Janus Henderson Group PLC Q2 FY2020 Earnings Call

Good morning. My name is Nicole, and I will be your conference facilitator today. Thank you for standing by, and welcome to the Janus Henderson Group Second Quarter 2020 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer period. 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 sections of the company's most recent Form 10-K and other more recent filings made with the SEC. Janus Henderson assumes no obligation to update any forward-looking statements made during the call. Thank you. And now it is my pleasure to introduce Dick Weil, Chief Executive Officer of Janus Henderson. Mr. Weil, you may begin your conference.

Thank you, operator. Welcome, everyone to the second quarter 2020 earnings call for the Janus Henderson Group. As usual I'm joined by Roger Thompson our CFO. Let me start by saying that I hope all of you and your families and your loved ones are all safe during this unprecedented global health crisis. As we've said on previous calls on the second and the fourth quarter we try and give a longer term perspective on our business. And so in line with that promise, today Roger will run through the quarterly results and I'll try and give you a bit more discussion on business and strategy. And then like usual we'll take your questions. Turning to slide 1. This quarter represents our three-year anniversary since the closing of the Janus Henderson merger. Before I turn it over to Roger to go over the quarterly results, I just want to touch a little bit on the strategic journey that we've been on over these three years. The industrial logic of the merger between Janus and Henderson was all about bringing two independently successful firms together because they had complementary strengths. And by joining them together, we felt we could gain the benefits of those complementary strengths and also increase scale and diversification. As we went through the merger we identified three immediate priorities. First, we needed to learn how to deliver growth from our enhanced global platform. Second, we needed to consolidate the business footprint and the infrastructure to leverage the benefits of scale. Third, we needed to deliver cost savings. Turning first to growth. The promise of growth has clearly taken longer to materialize than we planned, targeted, or would have liked. In this most recent quarter our institutional flows have been particularly frustrating given the progress that we are making across our business. That said, we're seeing encouraging signs. And we're confident that with the work we're doing to move our company to simple excellence, we're going to deliver better results. Later in the call, I will update you on the more specific steps that we're taking to deliver our simple excellence strategy, which should lead us to delivering positive organic net flows and profitability growth. Second, we've been successful in creating a unified company with a common culture. Now, that's the work of years and I think we've made really good progress in recent years and are delivering a strong global culture. We now have a very strong global product lineup. We've enhanced that with a truly global distribution team and we are now supported by integrated platforms and operating systems underpinning all of it. We've made challenging but essential long-term decisions to simplify our model. And going forward, we're going to drive modernization across products, capabilities and global client servicing, while still exiting as we have marginal businesses and reducing complexity. Turning, third, to costs. Through the merger we successfully delivered $125 million of savings both ahead of schedule and a bit higher than we targeted. Since that initial phase, we've maintained good cost discipline through our business. But discipline is not really a destination it's a journey. And so taking a look at the fact that we're three years on living in our shoes as Janus and Henderson, taking a look at the lessons that we're currently learning around the possibilities presented from working at home and more electronic servicing of clients that's been the bright edge of this terrible dark cloud of the global health crisis. We think it's an appropriate time to take a hard look at our business structure and our expenses all the while balancing that against the appropriate investments necessary to deliver simple excellence. And I'll update you in next quarter and quarters ahead as we progress down the road of reexamining our cost structure, as well as the investments necessary to support simple excellence. In summary, we're confident that our merger has positioned us for success as an active manager, although we own and acknowledge that it hasn't happened faster. And I'll get more into our strategy and the steps we're taking a little bit later in the presentation. But before I turn it to Roger, let me say a word on the very important topic of diversity and inclusion. Recent events have quite rightly outraged society, triggered really important conversations about prejudice and racial injustice in our communities and institutions and our firm is no exception. At our firm we recognize that we are stronger together and that our outlook is shaped by people's varied skill sets, backgrounds and cultures. This diversity helps us explore unique avenues and uncover opportunities that are unseen by others and underappreciated by others in our industry and in investing. We are committed to creating an inclusive environment that promotes cultural awareness and respect. As an example, we committed to reach our women in finance target of 25% by 2022 and we've already met that target. We are encouraged by this progress and wish to continue to build on these first steps. In addition to examining our employee demographic data to understand and measure our progress, this quarter we've launched a Stronger Together Campaign. It is an internal and external initiative that addresses systemic racism, social injustice, allyship privilege, microaggressions, and more. Look, we realize that we have a long way to go. We realize that we need to continue to get better, but we're working hard at it. We're trying to make Janus Henderson a firm that deep in our culture we value diversity and inclusion and we treat all of our people with respect. I will now turn it over to Roger to walk through this quarter's results.

Thanks, Dick, and thank you everyone for joining us. I sincerely hope everyone and your friends, family and colleagues are safe and healthy. Looking at the second quarter's results. The market bounced back during the quarter provided a significantly better backdrop for AUM and financials compared to when we spoke last on the April earnings call. Net outflows of $8.2 billion are disappointing. However, with the strong markets AUM increased 14%. The overall flow figure marked a strong and important rebound in the intermediary business. Investment performance remains solid with 60% or more of assets beating their respective benchmarks over the one, three, and five-year time period. Adjusted EPS of $0.67 was better, compared to $0.60 and $0.61 for the prior quarter and the same period a year ago. And finally, we returned $88 million of cash to shareholders during the quarter by dividends and share repurchases. Moving to slide 4, investment performance. Investment performance remains solid, with 60%, 62%, and 68% of firm-wide assets beating their benchmarks on a one, three, and five-year basis as of June 30. Short-term improvements came primarily from our equity and fixed income capabilities. We're encouraged by INTECH's year-to-date performance. However, the longer-term performance remains a concern. Relative performance compared to peers is strong, with at least two-thirds of AUM represented in the top two Morningstar quartiles on a one, three, and five-year basis, the majority of which is in the first quartile. Now turning to total company flows. For the quarter, net outflows were $8.2 billion compared to $12.2 billion last quarter. While flows improved quarter-over-quarter, the result is not where we expect it to be. The quarterly flow number reflects the continuing trend of positive flows into our intermediary business, while institutional saw significant outflows. Intermediary flows were positive for the quarter across the U.S., EMEA, and Asia Pacific. Our U.K. business within EMEA, posted its first positive result since the fourth quarter of 2017 and its best quarter since the merger. While U.S. intermediary flows remain positive and relatively diversified, year-to-date investment underperformance in our U.S. mid and mid-cap growth strategies could impact flows in the second half of the year. We remain encouraged with the institutional pipeline and its diversity across strategies and regions. The focus now is to realize some of those opportunities. Dick will speak more about our strategy on distribution later in the presentation. Moving to slide 6 which shows the breakdown of flows in the quarter by capability. Equity net outflows for the second quarter were $4.2 billion compared to $6.9 billion in the prior quarter. The improvement was primarily due to better market conditions. The equity result reflects a $1.6 billion redemption from an EMEA client who has experienced strong performance and with whom we continue to maintain a strong multiproduct relationship. This redemption was simply a derisking of their portfolio. Flows into fixed income were negative $700 million in the quarter, primarily due to a few smaller mandate redemptions. However, in retail, we continue to see positive flows with several strategies producing inflows, including strategic fixed income, absolute return income, European investment grade, high-yield, and our ETFs, JMBS and VNLA. Those fixed income ETFs were $600 million positive for the quarter and are just under $1 billion of net inflows for the first half of the year. INTECH outflows were $3.9 billion. Multi-asset flows of $700 million positive were driven by strong flows into the balanced strategy. Alternative net outflows improved to $100 million. Pleasingly, our U.K. absolute return strategy turned positive during the quarter, reflecting its good performance. Slide 7 is our standard presentation of the U.S. GAAP statement of income. There is one item to mention impacting the GAAP results this quarter, which is nonrecurring and hence not included in the adjusted results. The recent announcement by an unrelated issuer to delist their VelocityShares ETNs impacted the value of intangible assets, which resulted in the impairment of $26.4 million. I'll remind you that this is a non-cash adjustment. Moving to slide 8 for a look at the summary financial results. Adjusted second quarter operating results were down compared to the first quarter, primarily from lower average AUM. While AUM recovered during the second quarter, average AUM still decreased 8%, given the low starting AUM entering the quarter. We entered the third quarter with 4% higher AUM compared to the second quarter's average. Total adjusted revenues in the quarter decreased 7% compared to the prior quarter on the lower average AUM, partially offset by better performance fees and higher net management fee margin, as a result of strong markets, outflows from lower fee assets and inflows into higher fee strategies. Adjusted operating income in the second quarter of $138 million was down 16% over the prior quarter, driven principally by lower revenue. Second quarter adjusted operating margin was 33.5% compared to 37.2% in the prior quarter and 35% a year ago. Finishing up the financial results. Adjusted diluted EPS was $0.67 for the quarter compared to $0.60 for the prior quarter and $0.61 a year ago. Despite the lower operating income, the quarterly EPS benefited from mark-to-market on seed capital, mutual fund share awards, and other investments. On slide 9, we've outlined the revenue drivers for the quarter. Lower average assets was the biggest driver of the quarterly change in adjusted total revenue. Net management fee margin for the second quarter was 45.7 basis points, up from 45.1 basis points in the first quarter and 44.9 basis points a year ago. The margin remains resilient and has increased for three straight quarters. The quarterly increase is primarily due to mix shift and our focus on quality flows. Performance fees was $17.2 million in the quarter versus $14.6 million in the prior quarter and up from $3.5 million in the second quarter of last year. The second quarter has a significant pool of AUM eligible to earn performance fees, including the SICAV Horizon range and our U.K. absolute return strategy. In the quarter, we were pleased that both of those ranges of funds earned performance fees reflecting the much improved investment performance. U.S. mutual fund performance fees in the second quarter were a negative $4 million. Finishing off adjusted revenue. Other revenues declined $3.1 million, primarily on lower average assets, as well as lower revenue from the ETN business. Going forward, we'd anticipate this line to be slightly lower on a run rate basis due to the uncertainty around the ETNs, which make up a small proportion of other revenue. Turning to operating expenses on slide 10. Adjusted operating expenses in the second quarter were $275 million, which is a 1% decline compared to the first quarter. Outside of the increase in LTI which is market-driven and out of our control, the quarterly expenses reflect our profit-based variable comp structure, cost discipline, and our focus on running an efficient business. We remain committed to managing our costs in the light of the elevated uncertainty being created by the global pandemic. Adjusted employee compensation, which includes fixed and variable staff costs, was down 6% compared to the prior quarter. Fixed staff costs were down 3% and variable compensation was lower by 10% due to lower profits and lower sales. Adjusted LTI was up 46% from the first quarter, from the absolute impacts of the mark-to-market adjustments in both quarters. In the appendix, we provided updated detail on the expected amortization of existing grants. The second quarter adjusted comp-to-revenue ratio was 47.1%. This higher ratio reflects the significant mark-to-market in our LTI expense in the second quarter. And when looking at the first half of the year, the comp ratio on average is 44.7%, which is in line with our mid-40s guidance. Adjusted non-comp operating expenses were down 11% compared to the prior quarter. The decrease is primarily related to the full quarter impact of COVID-19 and our strong cost control, particularly around G&A and marketing. For the year, we now anticipate our non-comp expenses to be down low single-digits compared to 2019. And finally, our recurring effective tax rate for the quarter was 22.9%, which is just below the statutory rate guidance of 23% to 25%. Lastly Slide 11 is a look at our capital management. Cash and cash equivalents weigh $880 million, as of the 30th of June, of which Janus Henderson's portion was $837 million. You should think about the amount of cash we have on the balance sheet is what the Board and management are comfortable operating the business with due to regulatory requirements, a conservative working capital buffer, and a cash set aside to meet the 2025 debt maturity. As we said previously, we remain committed to returning excess from future cash flow generation to our shareholders. During the second quarter we paid approximately $66 million in dividends to shareholders and today declared a $0.36 per share dividend to be paid on the 26th of August to shareholders of record as of the 10th of August. And we purchased 1.1 million shares of our stock for $22 million in the second quarter. Our Board and management is committed to maintaining a strong balance sheet, which is why given the low market levels at the start of the quarter the buyback was lower in the second quarter. Our thoughts around the buyback have not changed and we believe it is a good use of our excess cash. And we will commence the next stage of the $200 million authorized buyback shortly. Now I'd like to turn it over to Dick for an update on our strategy.

Thank you, Roger. I mentioned at the beginning of our call that our strategy is simple excellence. And underneath that strategy, we have five strategic priorities that I'd like to talk to you a little bit about right now. Turning to Slide 13. Our strategy is centered on the belief that a combination of relentless focus and disciplined execution across the fundamental parts of our core business will drive future success as a global active asset manager. Specifically, our strategy is designed to deliver organic growth and increasing profitability. Let's look at each of the pillars individually. Turning to Slide 14. I'd like to highlight some of the work that we've undertaken towards our goal of producing dependable investment outcomes. We have world-class investment teams and they have overwhelmingly demonstrated industry-leading results exceeding both benchmarks and peers since the merger. While the downturn was a shock in many strategies and admittedly set us back in some places, long-term investment performance remains strong and our teams remain stable and focused. We're pleased that our one-year performance numbers have improved since last quarter. In the first half of the year we have taken steps to further strengthen our investment team. We've recruited some excellent talent. Greg Wilensky joined us earlier this year as the Head of U.S. Fixed Income; Matt Peron joined us in April as Director of Research. And in addition to those crucial positions, we've made several high-quality additions to our already strong group of analysts. So we're very pleased that we continue to be able to recruit the talent at the top of the market, the very best that we see in the marketplace. Turning to Slide 15. We take a look at how we have developed our client experience and enhanced our global distribution platform. As you know, Suzanne Cain joined us as Head of Global Distribution just over a year ago. And she's brought real energy and focus and globalized what to a substantial degree had been pretty regional efforts. She's revitalized and consolidated her teams under a truly global distribution umbrella. What this has enabled us to do is to take a more focused and strategic approach to global distribution. That includes both products and clients, and stands on our ability to leverage our client tools more globally. As a small example of this, in the U.S., we have our portfolio construction services portal, our PCS, which is a dedicated, award-winning service that we offer intermediary clients. And it's very, very popular and well received in the U.S. We've just recently launched that in the U.K. and started to make it available to U.K. clients. It's been well received and we're very optimistic that that will enhance our ability to build the right kinds of relationships with U.K. clients. Look, we recognize our flows are not where we aspire or need them to be, particularly in institutional, which as I mentioned earlier has seen a frustrating second quarter. But our efforts are beginning to pay off in many important ways. Annualized organic net growth in our intermediary channel for the quarter was 3%. Our gross sales momentum is strong, and we've substantially recovered from the market dislocation in March. We're capitalizing on a strong list of focused products with high-growth potential. We're launching select new vehicles to ensure our products have the appropriate global reach. For example, in the quarter, we extended our market-leading global sustainable equity offering to the U.S. with launches of a Forty Act and an SMA. We also launched our global multi-strat fund in a UCITS structure and with the Australian domiciled feeder for distribution in Europe and also Asia Pacific. Despite elevated year-to-date outflows in institutional, despite the fact that the COVID crisis has created delays in searches and in funding of one business, we remain optimistic about the potential we see across the strong and diverse pipeline in our institutional business for the second half of the year. In addition, we continue to make changes and globalize our institutional business to further enhance how we successfully work with clients, who often share common objectives and face common challenges despite the fact they're in different places around the world. And we're learning and positioning to do better in our institutional business globally. Our distribution efforts are complemented by our client experience program, where we've been enhancing and redesigning our most important client journeys. The improving feedback loops that we're building are driving improved client experiences that we intend to move to market-leading status. Done well, we're confident that this global client-centric approach will produce more sustainable relationships, allow us to increase market share and build longer-duration client assets for everyone's benefit. Turning to Slide 16. I'd like to highlight some of the work we've been doing around increasing focus and driving efficiency in our business. We operate a complicated global business. It's diversified across regions, channels, and products. We believe it is critical for us to keep a focus on what's important to have strong prioritization to operate with excellence and invest in the best infrastructure to support our teams around the world. Looking at focus, I'll give you a small selection of initiatives that we've completed. We wound down our Australian equities product. We divested Geneva. We outsourced some of our middle and back office functionality to BNP Paribas. On the efficiency front, we've moved largely to a single global operating model, maintaining global platforms underpinning our business. All the while, we've maintained a balanced approach between costs and investing selectively. Finally, as I look to the future, we're undertaking a host of actions to strengthen and modernize our infrastructure, which among other things include implementing a major upgrade to our OMS and portfolio risk systems. We're enhancing and modernizing our data architecture and our data stewardship. We're upgrading our CRM and our client analytics. These are important investments and will help drive towards the goals of simple excellence. Let me remind you that we delivered $125 million in merger-related cost synergies ahead of schedule. And while we are maintaining cost discipline and efficiency isn't a destination, it's a journey and what we need to do is keep pressure on that. So we're not going to sacrifice making the appropriate and necessary investments in order to deliver simple excellence. But we are going to renew and dedicate our focus ask ourselves the hard questions around our cost structure. And as I said, I'll be getting back to you with the results of that balance in future quarters. Slide 17 covers our four strategic priority of proactive risk and control environment. Frankly, if you don't do this you're not going to get a chance to do much else. Having a strong proactive risk and control environment and a strong compliance culture is necessary to maintain the trust of clients, to maintain the trust of regulators and to deliver for our owners and our employees. It's just essential. So I won't go through the specifics highlighted on this page. But know that it is a crucial thing for us perhaps especially during this time when so many people are working from home that we maintain a focus on proper compliance, proper risk, and proper control environment. Turning to slide 18, where we give you some insight into new growth initiatives. Our expansion strategy is centered on leveraging current investment and distribution strengths. That means we're largely led by strength combined with where our clients are moving. We're focused also in that effort on delivering profitable growth. On the product side, right now we're supporting our growth in the ETF business where we've already seen really good momentum. Our VNLA and our JMBS ETFs rank 5th and 15th in year-to-date flows out of over 100 actively managed fixed income ETFs. And today in Australia, we listed our second active fixed income ETF in that market. Regionally, we are committed to expanding our presence both in Asia Pacific and in LatAm where we see increasing client demand and underlying growth characteristics that can help us achieve our aspirations. Finally, we remain alert to other expansion opportunities which complement our strategy and our operating model. In conclusion, before handing over to the operator for questions, I'd like to wrap-up my view of the second quarter for you. Despite extraordinary challenges driven through significant extent by the global COVID-19 pandemic, we've delivered strong financial performance in the second quarter and our long-term investment performance remains solid. Our intermediary channel remains strong with $900 million of positive net flows and a 3% annualized organic growth rate for the quarter and it's driven by a really nice diverse set of products and across a diverse set of regions. Progress across our business in this quarter really was masked by recent institutional outflows, but we continue to have good opportunities in the pipeline to improve those institutional flow results in the future. We are convinced that we are on the right path to organic growth and to increasing profitability with our focus on our strategy of simple excellence. We will renew our strong focus on costs balanced against appropriate investments to achieve simple excellence. We're confident we're on the right path to deliver for our clients, our owners and our employees as well as to continue to make really positive contributions to the communities in which we operate. With that, let me turn it over to the operator to get your questions.

Thank you. And we'll take our first question from Ken Worthington from JPMorgan.

Hi. Good morning. I wanted to follow-up on your comments on the institutional business or institutional distribution. The assets there contracted this quarter while other channels are growing. We know INTECH is a big part of that institutional channel. But at this point it's less than half of the assets. So how are the non-INTECH parts of your institutional distribution performing? And maybe what is the path to growing institutional assets even if INTECH continues to suffer outflows?

Thanks, Ken. It's good to hear from you. Institutional flows were just under half from INTECH, with a diverse mix from other areas. We previously mentioned a significant redemption from a strong multi-product client with whom we maintain a great relationship, as they were reducing risk in their portfolio. Additionally, we experienced a redemption in our global value strategy from Perkins in Chicago and some in other areas as well. It was a mixed bag of somewhat unexpected, hopefully one-time events that affected us this quarter. Our institutional business is not as robust as we would like it to be. However, under Suzanne Cain's leadership and with Nick Adams managing that business from London, we are taking the right steps to improve it. Based on our interactions with clients, we see opportunities to perform significantly better than where we currently stand, but as Roger frequently emphasizes, we can't count it until the cash is actually received. We are working on enhancing the process, technology, and team for the non-INTECH institutional business, and we are confident in our strategy. However, the institutional business does take time and is subject to unpredictable flows, and this quarter, those flows did not work in our favor. We are committed to ensuring this situation is not repeated.

Okay. Thank you. And then on the direct channel you reopened the direct channel. I think while it was closed that maybe Janus didn't invest in some of the basic tools that some of your direct channel peers were making. So why have the risk to the intermediary channel from opening the direct channel diminished? And are you considering investing in the direct channel? And if so what are you planning?

Yes, we closed the direct channel in 2009 when investor preference shifted and investors changed their choices from doing business with a single fund company to doing businesses with platforms that offered them a choice of many, many different asset managers of funds. And we were concerned as you pointed out I think about the potential for competition between adviser-led distribution and our direct distribution. And so since 2009 that's been closed. We've now reopened the D share class on July 6. And it's still too early to assess how effective that's going to be in improving flows in our direct channel business in the U.S., but it's not a huge investment in sort of competing with Fidelity. It's a way to better serve the needs of the existing shareholders and then folks close to them. It won't be a broad open retail push across the United States. But we think there's a good chance that we can improve the flows in our historic direct business with this moderate effort on reopening. And it's just too early to say if it's going to work, but we're optimistic.

We'll move on to our next question from Ed Henning at CLSA.

Thank you for taking my question. Just a couple from me. Just further onto the flows. Obviously you've touched again on the strong pipeline and what you're doing there. But can you just run through gross sales and the movement especially maybe from month-to-month to get a feel of how that's tracking especially in equities because if you look at equities on the gross sales have trended down for the last three quarters on Slide 24?

Yes, I believe gross sales have fluctuated over the quarters. One of the main influences on this is the activity in relevant marketplaces, particularly in retail, where we are a significant player in many key markets worldwide. We cannot ignore the major trends occurring in these retail environments. I don’t think there’s a broader interpretation to the gross sales figures than that. The minor fluctuations do relate to investor demand. However, as we noted, our investment performance remains robust, and we will be affected by factors like COVID in the first quarter and seasonal trends in the second quarter, which will impact all players in the industry. At this time, we’re not drawing any significant conclusions from the changes in gross sales.

Did the situation improve towards June, towards the end of the quarter, especially with COVID impacting early on?

There are fluctuations in different markets. Initially, we were still recovering, and May and June showed improvement compared to April. However, I wouldn't make any significant conclusions from this.

Our next question comes from Mike Carrier from Bank of America.

Good morning and thanks for taking the question. I just have one. Roger I think you mentioned just on some of the U.S. growth strategies I think on like the SMID side some weaker performance. And I think you just indicated like on the second half it could impact flows. I just wanted to clarify like was that on the institutional side or would you say more on the intermediary side? I know you just like raising a flag just because the performance is a little weaker. So you could see something or if there was something like actually already known I mean that could impact the outlook? Thanks a lot.

Thank you, Mike, for your question. I think we have a variety of strategies in place. Overall, our performance has been quite strong. European equity is finally showing positive movement, which is encouraging, and we are seeing this reflected in our European flows. However, our U.S. SMID and MID strategies, which have performed well for many years, have faced some challenges in recent months. We recognize that these are significant strategies, and while their short-term performance has been tough, they have consistently delivered great results for our clients over the long term. We just wanted to make that point clear.

And it's retail it's not institutional.

Yes not in institutional. Yes.

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

Thank you very much for taking my question. I've just got one. Dick you mentioned before that you're going to be doing a review of how your cost structure could look and sort of a deep dive into how that cost structure might unfold. I'm wondering you to elaborate a little bit more whether this is part of a wider review about products and strategies and whether this may therefore lead to lower teams or a small amount of headcount or anything like that? Maybe you could just sort of give us a little bit more of a feel about what's behind that?

Sure. So this is a constant effort when you're managing a business and it's been a constant effort for us. I gave some examples in my earlier comments about some areas where we've simplified the business and stepped back from some things that we were previously doing. And we'll continue to look at choices like that on an ongoing basis. And we also look at trying to find more efficient ways to continue to deliver the BAU responsibilities and improve the quality of client service. So basically what we're saying is we think three years on from the merger and in light of the lessons that we're learning from working remotely and the power that the technology can have for our business we think it's a really appropriate time to sort of renew our commitment to that exercise. It's not a new exercise. It's a continuation of what we've been doing. But we'll raise it up on the priority list. We'll talk about it more and we'll drive to conclusions that we can come back and share with you all. And we haven't pre-judged anything in terms of whether there are choices to be made about further simplifying the business. Those are - but those are important questions to ask and we won't shirk from asking them.

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

This is James Steele filling in for Dan. So just firstly thanks for providing some additional color on where the institutional outflows are coming from. And I understand the one, I think it was $1.6 million EMEA client derisking. I'm just curious if especially since those aren't performance-related if there's any opportunity to keep those assets in-house maybe move to a different strategy especially if the derisking activity is going to continue?

Thank you for the question. It's something I also consider when I see flows like that since we have a strong relationship with the client. Unfortunately, we weren't able to retain those assets in-house this time, but it's an important focus for us. We certainly have many conservative options available for clients adjusting their asset allocations. In this case, the funds left without returning to us. You raise a valid point; we must strive to keep those flows within our institutional business. It's great that we've established a solid relationship with the client, and we hope to regain some of those future flows in different ways down the line, but in this situation, we weren't successful in keeping it in-house.

Okay. Thanks. And then just as my follow-up, I believe you mentioned in the prepared remarks, it sounded like there is a delayed funding in one of the institutional businesses related to COVID. I was hoping you could quantify that or provide any additional color on the asset class or if that's supposed expected to still fund this year?

No. No not really on a specific client-by-client basis, but what I was trying to indicate is, look, last quarter we came to you when we said we felt that the institutional pipeline was looking better than it had looked in a while. And then we come this quarter and we say, the institutional flows were pretty substantially more negative than what we wanted or expected, and we're frustrated by that. And we're just trying to be transparent about those two truths and say some of the stuff that we were hoping to achieve it's still hopefully coming, but a lot of clients have gone slower through their process of moving from pipeline and finals to funding. And that's a fairly broad truth. Maybe it's related to changing the processes to working from home or your guess is as good as mine in many ways. But we have noticed across the institutional business that the process of moving from pipeline to final decision to funding at each stage has gone a bit slower than it has in some prior times. And so we're still hopeful that we have good opportunities to do better on a go-forward basis. But we have to deliver and we have to prove it. We're just trying to be transparent with you through that process.

We'll take our next question from Nigel Pittaway from Citi.

Good morning, everyone. I want to focus on the intermediary channel again. There's been $900 million in flows and a 3% growth, but that's still relatively small compared to the total funds in that channel. You've mentioned the challenges with SMID and mid-cap growth, although there’s been some growth in European equities. Do you think there’s any chance this could start to grow more significantly in the near future, or is it likely to remain a slow process with limited movement?

Yes, absolutely. We demonstrated that as we moved through the latter part of last year, particularly as intermediary flows turned positive in the first half. By the fourth quarter, we achieved $1.7 billion in positive flows. As mentioned in our first quarter call, the initial six weeks of this year matched or slightly exceeded that level, indicating solid progress at that time. However, we experienced a setback in the next six weeks, similar to many others. Achieving $1 billion in intermediary flows compared to the first quarter is an outcome we are quite satisfied with, although it’s not where we aim to remain. We have several factors working positively, whether in fixed income, equity, or multi-asset areas such as balanced and U.K. absolute return. There’s a positive trend, and we have a targeted lineup of products that are performing well. While we noted that U.S. SMID and MID might slightly slow us down in the second half, we have plenty of initiatives that are progressing effectively.

The second question is regarding the LTIP. You mentioned that it is influenced by market conditions and beyond your control. However, based on what you presented on slide 40, it seems that the second quarter might have received more than its fair share in terms of LTIP, which could impact the remaining two quarters. Is that accurate? Also, given that the compensation ratio was in the mid-40s, which likely was at the market's low, is there potential for improvement moving forward?

For the second half of the question, the answer is, yes. Our guidance going into the year is low to mid-40s. We said it was more like mid-40s with where the markets were at the end of the first quarter. With where they are now you should expect it to be more low to mid-40s as we guided at the beginning of the year. In terms of the LTI charge in the quarter that purely is the mark-to-market on it. Some of that is hedged and therefore that's part of the investment gain you see below the line. So you've just got to take the rough with the smooth with that in Q1 we had a very low figure and that number came down in Q2 and goes up. So as far as saying it's sort of out of our control. We hedge what we can and the hedge part of that comes through below the line. So I think you should look at the first half on average. And as you say in the appendix on 40, we've shown what the future charges would be given markets where they are at the moment.

And our next question comes from Alex Blostein from Goldman Sachs.

Hi, good morning everybody. So Dick, appreciate the strategy update. And I guess on this journey to simple excellence, what are the key financial and operating targets we should keep in mind? And I guess targets that you all spread up for yourself and your management team as you progress through this process and over what time frame?

Yes. We have internal measurements for the different parts of the story. I've tried to give you a sense of some of the underpinnings in this call. But I don't have more specific stuff to give you. Look the big score of the scoreboard is earnings and flows. And what we've told you is the big score is we need to get to positive organic growth and growing profitability. And those are the main metrics that are targeted in the strategy of simple excellence. And I don't think I can do a better job of highlighting the underpinnings of that than I have done.

I would like to add that we do not consider flow in isolation. Instead, we focus on quality flow, which is essential for increasing our business's profitability. The fee margin indicates that the assets we are acquiring are of high quality, and this is something we aim to achieve over time.

Yes, that makes sense. As a follow-up, when you mention the second pillar, revisiting the cost structure more holistically, could you remind us about your expenditures on areas like OMS portfolio risk systems and data? Are these costs mostly in-house or outsourced? What opportunities do you see for streamlining the technology stack and services?

Yes, let me pick that up. They are pretty chunky investments as Dick said. They are in our guidance so you shouldn't be concerned that there is a bunch of costs coming down the track. And some of those things should have some improvement around the tech stack as you point out in our data and allow us to further simplify the business which as Dick pointed out is part of the strategy. But the main reason we're doing those things is for improved tools for our fund managers around CRM for our salesforces. And so it's around giving access to the best information. We want to have the best technology and we've got some work to do there. So, they're the investments we're making but that is baked into the current costs. And yes, we'd like to think there's some simplification of the back end of it. But it's more around improving the tools for our staff.

We need to strive for excellence, and to achieve that, we require the right tools that are implemented simply to ensure they are cost-effective and reliable. There is significant potential for improvement in our infrastructure systems and data management, and we are committed to investing in these areas. Our focus is on achieving excellence rather than solely reducing costs. However, to support these investments while still providing distributions and share buybacks for our shareholders, we must manage our spending as efficiently as possible. It's about finding the right balance, and we are recommitting to reevaluating our approach. We will update you on our progress regarding both the upgrades to our infrastructure and our cost control efforts in the future.

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

Good morning. Good afternoon. I just wanted to ask two questions. Firstly, if any call in terms of where the rate of flows actually are ceding to start the September quarter? Where they've headed in the month of July?

We don't typically discuss monthly flows, as that information is publicly available. However, as mentioned, the intermediary flows in the third quarter are positive across all three regions: the U.S., EMEA, particularly strong in the U.K., and Australia. Recently, we launched a new fixed income ETF in Australia that we expect will contribute to those intermediary flows. Additionally, we have just filed a preliminary registration for a new CLO ETF in the U.S. These initiatives are part of our ongoing efforts, and we are seeing positive flows across all regions.

My line must have been patchy earlier. And another question a fairly sort of kind of mechanical one. But in terms of the operating margin outlook for FY 2020. On the last call, you mentioned lower third in spread in margin would be more likely but we've seen some things on the cost and revenue side may be headed a little bit better. So, what should we be thinking about in terms of operating margin at this point?

Yes, I think the answer is similar to what I mentioned to Nigel earlier. The guidance we provided at the beginning of the year was mid-30s, and we revised that down when the markets were lower. So, you should expect a mid-30s margin similar to 2019.

Our next question comes from Robert Lee from KBW.

Great. Thanks. Good morning. I appreciate you taking my question. I was hoping you could provide more details about the intermediary channel in the U.S. Do you think that early placements will lead to better success? I'm curious about the various types of channels and products available. I don't believe the sales are limited to SMAs or just model portfolio products. Additionally, could you share insights on the wirehouse versus RIA channel in direct platforms? I'm trying to understand where the momentum lies and the potential opportunities there.

Rob, a bit difficult to hear you. So perhaps we can follow-up with you afterwards. I think it was around the different parts of U.S. intermediary. Our SMA channel is certainly growing well. But let's pick up with you. We'll pick up with you offline post completing the call.

And we will be taking our final question today from James Cordukes from Credit Suisse.

Hi, guys. Thanks for taking my question. Just an inquiry on the balanced fund you've obviously had some changes there interested in knowing what the response of the clients has been and whether there's been any engagement with the rating houses and how comfortable they are with the changes to the team there?

Sure. Yes, we've seen that Marc Pinto has announced that at the end of this coming March after a 26-year career, he'll be stepping down from the fund. The client reaction has been as good as we would hope at this point, but obviously it's really too early to say what effect that will have on a go-forward basis. Marc's successor has been a co-portfolio manager with him for a number of years. Jeremiah Buckley has been an excellent co-portfolio manager with Marc. So if you drew up a sort of an ideal transition, I think this would probably fulfill all those conditions that you might describe. That said a transition is always a moment of higher risk for one of your big very successful strategies. And certainly, Marc has been just absolutely first-class for our business and for his clients in the balance fund for a long, long time and he will be missed as a person, as a leader, as an investor. But what he's done for the firm is give us great succession in terms of a partner carrying on in exactly the same style and given lots of warning and doing all the appropriate things in terms of client meetings and communications to make sure that this goes as smoothly as possible. So fingers crossed, it is a transition and transitions are moments of heightened risk but I don't know how we could have done this transition better.

Thank you. I have a question for Roger regarding the buyback. You've completed about 10% of the $200 million buyback in the last quarter, and it seems you remain committed to it. Should we anticipate an increase in purchases in the future to catch up? Additionally, could you share your plans for the proceeds from the Geneva acquisition?

As you say we did go a little bit slower in Q2 and that was as we said that at the beginning of the quarter obviously, there's a lot of uncertainty and markets were at a low. So we did go slower this quarter. We are also kept out of the market a few days because of the 5% rule in Australia. So the buyback was pretty low. And with market levels where you are then you'd expect us to be stepping that up in Q3. The buyback is a $200 million buyback authorized through the end of Q1 next year. So we've done about $50 million of it. So you'd expect to see us back in the market shortly at an increased level. But again, being very careful and looking at volatility. The Geneva piece is part of our regular cash and capital. So I guess it's part of the $200 million the Board committed to at the end of the first quarter.

And ladies and gentlemen, that was our final question. That does conclude today's conference. We appreciate your participation today.