Janus Henderson Group PLC Q4 FY2021 Earnings Call

Good morning. My name is Alex, 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 2021 Results Briefing. 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. 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 2021 earnings call for the Janus Henderson Group. I'm Dick Weil, and as usual, I'm joined by our CFO, Roger Thompson. Before we get into results, I want to take a moment to welcome Nelson Peltz and Ed Garden from our largest shareholder, Trian Partners, to our Board of Directors. The company looks forward to benefiting from their valuable insights and fresh perspectives. In today's presentation, I'll give a brief summary of our 2021 results. I'll then touch on progress we've made towards delivery of our strategy of simple excellence. I also want to provide you with an update on INTECH and the transaction that we've announced today. As usual, I'll then hand it over to Roger, who will take you through the results with more precision. And then following our prepared remarks, we'll take your questions. Turning to Slide 3. Our full year results showed significant improvement over the prior year. Our financial results for the full year were very strong. Our adjusted diluted EPS increased 42% over last year, which was a record for Janus Henderson. Also a record AUM of $432 billion and our full year adjusted operating margin of 43.5%. Our increased profitability led us to generate almost $900 million in cash flow from operations in the last 12 months. This significant cash flow enabled us to reinvest both in the business as well as to continue to return capital to shareholders. Over the year, we returned approximately $630 million to shareholders through a 4% increase in dividends per share and by repurchasing over 6% of the total shares outstanding. We also invested an additional $175 million in seed products, bringing our seed book to over $500 million. Investment performance for us remains solid in a volatile year. We certainly have some challenges that we're working on, but 54%, 58%, 78% and 86% of our assets beat their respective benchmarks over the 1-, 3-, 5- and 10-year time periods. With the benefit of markets, AUM ended up at $432 billion, as I mentioned, despite challenging headline flow for the year. That said, we had good momentum in our flows compared to the prior year. The improvement is even more marked if we exclude the impact of flows from INTECH, given our near-term aim of positive net flows, excluding Quanta equities. Excluding INTECH, net outflows were $4.3 billion in 2021 compared to $15 billion in 2020. We're not where we want to be, but it is a significant improvement year-on-year. Flows into our fixed income and multi-asset capabilities were positive, which was offset by net outflows in equities, and our intermediary channel was positive for the year, driven by strong client demand in Asia Pacific, EMEA and Latin America. Turning to Slide 4. Let me update you on the management buyout of INTECH we announced this morning. As you know, INTECH has experienced challenges in flows and investment performance for a number of years. We made the strategic decision to sell that business to its management and employees in the management buyout. We're pleased to have reached an agreement that benefits both firms. It provides Janus Henderson with increased operating efficiency and focus on our core business of fundamental active investment. And it fulfills INTECH's desire to operate independently, delivering quantitative investment solutions and gives them the best opportunity to grow their success in the future. So we've resolved the challenge from INTECH, and we're optimistic about growing our strengthened and simplified platform. Turning to the strategy of simple excellence. I want to talk you through some of the accomplishments of the year in each of its 5 pillars. We continue to produce dependable investment outcomes. Investment performance remains solid. There are pockets of mixed performance, and we continue to invest in people and technology to strengthen our risk-adjusted returns for clients. We also enhanced our leadership and distribution and client experience. We made a number of critical senior appointments globally in sales and consultant relations and client experience that should serve to deepen our relationship with our clients going forward. Another very important appointment for our firm was the addition of JR Lowery, who joined in the newly created role of Global Chief Operating Officer in October. He's already made significant contributions in strengthening our infrastructure and helping us run our business, and he's added further strength to our very talented executive committee. Operational efficiency continues to be a key focus for our business. We continue to make substantial investments in technology and data architecture in our CRM and in our order management systems. These are transformational projects, which are expected to significantly improve the way in which we work. We've also continued to make enhancements to simplify and strengthen our platform in order to deliver future growth. For example, earlier this year, we made changes to our former Perkins team and brought them under the Janus Henderson brand umbrella. And today, we announced the strategic decision to sell INTECH. Our risk and control environment is not something I'm going to spend much time discussing, but the work we've been doing is critical in building long-term growth foundations and enabling us to actively pursue expansion opportunities. This year, some of our work has been evidenced by lower regulatory capital requirements. This has assisted us in our efforts to return more capital to shareholders. During the year, we started to make real progress in developing new growth initiatives. We had our most active year in launching new products. These new products were spread across our focused areas of growth, including active ETFs, ESG, fixed income, and alternatives. We successfully launched 24 new products globally. These include a suite of 5 sustainable ETFs in the U.S. and the U.S. real estate ETF. In Australia, we launched our successful global sustainable equity strategy, including as an ETF. In Europe, we launched 2 Article 9 funds under the EU sustainable finance disclosure regime, including a sustainable technology fund that we also extended to a U.K. vehicle. We continue to focus on the rollout of Article 8 and Article 9 funds. By the end of the month, we expect approximately 55% of AUM in our CCAP range to be designated Article 8 or Article 9. Globally, we extended the reach of our growing multi-strategy hedge fund. This product has gained momentum since we launched it in both CCAP and UCITS funds in June of 2020. It has exceeded $1 billion in net inflows in 2021, and we look forward to a bright future. We expect that growth will continue with the fine work of that team. In addition to our product launches, we had some early successes in growing relationships with model portfolio providers in the U.S. Again, we look forward to continuing to grow that success. We also continued to invest substantially in growing our ESG teams in both investments and products. We more than tripled the size of our central ESG team within investments to better support our portfolio managers and the delivery of sustainability across their investments. Finally, we made big strides in ESG data architecture, which is a key foundation in building a credible and strong ESG platform. Last year was a year of real progress, strengthening our operating platform and gaining momentum in flows. We've put the right building blocks in place to start capturing growth opportunities organically, and I'm very optimistic Janus Henderson is well placed to deliver organic growth in the future. Let me now turn it over to Roger, who can take you through the results with more precision.

Thank you, Dick, and thank you, everyone, for joining us. Starting on Slide 6 with the fourth quarter results. As Dick has already discussed our solid investment performance on our AUM at the end of the year, I'll touch briefly on flows and EPS. Net outflows were $5.2 billion in the quarter, primarily as a result of $4.2 billion of outflows at INTECH. The remaining outflows were driven by equities, which were partially offset by inflows into fixed income and multi-asset capabilities. The financial results continue to be strong, with EPS of $1.05 compared to $1.16 a quarter ago and $1.04 in the same period a year ago. Before moving on, I wanted to make a few comments on how we will be discussing investment performance and flows in light of today's announcement regarding the sale of INTECH. We showed total investment performance and flows for the quarter, including INTECH. However, we will also show and discuss the investment performance and flow results excluding INTECH, as this represents how our business will look going forward after the transaction closes. Moving to Slide 7 and investment performance. Investment performance remains solid, with the majority of assets beating their respective benchmarks over all periods as of the 31st of December. Performance of fixed income, multi-asset, and alternatives is excellent and very competitive. Equity is more mixed, but with real strength in some areas and significant improvement in strategies such as U.S. Mid-Cap growth. We're pleased that relative performance compared to peers improved again this quarter, and we now have over 60% of AUM represented in the top 2 Morningstar quartiles over all periods. Slide 8 shows total company flows, including INTECH. Although I won't speak about the flow results, we've provided the fourth quarter flow results. Turning to Slide 9 to focus on flows excluding INTECH, which reflects how our business will look going forward. For the quarter, net outflows excluding INTECH were $1 billion compared to $800 million last quarter. The flow result was negative and not yet where we expected to be, continues a much improved trend compared to the prior year. The net organic growth rate for the fourth quarter and for the full year of 2021 was negative 1% compared to the negative 5% and 6% in 2020 and 2019, respectively. As I will show you shortly, our average fee rates remain strong as clients have been buying higher-fee products than they've been redeeming. Slide 10 shows the breakdown of flows in the quarter by client site. Net outflows for the intermediary channels were $100 million. The quarterly result was impacted by the significant slowdown in retail flows in December that was experienced across the industry. By region, intermediary flows are positive in Asia Pacific and Latin America, which were offset by outflows in the U.S. and EMEA. In the U.S., which is our largest pool of assets in the intermediary channel, the outflows were dominated by our U.S. SMID and mid-cap growth strategies due to 2020 performance challenges in those strategies. Pleasingly, investment performance in those strategies has improved dramatically, and we're optimistic that the pace of outflows will slow in 2022. In the APAC region, the fourth quarter marked the seventh consecutive quarter of positive intermediary flows. For 2021, the organic growth rate for the Asia Pacific intermediary business was 19%. To continue and accelerate that growth, we're delighted that Andrew Henry has recently joined Janus Henderson as our Head of Distribution in Asia. Moving to institutional, which had $100 million of outflows in the fourth quarter, excluding INTECH. In 2021, we've taken further steps in globalizing the institutional team and have infused the business with new leadership. Our diverse pipeline resulted in the top 10 mandates in 2021 occurring in 10 different strategies, and we remain confident this strong and diverse mix will continue for 2022. Finally, net outflows for the self-directed channel, which includes direct and supermarket investors were similar to prior quarters at $800 million. Slide 11 shows the breakdown of flows in the quarter by capability. Equity net outflows in the fourth quarter were $3.2 billion. The quarterly outflows were driven primarily by U.S. SMID and mid-cap growth strategies in U.S. retail. As I've mentioned, investment performance in these strategies has improved significantly, which is encouraging for the flow trends in the future for these strategies. Areas of flow strength included global sustainable equity, global real estate, U.S. Small Cap Enhanced index and U.K. Enhanced index. Flows into fixed income were $100 million in the quarter. Fixed income continues to see positive flows across a wide range of strategies, including our AAA CLO ETF, and also, we're pleased to have launched our BBB CLO ETF this quarter. Total net inflows into multi-assets were $2.1 billion, driven primarily by inflows into the strategy. The quarter has also benefited from the sub-advised mandate wins in the insurance channel for the adaptive portable output strategy. While performance remains strong, and we continue to see strong flows into balance from all geographies, I do want to provide an update on an outflow in the first quarter of 2022. Structural changes within one client will result in a $2.2 billion redemption from our $52 billion balance strategy. Finally, alternative flows were breakeven for the quarter. Slide 12 is our standard presentation of the U.S. GAAP statement of income. Slide 13, we look at the summary of financial results. First, for the full year's results. A 20% increase in average AUM enabled improvements across all adjusted financial metrics compared to 2020. The higher average AUM, coupled with a higher net management fee margin led to a 21% increase in adjusted total revenue for the year. Full year adjusted operating margin improved 5.5 percentage points over 2020 to 43.5%, as Dick just mentioned, this is a record for the firm. Adjusted diluted EPS for the year was $4.28, up 42% on 2020. Now looking at the quarter-to-quarter comparison. Management fees are very similar to the prior quarters, with a 1% quarterly increase in total revenues due to seasonal performance fees. Adjusted operating income of $240 million was down 5% compared to the third quarter, primarily due to the planned reinvestment in the business during the quarter as we guided in the third quarter call. Now that INTECH contributed roughly $5 million in operating income in the quarter, which hopefully will help you with your modeling. Fourth quarter adjusted operating margin was 43.6%, roughly equal to the figure in the full year. Finally, adjusted diluted EPS was $1.05 compared to $1.16 for the third quarter. During the quarter, we recognized a noncash nonrecurring impairment on intangible assets of $77.5 million related to certain investment management contracts, which represents the main difference between our U.S. and our adjusted diluted EPS. On Slide 14, we've outlined the revenue drivers for the quarter. Adjusted revenue increased slightly quarter-to-quarter due to seasonal performance fees. Net management fee margin for the fourth quarter remained at 47 basis points and is up from 45.9 basis points from a year ago, demonstrating an improved fee margin during the period when the industry is seeing fee compression. At the bottom of the page, we've added the table to show the 2021 net management fee margin by capability on this slide and compare that to 2020. 2021 was a solid year with all capabilities outside quantitative equities, showing an increase in net management fee margin versus 2020. This increase in each capability is being driven by inflows coming into high fee margin areas such as EMEA, Lat Am and Asia Pacific intermediary. Turning to operating expenses on Slide 15. Adjusted operating expenses in the fourth quarter were $310 million, which was up 6% from the prior quarter. Adjusted employee compensation, which includes fixed and variable costs were down 4% compared to the prior quarter, primarily as a result of lower variable costs given lower preference profit compared to the third quarter and the impact of finalizing the cash noncash payout mix for the annual compensation program. Adjusted LTI was up 22% from the third quarter, mostly due to mark-to-market. In the appendix, we've provided the usual table of expected future amortization of the existing grants along with the estimated range for 2022 grants for you to use in your models. The fourth quarter adjusted company ratio was 36.9%, which reflects finalizing the variable compensation program. For the full year, the total comp to revenue ratio was 39.5%. Adjusted noncomp operating expenses were up as we guided compared to the prior quarter, primarily from higher marketing and general and administrative expenses. For the full year 2021, noncomp operating expenses were up 8% compared to 2020, which is in line with our guidance. Finally, our recurring effective tax rate for the fourth quarter was 24.1%. For the full year, the firm's effective tax rate was 22.4%. Switching to expectations for 2022 expenses. As a management team, our philosophy has always been to maintain strong financial discipline while reinvesting in the business to deliver against our strategy of simple excellence and position us for growth. As we head into 2022, areas of focus for reinvestments are in our investment teams, including still more in ESG, distribution, technology, and increased spend in such areas as travel and entertainment, where we plan for pandemic-related restrictions to ease as 2022 progresses. With that said, let's walk through expense expectations for 2022. First, looking at compensation. With the investments we've made in our people in 2021 and the impact of anticipated higher LTI amortization in 2022, we'd expect the adjusted comp ratio to be in the low 40s. Secondly, for non-compensation expenses, we'd expect to see a percentage increase in the low teens. This increase is due to the investments being made in the business that I've mentioned previously. Finally, the firm's statutory tax rate is expected to be similar to 2021 at 23% to 25%. The overall effective rate will be impacted by various differences, which arise quarter-to-quarter. Finally, turning to Slide 16 and look at our liquidity. Cash and cash equivalents were $1.1 billion as of the 31st of December. This is virtually flat compared to last year as robust cash flow generation has been used to fund dividends, buy back shares, and importantly, invest in new products through further investment in seed capital. The GHG portion of the consolidated feed book is over $500 million and represents our largest investment in seed capital level. During 2021, we paid $256 million in dividends to shareholders and today declared a $0.38 per share dividend to be paid on the 28th of February to shareholders of record as of the 14th of February. For the year, we purchased 11.4 million shares of our stock for a total of $372 million, and we have $58 million of the current $200 million accretive buyback authorization remaining. Since we started our buyback program in Q3 2018, it has been roughly 16% accretive. Now I'd like to turn it back over to Dick for some final thoughts before we open it up for Q&A. Thank you.

Thank you, Roger. Before handing it over to the operator for questions, let me briefly wrap up. This is my last set of quarterly earnings with Janus Henderson before I retire at the end of March. It's been a tremendous opportunity over these last 12 years. It's been an honor to lead Janus and now Janus Henderson. The firm that we are today is so much better positioned and more powerful. I'm proud of the progress that we've made, although frustrated that we haven't delivered the consistent organic growth that we've aspired to. I know that's in your future. Really, the thing that I'm most proud of is the quality of the team here. We have exceptional people doing great work, and I know that the future for Janus Henderson is very bright. So thank you for allowing me the time and honored to be the CEO over these last 12 years, and I wish you all the best going forward. That said, now I'd like to turn it back to the operator for your questions.

Our first question for today comes from Ken Worthington of JPMorgan.

Dick, congratulations on the retirement. I think you hit a real difference for Janus, and it was a pleasure working with you. So best of luck. I wanted to ask maybe Nelson and Ed Garden, if they're taking questions. Trian has taken the big ownership position in Janus. I guess, what is your plan as Board members to drive shareholder value for Janus? And my understanding is Trian's thesis for asset managers has at least in part focused on consolidation. So if consolidation is a theme here for Janus, do you see Janus as a buyer or a seller?

Ken, Dick here. Thanks so much for the kind words you started with. Deep apologies to follow that up with a frustrating answer, but Nelson and Ed are not here with us on this call. They are part of the Board, but they're not doing the quarterly call. I can't really...

Let me turn to INTECH. As we think about the separation of INTECH, can you disclose the margins on INTECH, maybe performance fees generated in '21 and multiple you sold it for? And I'm assuming the deal is dilutive to earnings? And if so, how dilutive?

Ken, it's Roger. In terms of performance and financials, this aspect is relatively minor for our business, as we've mentioned previously. We've provided the asset level from the start of the year and the fee rate, indicating it contributes around $5 million to our operating income in the fourth quarter. I hope this information is helpful. Regarding performance fees, INTECH generated less than $1 million in the fourth quarter. We'll clarify that. As for the deal, it will be reflected in our U.S. GAAP figures upon closing. The consideration will be lower than the goodwill and intangibles we will write off, but these are noncash items and will be excluded from the ongoing business calculations. Ultimately, the deal will have a minimal impact on our ongoing operating income and the guidance I've provided on future compensation ratio and expense expectations.

Okay. And then maybe, Dick, there's been enough in the press to suggest that there may have been differences in the opinion on Janus' strategy going forward. And maybe if you could help us, if you weren't to retire, what would you have liked to have done with Janus over the next 3 to 5 years? And maybe where does your vision differ from what Trian's hope is for Janus over the next 3 to 5 years?

Thanks, Ken. I want to clarify that I can't speak for Trian, making it difficult to compare what I know with what I don't. I've been open about my thoughts on what this business needs to achieve. We've focused on a strategy of excellence, which has built a strong foundation. Now that the foundation is solid, the focus shifts to developing that platform. We discussed this in the last call regarding our strategic work and ideas for advancing the firm, and I believe we are heading in the right direction. I wouldn't have mentioned it otherwise. The key factor in my decision to retire is that the leadership team responsible for executing that vision should be the one that remains and sees it through. It’s an opportune time for me to step down and allow a new leader to take charge of both the plan and its outcomes. A significant reason for my retirement is the strategic decisions we need to make concerning diversification and investment. I think it’s fitting for a new leader to step in for the long term. After 12 years at the helm, I feel it’s time. I'm proud of our achievements and grateful for the opportunity, and I believe this team has a very promising future ahead.

Our next question comes from Ed Henning of CLSA.

I have a couple of questions. Firstly, on INTECH, and then secondly, on equities. Just starting with INTECH, did the management team approach you? Did you look externally to see if you could sell it? Could you just touch on how that transaction came about? And also, Roger, you mentioned that it's going to be below the value of what's the goodwill in your book. What is the goodwill in your book for INTECH?

Okay. So I think we've talked previously that we've been looking at options for INTECH, working with the management team as to what the right outcome is. And we firmly believe that this is a good outcome for Janus Henderson and very importantly, for INTECH and their clients, and we very much hope that that leads to future potential success, and the early feedback from clients has been strong. So that's great. But yes, we've been through a process as to what the best outcome is and firmly believe that this is the right outcome. In terms of the financials, the goodwill that's on our books is one big number. So we need to agree that with internally and then with our auditors as to how much is ascribed to an individual piece. But again, we'll do that as we close the transaction in 2022.

So just to clarify on the bit before that you went through a process, did you look at selling it externally?

We considered various options, and it ultimately comes down to determining what is best for our clients, for INTECH, and for Janus Henderson. We believe this is a very positive outcome for all involved.

Okay. Regarding equities, the performance really declined in the fourth quarter. Can you discuss what brought about the comeback in U.S. mid and mid-cap stocks, and how the overall performance in equities has changed since December?

It's a real mix. December was particularly volatile, and our Forty Fund experienced a very tough month, which is reflected in the performance guidance we've provided. Meanwhile, some other funds had strong quarters as the markets shifted in their favor. While we faced challenges in U.S. mid and SMID, the end of the year showed extremely strong results. As we enter 2022, the one-year numbers for U.S. mid and SMID are significantly positive, with some even showing double-digit gains for the year and moving upward for three years. Overall, the fourth quarter saw solid outperformance. Europe has also shown good performance, especially in our sustainable equity funds, while we've encountered difficulties in Asia and made some recent changes there. Overall, it's a mixed story. In terms of flows, the fourth quarter continued the trend we've seen throughout the year, with the outflows in U.S. mid and SMID being predominant, despite the improvement in performance we hope continues. We have strong teams in place and expect those flows to improve, but we recognize that the situation in equities remains mixed.

But regarding the equity performance, you mentioned some positive aspects, which was encouraging. However, the only drawback was that Asia negatively impacted the overall performance in equities, causing it to fall below the 1-year benchmark.

There have been contrasting factors at play. For instance, we experienced an outstanding performance in 2020, ranking highly among our peers for that year, but faced challenges in the following year. I also highlighted the Forty Fund, which is a significant fund that struggled towards the end of the year. Consequently, some of the larger funds encountered difficulties in 2021. Overall, it remains a mixed picture.

Our next question comes from Nigel Pittaway of Citi Group.

First of all, can I please just ask a question about the alts business? I mean, obviously, it's a very good performance against the benchmark. It doesn't look quite so good if you look at the quartiles, and it does seem as if the redemptions have started to increase in that business. So given the strong performance, why is it sort of so hard to generate flows? Is the quartile performance relevant? Or what's going on there?

There's a number of things, and then one of which is relatively small peer groups included in there as well as the property fund, which has been in outflow for a period of time, as you know. The biggest area in there is our U.K. absolute return or absolute return funds, which have been very successful over a very long period of time. They turned positive inflows at the beginning of 2021, having had a tougher period in 2020. I mean, the quarter overall was flat. But that's an area that we're investing in. We've talked about other things like our multi-strategy hedge fund, which is gathering some good flow as well. So again, there's a mix of things in there. But U.K. absolute return is the largest one in there, and the property fund is about $1.5 billion where we saw some outflows.

Okay. Regarding the P&L, you've provided guidance on the costs, so there shouldn't be any surprises there. However, I would like to know more about the $7.3 million investment loss. Can you provide any details on what it includes?

That's in our seed capital or primarily in NCI. You need to consider what's in NCI as well. It's about finding a balance on seed. Our feed book is hedged, but we do not hedge the NCI component, which is currently influencing that aspect. We can discuss it in more detail offline if you would like.

Our next question comes from Elizabeth Miliatis from Jarden.

The first question is regarding cost. This represents a significant increase in the non-compensation growth you projected for 2022. Are you planning to allocate all that spending towards team investments primarily in 2022, or will some of it extend into 2023? How should we approach the cost growth estimates for the following years?

Yes, we are making significant investments in the business. As mentioned, we believe we are positioned to shift toward growth, which includes essential regulatory investments. Additionally, as we recover from COVID, there may be opportunities to expand, including potentially re-entering New Zealand next February. We see significant opportunities in marketing and distribution, where we plan to reinvest. Our ongoing technology investments, which we've discussed for several years, are beginning to yield results in 2022. However, we are also facing higher costs related to data and system operations. We are committing resources to ESG initiatives, and while we expect our spending to be less than in 2019, it will be greater than in 2020 and 2021, considering the low expenditures during the pandemic. Overall, while I don't anticipate our year-on-year increase to repeat, we will continue to reinvest in the business as necessary.

Our next question comes from Patrick Davitt of Autonomous Research.

Congratulations, Dick. It appears that the fee rebates for performance-driven mutual funds have picked up again. Considering the performance trends rolling on and off, could you provide a rough estimate of how you see this tracking if the markets remain flat from this quarter?

Yes, you're correct. The main point I've hinted at is the Forty Fund, which transitioned from being a positive contributor to fees earlier this year to a negative position following a challenging December. As we've discussed in previous periods, you can project its public data regarding the 36-month rolling performance fees, and we already have 33 months of that data. If there were no performance in 2022, we would anticipate the fulcrum fees to be around minus $55 million. The primary variable influencing this will be the Forty Fund, which faced significant difficulties in December, but hopefully, it can recover quickly. This is definitely the fund to keep an eye on. The figures I provided are the highest estimates, but if performance improves, those numbers will also improve, and since it's a large fund, any additions this year will further impact those numbers.

Got it. Makes sense. And then on the expense guide, obviously, a lot more volatility this year. How much flex do you have on that guide if markets keep correcting?

Yes. I mean, I guess there's a number of ways of looking at that. The first is the natural flex in our business given variable compensation. Variable comp, including LTI is about 40% of our cost base. So it's a very natural correcting device purely with variable comp. But taking that aside, I guess, first is we take a long-term view of the business. As I said, there are things that we need to do and want to do to invest in the business because we are wanting and expecting this business to grow. The second is possibly sometimes those are opportunities to take advantage of markets and who want to move faster, but we'll obviously look at that. The third part of that is, yes, we obviously do look very carefully at our expense base. We have a pretty good reputation for that. And we would look at what we need to do. But again, the most important thing is that this is a long-term business and you need to make the right decisions for the long term. So hopefully, that's a combination of answers in there. The first bit is 40% of our costs are variable. Second thing is we think long term. The third thing is we need to make investments and want to make investments in our business to grow, but we'll do that very carefully. And there are things that we can continue to do. And I guess the last bit is we are always looking to find efficiencies in our business just because we're not coming out with a major cost exercise that we're announcing doesn't mean we're not always looking at how can we be more efficient. There are always things we can do, and there's always things we'll want to do more about. So I hope in summary, Patrick, that adds up to something that makes sense to you.

Our next question comes from Alex Blostein of Goldman Sachs.

This is actually Ryan on behalf of Alex. I was wondering if we could come back to INTECH quickly. Can you help us think about at least maybe the multiple that you're selling the business for?

As I mentioned, Ryan, it's a relatively small part of our business, and we are not disclosing the specific details that have been agreed upon with management. Therefore, we cannot share that information. Apologies.

Okay. All right. Maybe is there any way you could give us color on what you potentially think you'll do with the capital? I guess your point on its relatively small piece of the business, is there any thoughts on the use of capital at all me?

I think this is consistent with what we've discussed previously. Dick has mentioned some growth areas we are targeting. We've maintained a disciplined approach to returning capital over an extended period. We initiated our buyback program in 2018 and have returned 16%, which has been accretive during this time. We've consistently noted that our priority is the hierarchy of capital needs and how we allocate our capital. In 2021, we added $175 million of seed capital and have some promising ideas. As I mentioned, we launched over 20 products this year, and we're exploring some inorganic opportunities. We've alluded to some ideas, but there is nothing concrete to share today.

Thank you.

Our next question comes from John Dunn of ISI.

So could you maybe give us a little more color on what you're seeing in the institutional channel? And you gave some comments, but do you think you could possibly be a positive contributor in '22?

Yes, the answer is yes. Can it be positive? Absolutely. We have made significant investments in that team over the last few years, with Nick Adams becoming the global head of that team a couple of years ago. We've appointed a new head for the U.S. business, which has been relatively small for us. We've also brought in Richard Graham as the new global head of Consulting and Debbie Dratman as the new Head of U.S. Consulting. So we’ve made substantial investments in that area. We discussed earlier that this year we had our largest funding, which came from ten different strategies. There are numerous opportunities at both lower asset, higher fee levels and higher asset, lower fee levels. I don't want to make any promises for Q1, but INTECH will be part of our institutional numbers. I mentioned one client outflow from our well-performing balanced strategy, but I wanted to bring to your attention that we do have one institutional client regarding that. Overall, I do see potential for success and believe we should be positioned for it.

Got it. Could you elaborate a bit more on ETFs? You've come up with some interesting ideas, but it seems challenging to enter that market. How many launches do you anticipate in an average year, and could you share more about your plan to achieve some scale in that area?

Yes, we've been involved in that business for several years. Right now, we're focusing on active ETFs, which is a smaller segment that is growing faster than any other. In the third quarter, we launched five ESG ETFs in the U.S. and a real estate ETF. We have also launched two ETFs in Australia this year. Currently, we do not have any ETF presence in Europe, but that's something we are looking to explore in the future. We have been able to successfully grow this business. Our AAA CLO ETF, which was introduced at the beginning of last year, became the 11th largest ETF launch, achieving several hundred million dollars. We just launched a BBB ETF as well. It's essential for us to focus on launching the right ETFs rather than just adding to the market, which already has plenty. Our goal is to be selective; we have probably launched around eight or nine ETFs this year. This demonstrates our capabilities, and we intend to scale those efforts while also introducing new products in 2022.

Our final question for today comes from Alex Murray of KBW.

Congratulations, Dick and best of luck. I'm curious if you could maybe give us an update on the CEO search and any progress being made there?

Sure. This is Dick again. Yes, the search is being run by the Board, and so you really don't have the right people on this call to comment on it being management. But I know the Board has been very focused on it and is working hard and is making good progress, but I'd have to leave it for them really to comment further.

We have no further questions. So that concludes today's Q&A session and today's conference call. Thank you for joining today's call. You may now disconnect.