Janus Henderson Group Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 2, 2023

There are 10 speakers on the call.

Operator

Good morning. My name is Sam, and I'll be your conference facilitator today. Thank you for standing by, and welcome to the Janus Henderson Group Second Quarter 20 20 3 Results Briefing. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period.

Operator

In the interest of time, questions will be limited to one initial and one follow-up question. In today's conference call, certain matters discussed may constitute forward looking statements. Actual results could differ materially from those projected in the forward looking statements due to a number of factors, including, but not limited to, those described in the Forward Looking Statements and Risk Factors section of the company's most recent Form 10 ks and other more recent filings made with the SEC. Janus Henderson assumes no obligation to update any forward looking statements made during the call. Thank you.

Operator

Now it's my pleasure to introduce Ali Dibadj, Chief Executive Officer of Janus Henderson. Mr. Dibadj,

Speaker 1

you may begin your conference.

Speaker 2

Welcome, everyone, and thank you for joining us today on Janus Henderson's Q2 2023 earnings call. I'm Ali Dibadj, and I'm joined by our CFO, Roger Thompson. In today's call, I'll start with some thoughts on the quarter before handing it over to Roger to run through more detail. After Roger's comments, I'll provide an update on our strategic initiatives, And then we'll take your questions after those prepared remarks. Turning to Slide 2.

Speaker 2

Markets remain uncertain and while second quarter and year to date market The rally has been extremely narrow, led by a few mega cap stocks. Persistent headwinds, including an opaque economic outlook, higher interest rates, Uneven inflationary pressures and recession fears, notably in the UK and Continental Europe, are contributing to a difficult market backdrop. Even amidst macro challenges, we're very pleased that Janus Henderson continues to make progress executing our strategy and again delivering good quarterly results. Assets under management increased 4% to $322,100,000,000 due to positive markets and up 12% since the beginning of the year. The quarterly flows were negative $500,000,000 this quarter.

Speaker 2

While just negative, the result is the 2nd best quarter in nearly 3 years. Taking a step back to look at the broader picture, our results this quarter clearly show significant improvement from where we were a year ago. Inflows for the first half of twenty twenty three were $5,000,000,000 a market improvement from the $14,000,000,000 of outflows during the 1st 6 months of 2022. Let me just say that again. Last year in H1, we were sitting at negative $14,000,000,000 in net flows.

Speaker 2

Now we're at a positive $5,000,000,000 in net flows, Clear progress. To remind you, we've also said that our flow trajectory won't be linear and we're not yet at the point to be able to promise consistent positive flows despite the tangible improvements. As we begin the second half of the year, we need to rebuild our pipeline, which takes time. Our retail flows continue to be negative, especially in EMEA, and there are a few pockets of internal transition that will make us a stronger firm for the long term, will negatively impact our flows in the near term. That being said, remember that last year's total annual net flows were negative $31,000,000,000 And we expect to show great improvement from that and believe we're on our way to sustainable organic growth in the future.

Speaker 2

In particular, we remain encouraged with the momentum in sales activity levels in the business and conversations we're having with clients given our investments in client service, 20. Great accountability and collaboration, improved selling processes and investment performance. Given long lead times in this industry, our expectation continues to be that we deliver 1 or 2 quarters of positive net flows over the next 1 to 2 years as an indication that our strategic plan is taking hold. Turning to investment performance. It is solid in aggregate with 68% of assets ahead of benchmark on a 3 year basis.

Speaker 2

The ability of our world class investment and distribution teams across all our capabilities to deliver differentiated insights, investment discipline and world class service Position us well to navigate these uncertain markets and deliver the best possible investment outcomes for our clients and their clients. In summary, We are clearly showing progress on our strategic path to deliver consistent organic growth. There's still much opportunity for improvement. Our financial results are solid. We're generating good cash flow and we have a strong and stable balance sheet.

Speaker 2

I'll now turn the call over to Roger to run you through the financial results.

Speaker 1

Thank you, Ali, and thank you again to everyone for joining us on today's call. Turning to Slide 3 and Investment Performance. Investment performance versus benchmark remained solid with over 60% of assets beating their respective benchmarks over all time periods. Short term fixed income performance versus benchmark improved this quarter, and the longer term time periods remain very strong. Investment performance compared to peers continues to be competitively strong with 70%, 61%, 78% 87% of AUM in the top 2 Morningstar quartiles over the 1, 3, 5 10 year time periods.

Speaker 1

Slide 4 shows company flows. As Ali mentioned, net outflows were $500,000,000 this quarter. And while we're pleased with year to date flows compared to the prior year, Our goal is to deliver consistent organic growth over time, and we're not there yet. Based on the items that Halie has discussed, we wanted to provide an outlook for 3rd quarter flows. As we sit here today, we expect net outflows in the Q3 to be in the range of negative $3,500,000,000 to negative $5,000,000,000 Turning to Slide 5 for a look at flows by client type.

Speaker 1

Net outflows for the intermediary channel were $1,600,000,000 compared to $700,000,000 in the Q1. The quarterly decline was primarily from the EMEA and LATAM regions to those regions. U. S. Intermediary flows were virtually flat, supported by strong positive flows in several strategies, including the AAA CLO ETF, our Mortgage Backed Security ETF and U.

Speaker 1

S. Mid Cap Growth. We told you before that U. S. Intermediary is a key initiative under our Protect and Grow strategic pillar.

Speaker 1

Now we're pleased That we've shown a significant improvement in net outflows in the first half of twenty twenty three compared to the same period a year ago and that we are capturing market share. Institutional net inflows were $1,900,000,000 versus $6,900,000,000 in the 1st quarter. Pleasingly, the quarter included a $3,000,000,000 enhanced index mandate from a global insurance client, adding to flows 20. In addition, in Q2, we had our largest emerging market debt mandate funds to date. We are not anticipating any similar size fundings in Q3, in line with our comments on last quarter's call, that our distribution team is working to replenish and build a sustainable pipeline And that this will take time.

Speaker 1

Redemptions were normalized in Q2 after a benign Q1. Finally, net outflows for the self directed channel, which includes direct and supermarket investors, were $800,000,000 The U. S. Direct business is a strategically important pool of assets. And to better deliver for our clients during the Q2, we started to offer an investment advisory service to our direct investors in the U.

Speaker 1

S. This is a service we haven't offered previously and helps us guide our direct clients So that they are better positioned to achieve their desired financial outcomes. Slide 6 is flows in the quarter by capability. Equities flows were breakeven in the 2nd quarter compared to net inflows of $3,300,000,000 in the prior quarter, A good result considering the challenging environment for active equities. Net inflows for fixed income $1,000,000,000 compared to $3,600,000,000 in the prior quarter.

Speaker 1

We remain encouraged that despite the challenging short and medium term investment performance in fixed income, we have differentiated breadth of products that is able to capture flows across multiple channels and regions. Several strategies contributed to positive fixed income flows, including emerging market debt, which had $600,000,000 in net inflows for the quarter and has crossed the $1,000,000,000 market of assets under management. Elsewhere, fixed income ETFs had positive flows of $870,000,000 in the quarter, led by the AAA CLO ETF and our mortgage backed securities ETF. For the year, our fixed income ETFs have gathered 20. $1,700,000,000 in inflows and our ETF AUM has grown to over $7,000,000,000 Total net outflows for multi assets was $700,000,000 driven by the balanced strategy within the U.

Speaker 1

S. Retail channel. Whilst the net outflow is in part due to short term underperformance back in 2022, the strategy is currently outperforming versus Benchmark and peers 20. Finally, net outflows in the alternatives capability were $800,000,000 primarily from the multi strategy and the absolute return strategies in the UK and Continental Europe. Moving on to the financials.

Speaker 1

Slide 7 is the U. S. GAAP statement of income. And on Slide 8, we explain the adjusted financial results. Adjusted revenue increased 5% compared to the prior quarter, primarily due to increased management fees on higher average AUM in addition to seasonal performance fees.

Speaker 1

Net management fee margin for the 2nd quarter was 48.5 basis points 20 compared to the prior quarter of $49,800,000 The decline is primarily due to the impact of large institutional mandate fundings during the first half of twenty 23. All else equal, we anticipate the net management fee margin to stabilize in the 3rd quarter. 2nd quarter performance fees were negative $6,000,000 and include negative $17,000,000 of U. S. Mutual fund fees, As we sit here today, based on our current investment performance, our estimates of aggregate performance fees for the full year remains unchanged Towards the lower end of negative $35,000,000 to negative $45,000,000 This includes roughly negative $65,000,000 from U.

Speaker 1

S. Mutual fund performance fees. Clearly, the result will be dependent on future performance. Continuing on to expenses. Adjusted operating expenses in the 2nd quarter were $280,000,000 up 1% from the prior quarter.

Speaker 1

Adjusted employee compensation, which includes fixed and variable costs, was up 5% compared to the prior quarter, largely due to seasonal payroll taxes triggered by annual vestings in the prior quarter. In the appendix, we've provided the usual table On the expected future amortization of existing grants BTUs in your models. The 2nd quarter adjusted comp to revenue ratio was 45.6%, in line with expectations. Adjusted non comp operating expenses increased 13%, again in line with expectations compared to the prior quarter, primarily due to higher G and A and marketing expenses. Adjusted operating income increased 15% over the prior quarter to $121,500,000 in Q2.

Speaker 1

2nd quarter adjusted operating margin was 30.2%. Finally, adjusted diluted EPS with $0.62 Updating on our expectations for full year 2023 operating expenses. We continue to be disciplined on costs and are always looking for ways to operate more efficiently. We now expect to deliver at least To the high end of the $40,000,000 to $45,000,000 in previously communicated cost saves to provide fuel for growth to strategically reinvest back into the business. Our compensation and non comp guidance remains unchanged.

Speaker 1

We expect our adjusted compensation ratio to be in the mid-40s. We expect adjusted non compensation expense percentage growth of mid to high single digits compared to the prior year, which implies an acceleration in our non compensation costs 20. Increased but very disciplined T and E expenses and the amortization of capitalized costs associated with our OMST project, and a look at our liquidity. Our balance sheet remains very strong. Cash and cash equivalents were $966,000,000 as of the 30th June, an increase of approximately $137,000,000 resulting primarily from strong cash flow generation, and the investment opportunities of the business with returning capital to shareholders.

Speaker 1

As I stated on last quarter's call, Given the opportunities we see in investing in the business organically and inorganically, we do not anticipate buying back shares at this time. We'll continue to return cash to shareholders through a strong quarterly dividend, and the board has declared a €0.39 per share dividend to be paid on the 30th August to shareholders of record as at the 14th August. With that, I'd like to turn it back over to Ali to give an update on our strategic progress.

Speaker 2

Thanks, Roger. Turning to Slide 11, a reminder of our 3 strategic pillars of protect and grow our core businesses, Amplify our strength not fully leveraged and diversified where clients give us the right to win, we are in the execution phase, And we believe this strategic vision will lead to consistent organic revenue growth over time. In Protect and Grow, we've talked previously about the importance of protecting and growing our U. S. Intermediary business and have been investing in and supporting this channel.

Speaker 2

We've appointed a new Head of North America Client Group, Launched a national brand campaign, selectively upgraded talent, aligned org structure and compensation with the growth strategy and increased wholesaler client engagement. Progress has been tangible, significantly improved net positive flows into our advisor group is pleasing to see and has been offset by negative flows in the typically lumpy retirement channel resulted in overall negative 1% annualized organic growth rate for the first half of twenty twenty three. That is strong progress compared to a negative 6% organic rate for all of 2022. As Roger mentioned, importantly, we are capturing market share in this channel. Under Amplify, We've previously talked about our institutional and diversified alternative businesses.

Speaker 2

In the institutional business, which is almost $9,000,000,000 of positive flows year to date, We've restructured coverage to be more aligned to different client types, helping us to better serve their needs through greater specialization. We've made many new appointments and 20. Other professionals are joining in the coming months. Diversified Alternatives, which includes multi strategy hedge funds and enhanced index funds, has experienced 35% growth in AUM in the 1st 6 months of 2023. We also continue to launch new products and vehicles based on what our clients are telling us.

Speaker 2

For example, in 2023, we've established the Global Properties Equities Fund in an OIC, the sustainable credit active ETF in Australia, Additional SMA strategies in the U. S. And an emerging markets innovation fund in a CCAP. Under our diversified pillar, Our emerging markets debt team, which we brought in last September, now manages $1,200,000,000 in AUM after starting at 0 less than a year ago. Finally, we continue to look actively to buy, build or partner to diversify where clients give us the right to win.

Speaker 2

As an example, we announced a joint venture, Privet Corp, that looks to take advantage of the democratization of private alternatives into the retail channel. Moving to Slide 12, formal background on Privacore. In June, we announced a new joint venture with Provo Corp, which is an open architecture distributor and trusted advisor for alternative investment products Tailored to private wealth clients in the U. S. And aligns with our strategic ambitions to diversify and grow our business.

Speaker 2

Pivacore taps into the fast growing market with a strong leadership team in a strategically important segment of the industry where Janus Henderson's clients have asked for help. The initiative positions Janus Henderson to grow with our clients and further strengthens our credibility as a future partner strategic M and A in private and alternative asset classes of focus for our firm. Very importantly, it allows us to do all this without distracting any part of our firm from our core businesses. We recognize that the democratization of alternatives among private web clients is still in the early stages, and this trend represents a significant opportunity For firms with strong relationships with retail intermediaries like we have at Janus Henderson to provide a broader range of alternative investment solutions for clients. Alternatives as a category represents a $12,000,000,000,000 market today with assets expected to roughly double in size over the next 5 years.

Speaker 2

Our net worth investors command $80,000,000,000,000 of assets globally and are expected to account for much of the growth in private markets. We expect that Privacore with Janus Henderson will play an integral role in bridging the gap between managers of alternative assets and end investors Pivacore's mission to partner with the best in class managers' alternative investments, paired with extensive relationships at wirehouses, broker dealers and RIAs creates value on both ends of the value chain, accelerating GP fundraising and bringing differentiated institutional quality investment opportunities set of clients that are notably under allocated to alternatives today. This partnership seeks to provide access to best in class largely private alternative investments This quarter is led by 2 principals, Brendan Boyle and Bill Cashel, a pair of industry veterans, each with proven track records of building dynamic, alternative focused businesses. 20. Brendan and Bill are truly the best in the business.

Speaker 2

And Janus Henderson's robust heritage combined with this new entrepreneurial team demonstrates our commitment to ensuring our clients come first always. Turning now to Slide 13. Reminder of a few of the things each and every person at Janus Henderson has pulled together to accomplish over the past year. We've made a significant amount of positive change in just a few short months that are showing tangible progress and is setting us up for the long term success of the firm despite some volatility in the short term. Reflecting my first impressions from last summer, there was and continues to be a strong foundation in place at Janus Henderson.

Speaker 2

There are very talented people who want to win. We are an investment powerhouse with world class client focus with global corporate functions and infrastructure And underpinning all these attributes is a strong financial position, including a fortress balance sheet. We leveraged this 2.5. Strong foundation through a new strategy and focused execution with increased collaboration, accountability and urgency with the intent of repositioning Janus Henderson to meet our client and their clients' needs and thus for our future growth. Established the strategic leadership team that created and is now executing on our new strategic plan.

Speaker 2

We have 7 new board members, including a new board chair, and their exceptional breadth and depth of experience will be critical in leading Janus Henderson. We created Fuel for Growth to reinvest in Janus Henderson's strategic growth initiatives on behalf of the client. The operating model has been upgraded and simplified, including the order management system transformation project that went live smoothly in the Q2. This multiyear effort is a monumental step forward in our technology evolution will help our clients and their clients achieve superior financial outcomes. And finally, we've added talent Notably, of the talent coming in, many are high caliber former employees We've taken notice of the positive changes happening at Janus Henderson, see the great opportunity at hand and want to come back and be a part of it.

Speaker 2

Net net, we have a solid foundation, the core team is nearly fully in place and our plan is in motion. The element about our team or people is so key given we want an enduring culture of performance built upon our stable and client focused processes at Janus Henderson, and we are well on our way. Moving to Slide 14, which shows how we're enhancing our culture 20. That firms with a clearly defined MVP are more successful in the long term and generate better returns than those companies that don't. We introduced our MVP earlier this year to define who we are and what we stand for as a collection of individuals and affirm Not just for today, but what we want to be in the future.

Speaker 2

It gives us a clear North Star. Importantly, we developed our MVP much like we did our strategy inclusively and from the bottom up as opposed to top down, but truly crowdsourced and thus bought in articulation and aspiration. Our MVP, coupled with our strategy on a foundation of creating fuel for growth, guides our decision making and prioritization and allows all colleagues to move together in the same direction to help us win in this competitive landscape. Wrapping up on Slide 15. I'm proud of the progress made this quarter building on the progress of past quarters.

Speaker 2

Net flows are positive $5,000,000,000 year to date. Investment performance is solid. 20. Financial results are good and we continue to execute on our strategy, including providing more fuel for growth to reinvest back in the business. Success will not happen overnight and progress will not be linear, particularly as we rebuild our institutional pipeline, retail flows remain negative We go through pockets of transition over the next few quarters, which when taken in aggregate will lead to negative flows in at least the Q3.

Speaker 2

Even so, 2023 flows are set to be significantly improved versus 2022. We are in the early stages of executing our strategic plan. And as we have shown, progress is starting to bear fruit. We believe our strategy will lead to organic revenue growth over time. Our focus continues to be helping clients define and achieve superior financial outcomes and to deliver desired results for our clients, shareholders, employees and all our other stakeholders.

Speaker 2

Let me turn the call back over to the operator for your questions.

Operator

20.

Speaker 3

20.

Operator

Our first question comes from Ken Worthington from JPMorgan. Ken, your line is now open. Please go ahead.

Speaker 4

Hi, good morning. Thanks for taking the question. In the relationship with Private Core, what are the Janus alternative products that You seem best positioned to succeed with this relationship. I think you mentioned that private core is really A U. S.

Speaker 4

Focused distribution strategy or platform, but I also think your biggest alternative products like Absolute Return are sort of registered in Europe. So what existing products seem better positioned to sell well on this platform? And how much assets do those products have today? And will you be developing new alternative products to kind of maximize this relationship.

Speaker 2

Hey, Ken. Thanks very much for the question. So Look, first off, we're very enthusiastic about the potential of Pribicore. We firmly believe in the democratization of Private alternatives and the broader democratization of sophisticated investment products. And we certainly believe that this is going to be a very exciting way that Janus And can participate in with our joint venture with PivotCore.

Speaker 2

Because it does serve and this will start to answer your question, PivotCore does serve to deliver on both ends of the value chain. A set of clients who have told us that they want more access to alternative investment capabilities, But perhaps don't have the ability to have client service from those alternatives capability managers. On the flip side, the GPs, the actual investment managers, want to get access to private wealth given that $80,000,000,000,000 20. Wealth is sitting there and that a lot of allocations are lower relative to where they should be from a broader alternative perspective. And so the The investors want to get access there, but they don't have the scale to develop the client service that the clients need.

Speaker 2

So Pruvacore sits right in the middle And answers both of those questions, answers both of those needs. And coupled with the Janus Henderson brand and our ability to reach out to The retail channel. Starting in the U. S, we think it's going to be a really interesting and exciting opportunity for us to deliver for our clients and for our shareholders. Results.

Speaker 2

So that's the broad view. Now to your question very specifically, PivotCore is an open architecture platform. Its Point, its value proposition is not just the client service part, but it's also selecting the best in class Alternative asset managers then deliver that to the client base that is in great need of access there. We may have products currently. You're exactly right.

Speaker 2

If there's anything that's closest, it'll be in our liquid alternatives businesses. But right now, we don't have necessarily the right products to prove to PivotCore, which is why it's open architecture, which is why the team at PivotCore has the great experience that it has In selecting, the best alternative managers out there to deliver to the clients. Over time, could we have more capabilities That we can bring to clients via PivotCore, to your second part of your question, absolutely. That's part of the plan. And in fact, having a relationship with PivotCore Legitimizes us even further for potential M and A down the line in the liquid alternatives and illiquid alternatives area.

Speaker 2

Thanks for the question, Ken. Okay.

Speaker 4

Yes, understood. Maybe as a follow-up, outflows for the 3Q, you mentioned EMEA. Any rationale for the redemption or redemptions? And can you compare the fee rate to the assets being lost versus the fee rate And the larger mandates that you've been winning in recent quarters.

Speaker 2

So let me start and then pass it over to Roger to see the context. 20. So look, in our guidance for Q3, you'll see it's a little bit different in consensus, not massively. We just want to make sure a few things. One is that People don't just project forward the past couple of quarters, of our delivery here on net flows 2.

Speaker 2

Into Q3 and beyond, we said it won't be linear. We've also mentioned last quarter and this quarter that we have to replenish the pipeline. We certainly talked about intermediary being challenging. That's especially an EMEA comment for us, particularly in an environment where Our rates in that market are quite high. There's a lot of uncertainty about the economic outlook.

Speaker 2

EMEA intermediary seems to be pulling back a little bit. And obviously, we're going through Some transitions that are internal in nature that will make us a better firm for the longer term. What I would say though 20. We continue to see our market share look better and better versus peers. And if you take a step back for the year, We certainly expect significant improvement versus 2022 numbers, despite what we expect to be outflow in Q3.

Speaker 2

Let me hand over to Roger for more comments there or broader on the fee rate.

Speaker 1

Yes, sure. Okay. Yes, I mean, remember that last quarter we told you that in the near term, our success in Institutional would impact the fee rate because we were winning with those large sovereigns and insurance clients. But over time, we'd anticipate A stable fee margin as we execute the strategy. And importantly, we're not discounting business in order to win.

Speaker 1

I think When I look at our 10 largest strategies, our inflows and our outflows are actually at almost identical management fee levels. 20. So it's not a pricing story. It's around where the inflows have been. And in the first half 20.

Speaker 1

Yes, we've been really pleased to see those sizable inflows in institutional, but we'd expect so that makes sense that the fee rate has fallen by about a basis point In Q2, but we'd expect that management fee rate to stabilize going forward.

Speaker 4

Great. Thank you.

Operator

Our next question comes from Craig Siegenthaler from Bank of America. Craig, your line is now open. Please go ahead.

Speaker 5

Good morning, Ali, and congrats on another better than expected flow quarter. And it's also nice to see some of your stars are turning like Mark Finto. My question is on the flow side. I realized there were Few large institutional mandate wins in the 2nd quarter number, but if you could really attribute 2 or 3 factors to the 2nd better than expected net flow quarter in

Speaker 3

a row, What would those factors be?

Speaker 2

Look, thanks. Thanks, Craig. Look, I think it's a culmination 20. A lot of things that we're doing at the firm, and hopefully continued progress around that. So So look, if I take a step back and we've been talking at this firm for the past, call it, 12 or 13 months, I would argue that we are I am very pleased about the progress that each and every person at Janus Henderson 20.

Speaker 2

Has done on behalf of our clients. I wouldn't exactly have expected this kind of progress. 7. If you told me a year ago, we'd be where we are from a flow perspective. Think about it plus $5,000,000,000 first half of the year This year in inflows relative to negative 14% last year.

Speaker 2

So, I think there's a real improvement cycle there. And that has to your point translate to results whether it be EPS or flows. But underlying a little bit of that is a couple of things to your question. One is Significantly uptick in uptick to client activity. So we've been talking to more clients.

Speaker 2

And frankly, I like we like what we're hearing from clients. They want to do business with us. They're pleased that we're back on the radar screen. And that has filtered through. That has filtered through clients who We're waiting and seeing what the transitions would look like and they're pleased with what they see.

Speaker 2

They're giving us a vote of confidence and suggesting that we're very much on track In terms of our progress and our delivery to our clients, and that's culminating exactly as you described so far and good quarters of close. Again, I don't think we're out of the woods. I don't think that we can promise linear and positive flows going forward. But what we are seeing is real improvement from a market share perspective. Take U.

Speaker 2

S. Intermediary as an example. I mentioned in the prepared remarks that our U. S. Intermediary business Was at negative 6% last year.

Speaker 2

We're at negative 1% this year, and that's really driven By some of the lumpiness in the retirement channel as opposed to the core wholesaler driven investment intermediary business. So, you're seeing tangible progress here. And again, I think it's built up on a lot of the great work that the team has done, over the past year, and we'd like to see that continue. I wouldn't expect it, as Roger mentioned, to continue into Q3, particularly given we're not assuming large institutional inflows in Q3 at this point. It's really focused on intermediary and we have also mentioned obviously the intermediary challenges that we have in EMEA that in the macro environment there is It feels like it's a little bit of a lag in terms of improvement relative to the U.

Speaker 2

S. So hopefully that answers the question, Craig. It's a whole bunch of things that point us in the right direction.

Speaker 5

Helpful, Ali. My second one is on the momentum you've been seeing With your insurance clients. And I want to get a read on the appetite for Janus to take this one step further and form a partnership with an insurance company that could provide strategic benefits to both parties. I know you have

Speaker 3

a lot of experience with it.

Speaker 2

So look, we think that there is a real opportunity to provide our skill set to a broader insurance 20. We have very strong clients in the insurance market right now that we've had long standing relationships with And we're actually increasing the number of insurance clients that we have, very sophisticated global insurance clients, most recently, particularly in Europe, Where we have been able to deliver for them and we believe that we have the skill set to deliver them even further. You're right that historically, I've had Some interactions with insurance companies and relationships there that have been mutually beneficial. And we have been Quite active in speaking with insurance companies and seeing if there's something that we can do together with them. There's nothing to talk about today.

Speaker 2

Again, we're focused on our clients and our clients' clients, whether it be Insurance clients or otherwise, we think we can continue to deliver great product to them from a foreign perspective and a client service perspective on the strong foundation Janus Henderson has And broadening that client base insurance and otherwise is certainly part of our focus.

Speaker 6

Thank you.

Operator

Our next question comes from Dan Fannon from Jefferies. Daniel, your line is now open. Please go ahead.

Speaker 3

Thanks. Good morning. Wanted to follow-up on a comment you made around 2. The pockets of internal transition, I think impacting flows. So maybe talk about some of the headlines we've seen, but ultimately where you are in this process and As you think about the guidance for 3Q for flows, how much of that potential disruption is part of that and Whether you think that's going to continue for a few more quarters thereafter?

Speaker 2

Dan, thanks very much for the question. So look, the transitions are specifically things that we're doing that may increase volatility in the short term for sure, but are The right things for the future, particularly for our clients. All of these transitions, at least the ones in our control are client led Insofar as our clients entrust us to manage their well-being, their money, And we want to take that responsibility even more seriously than we have before and very much make sure that when we're managing their money, we're entirely focused I'm managing their money from a colleague and employee perspective. The specific transitions are going to be surgical, Very focused on delivering again for client needs. And they typically take 2 flavors of broad transitions.

Speaker 2

One is, and every company needs to do this, whether it be in our industry or other industries, look at The products that they have and look at them to make sure that performance expectations are being met from clients, making sure that There is real growth in those businesses, making sure there's real profitability in those businesses overall. We've done the bulk of that, to your question, From a fuel core growth perspective already, but there are a few stragglers here and there. The easiest decisions are when things don't meet performance and are Really big and clients don't like it. Those are some easy decisions, but some of the other decisions come through, as well when only 1 or 2 of those criteria are met. The bulk of that again, as I mentioned, has been done.

Speaker 2

What I would say is there's a second flavor obviously, which is more typical, right? So typical Turnover in this industry, which happens quite a bit. Just I'd ask you to think about your client base and how that turns over. We've been fortunate, Janus Henderson, that we have Less than industry turnover across the board for us, but we have turnover nonetheless. Typically, those things are Retirements that are expected usually there's lots of time to manage that.

Speaker 2

And the great news is that because we have really great tenure And we have 330 investment professionals around. We have long standing processes, that each of the investment Teams, hold to. We have risk overlays. We have portfolio construction tools. We have all sorts of other things That makes the transitions even more seamless, let alone obviously a very clear succession plan in bench.

Speaker 2

We believe that these transitions will be Somewhat seamless across the board. And again, over and over again, they're going to be in our client led, in every instance that we can deliver.

Speaker 3

Thanks for that. I appreciate the color. And then another kind of clarification Of your kind of longer term view of 1 to 2 positive quarters over the next 1 to 2 years for flows. And so thinking about 5. Institutional being the swing factor and then having as you think about intermediary showing steadily Improving in the U.

Speaker 3

S. And still maybe challenged in outside the U. S. And direct kind of being stable. Just trying to think about how You think about that progression in that scenario of 1 to 2 positive quarters over the next 1 to 2 years?

Speaker 2

Yes. So, look, just to clarify even further, remember that the Q1 of this year was positive, And we anticipate 1 to 2 more quarters between this year and next year. We've established our strategic roadmap. We're focused on the longer term. We're implementing that strategy with a revamped and very focused team.

Speaker 2

And the strategic plan has taken hold. To your point, we're seeing progress in the use of intermediary channel. We're seeing progress in institutional. We've had $9,000,000,000 of debt in institutional flows this year. Again, we can't and don't want to project that going forward.

Speaker 2

There's a long cycle for those, but certainly, the signs are positive. In other areas where we're focused like Diversite Alternatives, we've seen 35% growth And the first part of this year, all those things are very much pointing us in the right direction. What I would say is, and you know this better than anybody, right, This isn't going to necessarily be linear. We've said that before. So we can't yet promise consistent organic growth.

Speaker 2

We can see significant improvement certainly relative to last year. We believe we're on our way Sustainable organic growth, but I don't want to overpromise at this point, given to your points on the challenges in EMEA and some of the lack of clarity at this

Operator

Our next question comes from Nigel Pitterway from Citigroup. Nigel, your line is now open. Please go ahead.

Speaker 7

Great. Thanks very much. Just a quick question, if I could, on the comp ratio guidance. So obviously, you've had, I think, 50.1 percent first quarter, 45.6 20. 2nd quarter, but you're still guiding to the mid-40s.

Speaker 7

So that obviously implies that it does come down a bit in the last two quarters. Is that a reasonable assumption?

Speaker 1

Yes, that's reasonable, Nigel. The Q1 is always high given timings, particularly in the U. S, but that guidance of mid-40s still applies.

Speaker 7

Right. So presumably that means it's going to come through the comp expense, right, because your LTIP guidance really hasn't moved. So Is that a fair way of looking at it? Yes. Okay.

Speaker 7

Yes. All right. And then a similar vein, just on the Tax rate, obviously, you're reiterating that at 24% to 26% even though it was 22.2% this quarter. And any reason why it was Particularly low this quarter and reverts back up again?

Speaker 1

Yes. It's really how it's calculated. You need to exclude the NCI. If you exclude NCI, Our ETR in the second quarter is 23.9%. So it's basically at the lower end of our guidance of 24% to 26%.

Speaker 1

And again, I'd stick with that guidance of 24% to 26%.

Speaker 7

Okay, great. Thanks.

Operator

Our next question comes from John Dunn from Evercore ISI. John, your line is now open. Please go ahead.

Speaker 6

Good morning, guys. You talked about EMEA, the drag and some of the drag there. Could you just talk about Maybe where are you seeing gross sales overseas, both regionally and then strategy wise?

Speaker 2

Sure. So look, we are seeing a significant pickup in institutional business overseas, Particularly in actually the EMEA region, I mentioned earlier on large institutional clients in the insurance world entrusting us with Their and their policyholders capital, hopefully, we'll be good stewards of that. Similarly, very, very sophisticated sovereign wealth funds, 7. For example, in the Middle East, look to us for help. We're very proud to serve them and their citizens.

Speaker 2

And we're finding also in Asia, some interest from the institutional side as well and also intermediary flows looking relatively better in those regions. The core issue for us, as we mentioned before, is in the intermediary space. And again, We are setting ourselves up for when the wind is at our backs, with increased activity, With great product, with fantastic performance, with great world class service from our salespeople. Right now, the winners at everybody's face, including ours. The good news is even in that market, we're not losing share.

Speaker 2

In fact, I would I would argue we're gaining a little bit of share in that marketplace. So again, we're setting ourselves up for the future, but the macro headwinds are clearly there in the immune intermediary area and we just want to be mindful of that.

Speaker 1

John, if I can add to that. If you look on Slide 5, you You can see the growth flows in intermediary are pretty constant at around $9,000,000,000 So as Ali said, we've seen very significant improvement year on year In the North American intermediary flows, which for Q1 and Q2 are basically flat compared to $3,000,000,000 $2,000,000,000 out in the first The quarter of last year. And in EMEA, both in the UK and on the continent, outflows, 20. It is a tough market, as Ali said. But again, we think we're at least holding and possibly taking a little bit of market share in what is a very tough market.

Speaker 6

Right. Okay, cool. And then you have a lot of experience building in all its business, And the JV is definitely in a step in the right direction. Can you kind of frame what you think the next Couple of years of building that out could be?

Speaker 2

Absolutely. So we are very, very involved, As I mentioned, over the past several quarters and we saw each other live as well in the M and A landscape on private credit. I think One has to make sure from an institution perspective, Janus Henderson perspective, what one skill sets are and what can do inorganically, organically or So, it's some combination of partnership. From an investment skill set perspective in the privates world, between the private credit world, we do think, John, that M and A has to be part of the story. So we've been very active in the M and A landscape.

Speaker 2

I will suffice it to say, any deal you've seen occur, big or small, we've looked at. The M and A team has been very active and very strong looking through this. And if we're not involved in the final culmination of a deal, it's because of our decision either on valuation And so we would expect M and A to continue to factor into growing our private credit business, whether it be through partnerships like a private core or wholly owned Businesses and Private Credit, but we have to make sure, most importantly, it's the right team to deliver for our clients. The flexibility we have, Just to remind everybody is very easy to see if you look at our balance sheet. So we have real ability to leverage our balance sheet to grow To acquire inorganically and grow in that way.

Speaker 2

And then of course, the value that we bring inclusive of Pivot Core Is our distribution capabilities to grow any M and A partners that we sign and targets that we bring on board Both in the retail channel in the U. S. And globally as well as the institutional channel on a global basis. So we would only buy things we think we can grow. We will only do it at the right price.

Speaker 2

And of course, of course, probably the most important thing, I think I mentioned this a couple of quarters ago, we'll only do it if the cultural fit is there,

Speaker 6

20. Thanks very much.

Operator

Our next question comes from the line of Anthony Hu from CLSA. Anthony, your line is now open. Please go ahead.

Speaker 8

Thanks and good morning. I just had two questions. Firstly, thinking about your net flows, If we're thinking about gross sales versus redemptions, the past couple of quarters at a high level at least Look like you've seen improving trends and redemptions. Is there anything deliberate that you've done in there? Or is that simply an outcome

Speaker 2

20. So let me start and maybe pass it over to Roger. So I think there are a couple of things that are going on from redemption's perspective for sure. One of them is, we have Certainly delivered better performance consistently across the board and better performance from a long term perspective most importantly. 20.

Speaker 2

And that is being recognized more and more as we talk to clients that our performance over the longer term. Yes, there may be a spike Across that and we may have seen that last year for example where it was quite a unique market with bonds 20. And stocks going down significant amounts. But over the long term, we can deliver that performance. And I think that's something that clients are seeing and entrusting us with.

Speaker 2

So the short term volatility performance in Finite doesn't really impact the redemption as much. The second thing is that No clients are waiting and seeing a little bit, in terms of what the changes are at this organization. And change is often a worrisome term for clients. I think what clients are realizing is that the change that we're making here is for them. The change that we're making here for Janus Henderson is for our clients And we can certainly deliver stability, but I don't agree to any clients to deliver stagnation because it's not good for them.

Speaker 2

So the changes that we're going about here I think We're seeing very, very positively. The last thing I'd say before I hand it over to Roger is that our client service folks, our Talent that we have in the field that are interacting face to face with clients, are thinking about our clients, our clients' clients are world class And continue to be improved from a talent perspective as we bring more and more people in. I think that goes a long way to delivering on our clients' needs And thus, curtailing some of the redemption. So I'd argue it's those three points: performance, waiting on the positive change that they're now seeing And the client service personnel that we have, any upgrade that we brought to bear. Roger, I don't know if you have more detail maybe to bring to bear in Anthony.

Speaker 1

Yes. The same points, but as you said, a little bit more detail. If you remember, our small and mid cap growth performance in the U. S. Was pretty challenged in 2021 And bounced back very strongly in 2022, and you can see the strength of those numbers now.

Speaker 1

Flows take a little bit longer to turn, but it's really pleasing to see 20. Small cap growth is positive inflows this quarter. Interestingly balanced, which is our biggest capability Biggest single capability, about $40,000,000,000 Again, had a tough first part of 2022 perhaps. But again, as I said earlier, is now ahead of benchmark and right up there in top quartiles for 1, 3, 5, 10 and even longer So time periods were balanced. That's still an outflow.

Speaker 1

Again, these things take a little bit of time to turn. So hopefully, that will also Recovering the same way as we've seen with small and mid cap growth. And our European equity performance is also strong. And then as Ali said, it's really around activity And getting in front of clients. But I think, yes, flows do tend to follow performance and that strength of performance that we've seen Certainly showing coming through in small and mid cap growth.

Speaker 8

Great. Thanks for that. Can I ask also a follow-up question just around your dual listing on the Australian exchange? It looks like currently you only have about 5.5% of your shares listed on the ASX, which is a decline from around about 25% Just 4 years ago. How are you thinking about maintaining this deal listing?

Speaker 8

How costly is it for you to maintain this?

Speaker 1

Yes. I mean the AXS listing has been a long and valued part of our ownership structure for many years. But yes, I think it's currently at a low point. But as I say, it's been a very valuable holding for a long period of time. Okay.

Speaker 1

Thank you.

Operator

Our next question comes from Markus Bernard from Bell Potter. Markus, Your line is now open. Please go ahead.

Speaker 9

Yes. Thank you. And congratulations on our upbeat 20. I'm going to ask about your levels of cash on the balance sheet, if I may, We're just looking at Slide 10 have reached €966,000,000 I suppose the question is what's the right level of cash For your business, I think you've talked about acquisitions in response to John's question and And perhaps we're expecting some small bolt on acquisitions in the future. But where do we think that cash level will get to?

Speaker 9

And As a follow on, when do you expect to start to increase dividend or reinstate the buyback? Thanks.

Speaker 1

Thanks, Marcus. Yes, I mean, first thing is, yes, we have a strong balance sheet and we don't make any excuse for that. It's something that positions us well-to-do some of those activities that Ali has talked about. They're things we want to do. And the board's And the company's capital philosophy hasn't changed at all.

Speaker 1

We've taken an active disciplined approach to the management of cash. Obviously, we're earning more on that cash now as well. But we have a hierarchy of needs in terms of 20. The regulatory needs of the business, the working cap of the business and then how we invest Both organically and inorganically in the business. And that's where we think there could potentially be opportunities for now as Ali has talked about.

Speaker 1

So the dividend, we would still say it's a healthy dividend. But what we We'll continue to do is manage that manage the balance sheet prudently, but in the same way as we always have. We're not here to hoard cash. If we don't have a better use of it, we will think about returning it. But at the moment, we see real opportunities To invest in the business, as I said, both organically and inorganically.

Speaker 1

And we'll support that with a strong Healthy quarterly dividend.

Speaker 9

Excellent. Thank you very much.

Operator

And there are no further questions. I will hand back to the management team for any closing remarks.

Speaker 2

Well, thank you, operator. Thanks,

Speaker 3

2. Sam, and thanks everybody for joining today.

Speaker 2

Janus Henderson is clearly gifted with a solid foundation. Our core team is nearly fully in place. The plan is in motion. And hopefully, this is another quarter where you're seeing some of our clear progress based on those factors. Thanks for joining and we'll talk to you in a little bit.

Operator

This concludes today's call. Thank you for joining. You may now disconnect your lines.

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Earnings Conference Call
Janus Henderson Group Q2 2023
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