Janus Henderson Group PLC Q4 FY2020 Earnings Call

Good morning. My name is Andrew, and I will be your conference facilitator today. Thank you for standing by. And welcome to the Janus Henderson Group Fourth Quarter and Full Year 2020 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. 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. Now it is my pleasure to introduce Dick Weil, Chief Executive Officer of Janus Henderson. Mr. Weil, you may begin your conference.

Welcome everyone to the fourth quarter and full year 2020 earnings call for the Janus Henderson Group. I'm Dick Weil, the CEO, and I'm joined by our CFO, Roger Thompson. I hope you and your loved ones are starting 2021 safely and healthily. In today's presentation, I'll summarize our 2020 results, discuss the progress we're making in executing our strategy of Simple Excellence, and provide an update on our relationship with our strategic partner Dai-ichi. After my remarks, Roger will elaborate on our results, and we will then take your questions. Let's start by looking at our 2020 results. Our investment performance has been solid, with 68%, 65%, and 72% of our assets outperforming their benchmarks over one, three, and five years, respectively. Our fixed income teams performed exceptionally, with over 90% of our assets under management beating their benchmarks during the same timeframes. Although some of our equity strategies experienced challenges, particularly in the first half of the year, our teams have shown great resilience and we are proud of their achievements. Despite disappointing outflows, particularly in the first half, our AUM ended up over $400 billion, an increase of 7% from last year and over 35% from the lowest point during the market sell-off in the first quarter, which we are pleased about. While the overall flow results for the year may seem disappointing, they mask a significant trend of improving momentum. After a challenging first half with net outflows of $20 billion, we reduced that to $4 billion in the second half and recorded only $1 billion of net outflows in the fourth quarter. We expect this positive trend to continue into 2021. Our financial results for the full year were strong, with adjusted EPS increasing by 22% over last year and generating over $600 million in cash, allowing us to return $394 million to shareholders in dividends and buybacks. Turning to our strategy of Simple Excellence, I am pleased to report that we have made significant progress across our strategic pillars despite the unprecedented events of the past year. Our approach is built on five foundational elements that support positive client relationships and drive organic growth and profitability. As we look to the future, we believe Simple Excellence will provide a stable foundation and the capacity to explore inorganic opportunities that align with our strategic goals. On the investment side, we've strengthened our teams and recruited top talent, including a new US Head of Fixed Income and a new Director of Research. We also hired a Head of ESG, reinforcing our commitment to integrating ESG considerations across our investment strategies. Additionally, we've invested in upgrading our technology to better support our teams. In distribution, we closed the year with momentum, achieving double-digit growth across our global focus products. We also strengthened our distribution leadership, appointing new heads of consultant relations and product strategy, particularly in ESG solutions. Our commitment to leveraging data throughout the firm has led to significant enhancements in our distribution intelligence and client analytics capabilities. In terms of cost control, while it is essential to be efficient, we prioritize excellence and growth in AUM and profitability. Balancing efficiency with our commitment to Simple Excellence is critical. Lastly, I want to update you on our relationship with our strategic partner Dai-ichi. Dai-ichi has decided to separate its operational partnership with Janus Henderson from its Board and capital positions to focus its capital on its global insurance business. While we are disappointed, we have established a new cooperation agreement that will maintain a strong operational relationship moving forward. As part of this transition, Dai-ichi will begin a secondary offering of common stock to exit its investment in Janus Henderson. We will participate in this offering, purchasing up to $230 million of stock, which we believe will benefit our shareholders. With that, I will turn it over to Roger for a deeper dive into the results.

Thank you, Dick, and thank you to everyone for being here. Let's start with the fourth quarter results on Slide 9. As Dick mentioned, we had solid investment performance and strong assets under management at the end of the year. I will briefly cover flows and earnings per share. We saw net outflows improve to $1.1 billion this quarter, driven by net inflows into intermediary channels and robust gross sales in institutional. Our financial results were excellent, with earnings per share rising to $1.04 from $0.70 last quarter, primarily due to increased average assets, strong seasonal performance fees, and investment gains on our seed capital. Moving to investment performance on Slide 10, it remains robust, with 68%, 65%, and 72% of firm-wide assets surpassing their benchmarks over one, three, and five years as of December 31. The one-year performance improvement since the third quarter was mainly attributed to the U.S. concentrated growth strategy in equities. Fixed income multi-asset performance, predominantly from balanced and alternative strategies, is excellent. We are also encouraged by the significant improvement in INTECH's one-year performance. Overall, relative performance against peers is solid, with 57%, 66%, and 71% of our assets under management in the top two Morningstar quartiles for one, three, and five years. Regarding total company flows, net outflows for the quarter were $1.1 billion, down from $2.9 billion last quarter, indicating a significant positive trend in our quarterly flows. This quarter marks our highest gross sales since the merger, highlighting the momentum in our business. While the overall flow results remain negative and have not reached our expectations, they are the best quarterly figures we've seen in over three years. Analyzing net flows, we saw stability or positive growth across all capabilities except for quantitative equities, which we anticipate will take time to recover despite solid one-year investment performance. Now, let's look at the flows by client site on Slide 12. Intermediary net inflows for the quarter reached $1 billion. Net flows in EMEA, Latin America, and Asia Pacific were all positive across fixed income, multi-asset, and equity strategies, although certain U.S. equity strategies faced short-term underperformance. This intermediary outcome highlights our product diversity and global distribution reach. Institutional net outflows in the fourth quarter totaled $1.2 billion, influenced by strong wins in the U.K. and EMEA, but partially offset by net outflows of $3.4 billion in quantitative equities. Gross sales of $8.8 billion represented the best results since the merger, tapping into a strong institutional pipeline. In the self-directed channel, net outflows amounted to $900 million this quarter. On Slide 13, the breakdown of flows by capability shows that equity net flows for the fourth quarter were nearly flat, a significant improvement from the $5.1 billion of outflows in the previous quarter. This positive change included a $2.1 billion funding from a major insurance client into our U.K. enhanced index strategy, in addition to positive non-U.S. retail flows from European small cap, global life sciences, and global sustainable equity strategies. Fixed income inflows were positive at $1.2 billion, with retail flows across various strategies, including our short-duration ETF, developed world bonds, European investment-grade credits, and global high yields. Multi-asset inflows also totaled $1.2 billion, primarily driven by the balanced strategy. However, quantitative equity outflows decreased to $3.4 billion. We're pleased with INTECH's improving short-term performance, though we expect a longer recovery period for flows. Alternative flows were even. Slide 14 presents our U.S. GAAP statements of income. Turning to Slide 15, our summary financial results indicate strong growth in adjusted revenue, operating income, margin, and earnings per share both quarter-on-quarter and year-on-year. For the full year, despite the drastic market drop due to COVID in Q1, the subsequent market recovery and strong cost control allowed for increases in our adjusted financial metrics, despite a 1% decline in average assets under management compared to 2019. Even with the decrease in average AUM, a higher net management fee margin and better performance fees led to a 5% rise in adjusted total revenue for the year. Our full-year adjusted operating margin improved by 2.2 percentage points over 2019 to 38%, with diluted adjusted EPS for the year at $3.01, compared to $2.47 in 2019. Looking at the quarter-on-quarter comparison, our fourth-quarter adjusted financial results were bolstered by favorable market conditions and exceptional seasonal performance fees. Average assets under management increased by 6% compared to Q3, reflecting positive markets and currency impact. Combined with higher average assets and seasonal performance fees, total adjusted revenues rose by 18% from the previous quarter. Adjusted operating income reached $232 million, a 43% increase from Q3, resulting from higher revenues and strict cost control. The fourth-quarter adjusted operating margin stood at 43.8%, up from 36% in the prior quarter, with adjusted diluted EPS at $1.04 for the quarter versus $0.70 in Q3. On Slide 16, we outline the revenue drivers for the quarter. Higher average assets and particularly high seasonal performance fees were key contributors to the change in adjusted revenue. The net management fee margin for Q4 was 45.9 basis points, a slight increase from Q3 and up from 44.9 basis points a year ago. This marks the fifth consecutive quarter of rising net management fee margins, showcasing our resilience amidst industry fee margin compression. We provided the 2020 net management fee margin by capability in the appendix for your reference. Performance fees for the quarter reached $59.3 million, significantly up from $7 million in the prior quarter, driven mainly by annual performance fees on segregated accounts in our global life sciences and global tech strategies, supplemented by several smaller contributions across various strategies. Mutual fund performance fees improved to negative $2 million in Q4 from negative $5 million in Q3. Because performance fees are crucial, Slide 17 contains more details on their year-over-year changes. Performance fees totaled $98 million in 2020 compared to $17.6 million in 2019. Notably, 2019 was on the lower end of expectations, while 2020 was a strong year for performance fees. The largest contributing factors to this increase were performance fees earned from global life sciences, global technology, Core Plus Fixed Income, and INTECH integrated mandates, along with contributions from several outperforming strategies within the SICAV fund range, highlighting our diverse success. On Slide 18, we cover operating expenses. Adjusted operating expenses in Q4 were $297 million, a 3% increase from the prior quarter. Adjusted employee compensation, including fixed and variable costs, rose by 5% due to higher variable costs associated with pre-bonus profits, partially offset by adjustments in our cash and non-cash payout mix. Adjusted long-term incentives also increased 5% from Q3, primarily due to mark-to-market adjustments. Further details on future grant amortization and 2021 estimates can be found in the appendix. The adjusted comp-to-revenue ratio for Q4 stood at 39.2%, reflecting operational leverage. For the entire year, the total comp-to-revenue ratio was 42.9%. Adjusted non-comp operating expenses remained flat compared to the previous quarter, with full-year 2020 non-comp expenses down 1% from 2019, aligning with our guidance. Our recurring effective tax rate for Q4 was 22.1%, while the effective tax rate for the full year was 22.9%. Slide 19 provides insight into our expense management discipline and our pathway for 2021. We emphasize maintaining strong financial discipline while reinvesting in the business to support our Simple Excellence strategy and future growth. Our disciplined approach led to $125 million in cost reductions post-merger, executed ahead of schedule, and allowed us to maintain strict expense control over the last three years. Nevertheless, in light of COVID and the time elapsed since the merger, we believe 2020 was the right moment to reassess our cost structure. We engaged an external consultant and thoroughly examined our expenses, identifying an additional $40 million in cost-saving opportunities to be realized over the next two years, which will offset our business investments. Examples of these investments include enhancing client-facing technology and reporting, implementing a new order management system, and streamlining our data architecture, all critical for operational efficiency and continuous growth. Looking ahead to 2021, our cost control measures, combined with higher assets under management, should yield increased operating leverage. At current market levels, we expect the adjusted compensation ratio to trend lower to the low 40s, within the range of 40% to 42%. This decrease arises from higher assets under management and our ability to keep fixed compensation costs relatively stable year-over-year, even after accounting for annual pay adjustments and currency impacts entering 2021. For non-compensation expenses, we anticipate mid-single-digit growth, primarily influenced by currency rates, specifically the higher sterling to U.S. dollar exchange as we enter 2021 compared to the 2020 average. Additionally, we expect marketing expenses to increase as we incorporate lessons learned about client interactions from 2020, but total marketing spend will remain below 2019 levels. The firm's statutory tax rate is projected to stay in the 23% to 25% range, akin to 2020, but may fluctuate based on potential changes to tax laws. Overall tax rates will be affected by various factors that may vary from quarter to quarter. Finally, Slide 20 offers a look at our balance sheet. As of December 31, cash and cash equivalents amounted to $1.1 billion, an increase of $182 million, primarily due to strong operating cash flow in the fourth quarter. Our robust balance sheet and cash generation capabilities have allowed us to execute $131 million in accretive buybacks in 2020, with plans to repurchase $230 million of our stock in the registered secondary offering announced earlier today. Upon successful completion of this offering, our participation will effectively accelerate our buyback efforts for the current year. Our capital philosophy remains constant, and we will provide updates on future earnings calls regarding any new buyback plans based on our cash position and cash flow generation. Turning back to the fourth quarter, we distributed approximately $65 million in dividends to shareholders and have announced a $0.36 per share dividend to be paid on March 3 to shareholders on record as of February 17. Now, I will hand it back to Dick for additional comments before we start the Q&A session.

Thank you, Roger. Before handing it over to the operator for questions, let me just briefly wrap up. Most importantly, our investment teams performed over this past year with discipline and excellence across really challenging market conditions. We've improved results in many important areas that have been impacted by difficult and volatile markets. And even where we've seen difficult results, the teams are doing a really good job sticking with their discipline and their strategies. And over the long term, we're confident that those very talented people will continue to deliver on their client promises. We've also further strengthened our global distribution and product platform. We've made really good senior new hires and we've refreshed our product focus. We've modernized our client experience and we're investing in the underpinning technology and data. We're seeing important improvements in flows in the second half of the year and into the fourth quarter that demonstrates the resilience and the diversification of our platform and capabilities. We've continued to maintain our focus on cost discipline, while also making the appropriate investments in significant technology and data, and the operating platform enhancements, needed to strengthen our future and deliver Simple Excellence and growth. Dai-ichi will continue to be a very valued long-term strategic partner for us and we look forward to continuing our tremendous relationship. Looking ahead, our focus is on delivering excellence and delivering growth, using the momentum we have entering this new year to continue our progress and to deliver a strong profitable resilient business through our Simple Excellence strategy. We're confident we're on the right path. Simple Excellence is working. We're going to deliver for our clients, for our owners and our employees. And we're also going to continue to make positive contributions to all the communities in which we operate. As we turn to Q&A, I'd like to remind you that, as we are in the market with a live secondary offering, we're subject to certain securities laws that limit our ability to discuss the Dai-ichi transaction. This also limits our dialogue with you outside of the earnings call during this period. So please be sure to get your questions included in this call now and we kindly ask that they remain focused solely on our earnings today. With that, operator, let me turn it back to you for questions.

We will now begin the question-and-answer session. The first question comes from Ken Worthington of JPMorgan. Please go ahead.

Hi, good morning. Thank you for taking my questions. Dick I'll do my best to honor your comments on the Q&A, but I would like to flesh out Dai-ichi a bit more. So, hopefully, I can do this in a way that allows you to answer. How much did Dai-ichi contribute to Janus' sales in say 2020? And as we think about the Dai-ichi contribution I know some of this came from sort of those retail products which would seem to be ongoing. So, what portion of the sales are coming there versus the direct insurance company?

Thanks Ken. Roger may be able to find the precise numbers for you. The biggest sales we've made with the help of Dai-ichi's very strong partnership more recently we're down in Australia where their subsidiary TAL, an insurance company in Australia, partnered with our fixed income business. And we manage $3 billion or $4 billion of assets down there for TAL which is a Dai-ichi affiliate. That's the biggest change most recently. And again that was fixed income assets. We also have some more retail products sold through their insurance company in Tokyo, that's much smaller numbers but sort of a steady drumbeat coming in through that way. And so they've helped us in both those ways and probably other ways that aren't right on the top of my head, but they've been a terrific partner. But if you look across the size of our gross sales with the exception of a lumpy TAL commitment in the quarter, it's not a regular feature that it would be big enough to stand out from the rest of the business. As we've said, we started in 2012 with about $2 billion of their assets that we managed and it's grown to over I think it's about $10.4 billion now. So, it's growing very nicely. They've also obviously been a supportive partner in lots of other ways, but that's the basic frame. Roger can you fill in?

No, I think you summarized it perfectly. It has increased by $8 billion over the past eight years, and TAL will be the largest contributor in the last couple of years.

Okay, great. Your equity sales improved significantly. Can you help us understand the number of funds that are doing better? As we consider this quarter compared to quarters last year, given the weak first half of this year, to what extent are the improvements seen this quarter due to one-off events versus factors that you believe are sustainable? Thank you.

Let me start with that and then Dick can add on. There was one significant institutional mandate in the UK, which resulted in $2.1 billion in flows, along with a strong performance from many funds across Europe. Our European Small Cap is performing well, and we have a variety of offerings including life sciences and a biotech hedge fund. However, on the flip side, we've experienced some outflows from our US Mid and Smid cap strategies, which we previously mentioned regarding their short-term performance challenges this year despite having a solid long-term track record. So, while we're not worried about that, it's worth noting as another aspect of the situation.

Thanks very much.

The next question comes from Ed Henning of CLSA. Please go ahead.

Thank you for taking my questions and I pretty much follow-on from before. Firstly, can I just start with Dai-ichi? You mentioned you're managing about $10 billion. The new agreement has a minimum of $2 billion for a period of three years. In the old agreement was there any minimum? And why the $2 billion, obviously it's well below the $10 billion. That's the first question.

Yeah. The $2 billion was the same number as in the old agreement. And it's never really bounded our relationship in the past and that number got carried forward into the new agreement. But we have the opportunity to continue to grow the relationship with them if we do a really good job, but it's not guaranteed. But the operating relationship remains strong.

Okay, that's good. The second question is also regarding equities. Can you provide an overview of the gross sales aspect? Roger, you mentioned that several funds contributed to the performance. Could you elaborate on the capacities of those funds that are performing well? Additionally, you noted that the US and SMID cap strategies contributed to the outflows. Can you clarify how much of the outflows were related to those two strategies?

We have a very diverse range of funds, and some are still soft closed, such as Triton. However, we have substantial capacity in our large-cap offerings, including the Forty Fund and our research capabilities in both the US and global markets. Our European strategies also have strong capacity. Life Sciences, in particular, has seen significant growth, which means it may tighten at some point, but we still have good capacity across equities to keep growing. In the last quarter, the outflows in the SMID and mid-cap categories amounted to approximately $2 billion, which is evident from the fund flow data.

Okay. Thank you.

The next question comes from Dan Fannon of Jefferies. Please go ahead.

Thanks. Good morning. So just thinking about the Simple Excellence and some of the valuation you guys have been putting forth across your business, but you did mention kind of inorganic growth potential. So just thinking about in the backdrop of a consolidating industry how you think about the plans you've put forward to your outlook and the scale across the various kinds of businesses you're in.

Sure. So I think we've been very clear and consistent. Scale for us isn't really an answer. The answer is excellence. So if you're a below-average asset manager the proper price for you in a world where passive is available at basically no cost is low to zero, right? So the first goal isn't scale. The first goal is excellence. And then if you do that job that will be confirmed through AUM growth and profit growth. And so that's our plan. And so, when you think about Simple Excellence, it's about delivering on the Janus Henderson merger, it's about delivering for our clients and it's about delivering the AUM and profit growth that will be the confirmation of the success of driving that strategy. But, if you think about it in a slightly broader time scale, that builds a company with an extremely strong foundation. And that company, with that foundation, is potentially a better participant in organic ideas, because you're building on a very strong foundation. So right after the Janus Henderson merger, we said we really want to make sure we build the right foundation. We're not looking to add more complexity until we get the foundation right. And Simple Excellence is getting that foundation right. And then as you do that, I think you become a more capable participant in potentially adding complexity. But when we think about those ideas, we're humble about it because, we think Janus Henderson is a really good merger and it's taken years and a lot of hard work to deliver on that potential. Nobody should think these things can be done without that sort of commitment, even when they are the right partners. And so, we have a real humility and caution about thinking about inorganic ideas. But if you look across our business, we've had success adding our ETF business through an inorganic transaction. We've added fixed income assets. We've added other pieces of alternatives and things in London. If you look at the history of both Janus and Henderson and now Janus Henderson, we've had success doing transactions inorganically of different sizes and we certainly haven't turned our back on that. But establishing Simple Excellence builds the right foundation, which when that's well done that gives you more options to think about more things.

Got it. And then Roger, just with regards to the cost efficiencies that you announced in, I think the concept of keeping things flat or balancing spend versus the efficiencies coming out. So over what time period should – are we talking about the $40 million coming out? And then again, could you be a bit more specific around where those efficiencies might be coming from?

Sure. That's over two years. And we looked across the whole of the business. The majority of it is non-comp. Part of that is things that, we've learned during the year. So it's an expectation that our T&E spend continues to be lower. I talked about marketing consolidation of our TPA is another example there of where we've been improving our structure there, and there's some cost efficiency of it. So across the organization the bulk is in the noncomp lines and delivery over two years.

Great. Thank you.

The next question comes from Nigel Pittaway of Citi. Please go ahead.

Thank you very much. Just first of all to follow-up on that cost saving, I mean, you're saying most of it is on the noncomp lines. But if you do look at LTIP, you have revenue up this year LTIP down in '20. It looks like if we take your sort of guidance in what's going to happen in 2021 literally, yes, the same thing could happen again. So, can you just explain exactly, why we're seeing that trend in LTIP over this period?

So the – that's because comp has been lower in the last couple of years, so that's following through, effectively you've got a three-year amortization of that comp coming down over the last couple of years, with comp levels hopefully improving in the future. The LTIP will end up coming as well. So I guess that's a separate thing, but it's relatively formulaic of the variable comp, we pay over the three years previously. And as we've laid out in the appendix, you've got the current expectation of what LTIP is of those various grants over the vesting period going forward.

Yeah. Okay.

So put another way Nigel, the cost savings that Roger is talking about are not a reframing of the compensation or the LTIP that we've been doing. Those programs are continuing consistently within the past – with the past. That's not part of how we are saving the money.

Yeah. Okay. Fair enough. And then changing tack, but perhaps going back to some of the earlier questions. I mean, obviously as part of your sort of strategy you've got this return to consistent net inflow as the target. I mean, if you were to sort of roll out INTECH how close do you think you are to achieving that goal? I mean, do we – I mean, it looks like we still have to expect some volatility moving forward. But how far, do you think you are away from consistent net inflow?

I think when you're pretty close to the line, it's really hard. The world assigns a huge importance to being a little above the zero line or a little below the zero line. And when you're pretty close to that line it's pretty hard to predict. Now, we have lots of parts of our company that are doing really well and gathering momentum and we see opportunities. There are other parts of our company that are challenging and it's always the net combination of those two things that gives you the net result. And it's really hard to predict. We're very close maybe on the upside, maybe at zero, maybe a little bit on the downside ex-INTECH. We put up a quarter, which was positive ex-INTECH. Hopefully, we'll do that consistently. But I wouldn't want to guarantee it. It's not something, we know for sure, but it's what we aspire to. We've said previously and we believe the path to organic growth for us is first organic growth ex-INTECH and then INTECH is going to take a little more time to continue its healing process, and then we'll get to organic growth with no asterisks about any part of it. And that's the plan. We think we're on the plan. We think we're making progress. But quarterly – monthly and quarterly outcomes are – there's a lot of noise in that data, and it's not linear or perfectly predictable.

Okay. Thank you.

The next question comes from Patrick Davitt of Autonomous Research. Please go ahead.

Hey. Good morning, guys. So with some pretty big lumpiness in INTECH, again you mentioned, I think last quarter there were five mandates that made up 60% of the assets. Is that still the case? Or did one of those come out to drive the outsized outflow number as we kind of think about what could come out this year?

No, that's still the case, Patrick.

Okay. And then I guess, more broadly through that lens any known big wins or losses in the pipeline coming through this quarter?

Nothing to tell you about it this quarter. Again, we don't normally guide in intra-quarter, but there's nothing major that we need to tell you about today.

On either side.

On the expense guide, how should we view that in relation to the markets? How much would the markets need to move up or down for that guide to change significantly, in your opinion?

Yes, it is very dependent on the market. The biggest factor influencing our revenue in the short term is the current market levels. The guidance I've provided today is based on market conditions at the start of this year. If markets decline from their current state, achieving that comparison ratio will be challenging. However, we do have significant advantages this year, with an average AUM that is 14% higher than last year's average. This gives us some flexibility before reaching a lower figure than this year. At this point, that is why I'm estimating a comparison ratio in the low 40s, specifically between 40% and 42% based on current market conditions.

And the G&A margin could be more sticky?

Yes, correct.

Great. Got it. Thank you.

Let me just jump in and go back just one more comment on INTECH. Make sure I get these numbers right, Roger. But just so you all can size it. INTECH is something like 10% of our AUM, but it's something a little less than 5% of our revenues. So that's just to give you a sense of the scale that we're talking about when we talk about that part of our business.

Okay. The next question comes from Andrei Stadnik of Morgan Stanley. Please go ahead.

Good morning. Good afternoon. I wanted to ask two questions. Firstly, just on the operating margin for the fourth quarter. It was particularly strong and it doesn't seem to be just performance fees because despite on our strong performance fees and good base the staff costs were almost flat versus several prior quarters. So was there anything else happening in this quarter that supported the operating margin?

No, not really. It is a strong management fee. Our assets have increased significantly. As I mentioned, our management fee margin is up slightly in Q3 and has seen five consecutive increases. This is partly due to the strengths in equity markets, which have raised our average fee rates. Additionally, it's about the products we're selling. While we discuss assets during this call, the important measures are revenue and profit. We are offering some interesting products at prices that clients are very happy with. Our fee mix is showing slight improvement, which is reflected in the management and performance fees we've mentioned. On the cost side, we're flat quarter-on-quarter, and I don't see anything noteworthy there. Below the line, we have some strong investment gains, which should be netted against the non-controlling interest to understand what's actually ours. Overall, there is a strong net gain, partly due to significant gains in our SICAV portfolio, which is less perfectly hedged and has yielded substantial returns.

Thank you for that. And my second question, I just wanted to ask a more strategic question about ESG. Are you happy with your ESG progress at the moment? And with the new ESG head coming on what are some of the new targets that you're setting for them?

We are very enthusiastic about having a new Head of ESG for our investments, and we've also appointed someone for product and distribution. These two will collaborate to enhance our ESG efforts. However, we are not fully satisfied with our current progress. We have a lot of work ahead of us and we want to accelerate our initiatives. We feel there is more data to consolidate and convey what we've been doing for some time. The initial step is to clearly highlight our accomplishments and improve our communication. Next, we aim to strengthen our internal processes and ensure that we are accountable and transparent to our clients regarding their social values and interests and how these influence our investments. Moving forward, we will provide more options, greater transparency, and improved data. There is significant work to accomplish to reach these goals, and we believe we have some excellent new team members to support us. Overall, we feel a strong sense of urgency and want to speed up our efforts.

I would like to provide additional insight into some of the points made by Dick. We have a well-established global sustainable equity fund with $2.7 billion in assets under management, originally launched in the U.K. and Europe. We introduced this fund in the U.S. in 2020 and anticipate its growth. We plan to launch this fund in Australia in 2021 as well, and we expect it to continue to expand. It is a remarkable product managed by the same manager for over a decade and has been around for approximately 15 years. However, this is just the beginning of our ESG involvement, which spans $402 billion in our INTECH and ESG products. Our fixed income business is performing strongly, led by Jim Cielinski, who is very passionate about ESG initiatives. We have been engaged in ESG for a long time, being a founding member of UN PRI. As a corporation, we have been carbon neutral since 2007 and have a long-standing diversity and inclusion strategy, along with a foundation that has been active for several years. We support FASB and will explore more initiatives like TCFD. Paul LaCoursiere's role on the investment side is crucial for articulating and developing our strategies. It is essential to recognize that this is an evolution of our existing practices rather than a new beginning.

Thank you.

The next question comes from Mike Carrier of Bank of America. Please go ahead.

This is actually Sean Colman on for Mike. Just a couple of quick ones on Dai-ichi. So have they provided you guys with seed capital for new investments in the past? And if so, is that expected to continue in the future? And then also do they receive a preferred fee rate on the assets that you guys manage for them?

Yes. So we think that – sorry, Dick, go forth with what you're saying.

No you can go ahead Roger. Apologies.

Yes, they do provide some seed capital for products, and we have established a good partnership over the years in this regard. We anticipate this will continue, but we need to see how it develops over time. There may be a slight reduction in the future, but we’re uncertain about that. However, this doesn’t significantly impact our business. If there is a decrease, our strong balance sheet will support us if that becomes necessary. So, I’m not worried at all. Regarding preferred fees, they paid an appropriate amount for the size and type of product they invested in.

Okay. Thank you.

The next question from Simon Fitzgerald of Evans & Partners. Please go ahead.

Thank you for my question. Two really quick ones. On the performance fees, Roger, you gave a breakdown in terms of the delta. And I think you mentioned four funds. I was interested to know what the largest one out of that delta was of the $42 million. I'm talking about the change between 2019 and 2020.

So, two of the funds. Yes. Yeah. So as I said, but in global life sciences and technology have been two very successful areas for us, but they dominated the performance fees in Q4. But there were also more than $5 million in terms of performance fees from our European small-cap and our U.K. absolute return. So there is depth and some sizable numbers across the board, but dominated by life sciences and global technology.

Okay. Second question then, in related to the project spend or at least the investment spend that will offset the $40 million of cost savings. Can you elaborate a little bit in terms of what some of those projects are trying to achieve? Or is it related to people costs?

Dick, would you like to discuss the investments we are making? Actually, let me start. From a financial perspective, it's important to note that those costs are factored into the guidance I've provided. Our main focus is on excelling and growing the business profitably while maintaining efficiency. The cost savings we are discussing enable us to keep investing in the business. As we invest and hopefully grow, that will continue to provide the leverage we've talked about today. I want to ensure that everyone understands that our investment in the business is included in the guidance we are providing. Dick, would you like to elaborate on the types of initiatives we are undertaking?

We've previously discussed how we integrated Janus and Henderson, striving to create a unified global infrastructure. Unfortunately, we couldn't immediately advance to the next phase of significantly enhancing that infrastructure to achieve simplicity and excellence. Thus, we are currently focused on this upgrade phase, aiming for a standard of Simple Excellence. This involves implementing a new order management system, which is crucial for our portfolio management. Additionally, we're incorporating risk management tools, establishing a new data governance framework, and overhauling our technology and cloud solutions for distribution. These extensive behind-the-scenes projects are costly, amounting to tens of millions, and will span several years. We are making considerable progress in these areas, but it is financially demanding. Therefore, the cost savings we've achieved are vital for sustaining our investments in the business while still delivering solid margins and returns to our stakeholders.

The next question comes from Craig Siegenthaler of Crédit Suisse. Please go ahead.

Thank you. This is Kareem Afifi filling in for Craig this morning. My first question is on scale. You have nearly $402 billion in AUM. Do you believe you have enough scale today to compete with other large asset managers? And would you see a large global distribution effort as helpful to your organic growth?

I believe that excellence is more important than scale. Scale is beneficial only when it is paired with excellence. While having both is ideal, it is uncommon. Regarding whether we have sufficient scale and excellence to compete, our results demonstrate that we do. We are effectively servicing our top clients and have a robust global distribution team. The evidence clearly indicates that we possess the scale necessary to compete, although it remains a continual challenge. We will keep investing in excellence and global distribution to address ongoing business pressures. We are committed to improving our efficiency to consistently affirm our competitive position in the future. As it stands, I am confident that we are on the right track and making progress.

Got it. Thank you. And then for my follow-up, I believe it's a follow-up for one of the other question that was asked earlier. It's on capacity. So you have some very large funds that run with high active share including concentrated growth and mid-cap growth. Besides I believe like the Triton Fund, could you remind us what other funds are closed? And if we could see additional fund closed if the AUM keeps growing? Thank you.

I believe the only two funds that are currently closed are Triton and Venture. As I mentioned earlier, we still have plenty of capacity in the majority of our funds. It's a positive situation to consider soft closing funds, but we currently maintain sufficient capacity across the firm.

All right. Thank you for taking my questions.

The next question comes from John Dunn of Evercore. Please go ahead.

Thank you. You guys talked about almost $9 billion of sales in the institutional channel. Can you give us, kind of, a flavor of what strategies are driving that? And maybe could you characterize like where the institutional pipeline stands at this point?

Yes. As I mentioned, the largest sale in Q4 was a significant deal with an insurance client in the UK, which was a $2.1 billion enhanced index mandate. That's the most notable transaction. There are several other deals as well, with the largest being around $1 billion. While we don't disclose the exact details of our pipeline, we've previously discussed its growth. There has been some frustration about the delays in seeing that growth, so we are pleased that the pipeline is beginning to show results in Q4. We have numerous opportunities ahead to continue expanding that pipeline moving forward.

Got you. And then you guys got two mutual flows in all this quarter. What's that look for that business? And what kind of products could maybe push it into positive territory in 2021?

There have likely been some outflows before we see inflows. We have a property fund in the UK that has been gated for the last 11 months due to market dislocations caused by COVID last March. We recently announced that the fund will reopen after raising liquidity over the past year in a controlled and satisfying manner. The fund is performing well, but we have had clients locked up for 11 months. Therefore, we anticipate some outflows when the fund reopens on February 24. This will be reflected in our alternatives number. The largest strategy in this area is the UK absolute return fund, which performed well in 2020. It experienced outflows for the first time in a long while at the beginning of last year, but it's encouraging to see small inflows returning in Q4. We hope that trend will continue moving forward.

Great. Than you very much.

And the last question today will come from Liz Miliatis of Jarden. Please go ahead.

Hi. Can you hear me?

Yeah, we can hear you.

I'm sorry about that. My first question is regarding the cost efficiencies and the investments you'll be making as a result of those efficiencies. Are there any differences in the timing of the inflows and outflows? Are the cost savings expected to be realized upfront while the spending occurs later? Or should we anticipate that it will be distributed evenly over the two years?

They're pretty spread across the two years.

Okay. Great. And then, a follow-on question, on cost as well. You made a comment earlier, that some of the savings will be T&E. Obviously COVID impacts that quite significantly. Beyond the two years, should we expect some of that T&E to sort of come back? Or have you sort of adjusted your numbers, I suppose and your efficiencies there for a new way of doing business, in a post-COVID world?

Yes, it's the latter. We are assuming that our spending will be higher than last year, but not as high as it was before, based on what we've learned this past year. We're continually learning as we progress. We anticipate that our travel and entertainment budget will be lower in the future compared to 2019. However, we are not indicating that it will stay as low as it was in 2020; it will increase somewhat from that level.

This concludes our question-and-answer session. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.