Janus Capital Group, Inc. - CFO and EVP [54]

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Sorry, what was the question on Kapstream?

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Richard Maccoy Weil, Janus Capital Group, Inc. - CEO and Director [55]

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Cash flow.

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Jennifer Joyce McPeek, Janus Capital Group, Inc. - CFO and EVP [56]

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Oh, on cash flow?

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Michael Roger Carrier, BofA Merrill Lynch, Research Division - Director [57]

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I was just saying, because you guys bought in the remaining stake, like any impact?

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Jennifer Joyce McPeek, Janus Capital Group, Inc. - CFO and EVP [58]

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So we have bought in the 49% that was remaining outstanding with Kapstream, and you'll see that come through as fully consolidated earnings. We'll have a reduction, we saw it this quarter, in our non-consolidated income. So just some below-line movement to above the line. Is that really your question?

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Michael Roger Carrier, BofA Merrill Lynch, Research Division - Director [59]

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Yes, that was it.

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Operator [60]

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And at this time, I would like to turn the conference back over to Mr. Weil for any additional or closing remarks.

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Richard Maccoy Weil, Janus Capital Group, Inc. - CEO and Director [61]

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Thank you, operator. I'll just close by saying, look, the quarter story, I think, is pretty straightforward. We're having headwinds at INTECH, which hopefully weren't too surprising in the sense that we've talked about performance in the last half of the year as being seriously challenging. And we're encouraged that they had a good quarter, but obviously that needs to continue. More encouraging is our quarterly -- our continued market share gains in active equity space and in our intermediary subchannel. I think we're doing very well there and that's --- for the Janus Capital Group that's been and continues to be our most important marketplace. And so that's, I think, a very significant piece of good news. Also obviously, we want to shout out to Perkins with their continued improvement in positive net flows, well done to them. Well done to Bill Gross and his performance and continuing positive flows in his product, which were $200 million of positive in this last quarter. And so we have a range of bright spots, but some challenges as well. As we look to that mix, we're excited about being able to face it with the partnership and integration with our friends at Henderson. The more we get to know them, the more excited we are about the possible combination -- possibilities of the combination between us. We're just going to be a better firm. And so, we'll have better distribution, we'll have better economics and we'll have a broader and somewhat deeper investment team, and the combination of those things really does position us to face the future with greater strength and to do better at capturing future opportunities. So that's where we stand. I appreciate your attention today. And I look forward to talking to you as Janus- Henderson in a future period. Thanks, operator.

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Operator [62]

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Thank you. This does conclude today's conference call.