Janus Henderson Group PLC Q2 FY2022 Earnings Call

Good morning. My name is Harry and I'll be your conference facilitator today. Thank you for standing by, and welcome to the Janus Henderson Group Second Quarter 2022 Results Briefing. After the speakers' 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. Now it's my pleasure to introduce Ali Dibadj, Chief Executive Officer of Janus Henderson. Mr. Dibadj, you may begin your conference.

Thank you, everyone, for joining us today on Janus Henderson's Second Quarter 2022 Earnings Call. I'm Ali Dibadj, and I'm joined by our CFO, Roger Thompson. In today's call, I'll start with a short introduction before handing it over to Roger to run you through our second quarter financial results in detail. I'll then share my initial observations, mind you, after only about a month on the job, and how we're thinking about evolving our strategy. And then, following our prepared remarks, we'll take your questions. Before Roger gets into results, I want to start by expressing how pleased I am to be part of the Janus Henderson team. My first few weeks here have validated my reasons for joining. As I speak to you today, I'm even more convinced about the long-term opportunities ahead of us. I took the role of CEO because I clearly saw the tremendous talent and potential in this business. I'd like to take a moment to tell you about the main reasons why I think Janus Henderson represents such a good long-term opportunity. I go a long way back with Janus Henderson, and it's a very special place to me. It's a people business at its core with very talented and motivated employees who are energized to win. Earlier in my career, as a sell-side analyst, I was fortunate to serve Janus Henderson's investment teams, where I was struck by the intellectual honesty, depth of research, and focus on client outcomes. We have a true research, security selection, and portfolio management powerhouse at the firm. The client service model also remains strong. I've competed against Janus Henderson's client service teams, and what our clients are telling me is that we're known in the industry for over-delivering for customers and distribution partners. Furthermore, I was attracted to the truly global nature of the firm, forward-thinking corporate functions, and the strong financial foundation. While I'm optimistic about the long-term potential for Janus Henderson, one must acknowledge that there are also significant headwinds for this business. Those of you who know me know I'm transparent, analytical, and collaborative. I will remain that way with all stakeholders, including you. The facts are that we have some investment strategies that have delivered mixed performance, that we are losing market share in the industry, and that our stock has underperformed. All of this, of course, amidst geopolitical tensions, record inflation, volatile consumer confidence, uncertainty about interest rates, and concerns around global liquidity that are having negative consequences on our near-term outlook. Net-net, there's a lot to like at Janus Henderson, and much work to do. I'll now turn the call over to Roger to run you through the second quarter financial results.

Thank you, Ali, and thank you, everyone, on the call for joining us today. Starting on Slide 3, I'll look at our second quarter results. Historically challenging market conditions around the globe and continued outflows have had a significant impact on our results. Our long-term investment performance remains solid, with 60% of our assets beating their respective benchmarks over 3 years, which is similar to the prior quarter. June ending assets under management were just under $300 billion, down 17% from March due to lower markets, U.S. dollar appreciation against other currencies, and net outflows. Regarding FX, a little over 30% of our AUM is denominated in sterling, euro, and Australian dollar, all of which weakened against the U.S. dollar in the second quarter. Net outflows were $7.8 billion. We've seen a significant slowdown in intermediary sales across all regions due to rising interest rates, inflation, recession fears, and geopolitical unrest. The financial results were down compared to the prior quarter as revenues were significantly affected by those weaker markets, FX, and net outflows. In the quarter, we completed $56 million of the $200 million of share buybacks authorized by the Board, and today announced a $0.39 per share quarterly dividend. Moving to Slide 4 and looking at investment performance, the 1-year investment performance reflects the extremely challenging market conditions in the first half of the year. In equities, inflation, aggressive monetary policy, recession fears, and supply chain issues have created significant volatility. Our investment professionals remain disciplined in their approach, focused on looking through the near-term uncertainty and being steadfast in delivering positive long-term outcomes for our clients. Fixed income continues to be impacted by the worst selloff on record, and our short-term underperformance to benchmarks has been modest in most cases. Switching to long-term investment performance, this remains solid with 60% and 65% of assets beating their respective benchmarks over the 3- and 5-year time periods as of the 30th of June. Investment performance compared to peers continues to do well, with over 60% of AUM represented in the top 2 Morningstar quartiles over all periods. Slide 5 shows company flows. For the quarter, net outflows were $7.8 billion compared to $6.2 billion last quarter. With the flow trends we've seen in the first half of 2022 and the market volatility expected to continue through at least the end of the year, we anticipate flows to remain negative in the near-term. Turning to Slide 6 for a breakdown of flows by client side. Net outflows for the intermediary channel were $5.7 billion. The decline in flows is attributed to a 32% slowdown in gross sales, as I mentioned earlier, and the previously disclosed $1.3 billion liquidation of the U.K. property fund, which occurred in June. The lower gross sales are not unique to Janus Henderson as the industry has seen lower active retail sales in the U.S., EMEA, and Latin America, but we also lost market share, particularly in equities. Clients are sitting on the sidelines, monitoring current events and assessing the impact of the Russia-Ukraine war, pricing central bank policy, and ongoing inflation. Until these market headwinds subside, we can expect this risk of sentiment to continue. Institutional outflows were $1.2 billion. Pleasingly, the quarter included a $3.7 billion funding from European clients into a global commodities mandate in the alternative capability. This funding was offset by the previously announced $2 billion redemption in the Sterling Buy & Maintain credit strategy from a long-standing European insurance client. Approximately $4 billion remaining to be redeemed in this mandate will happen over the second half of 2022 in tranches yet to be determined. In total, we experienced $2.4 billion in net redemptions in the equity capability, spread across several strategies. Going forward, our pipeline is diversified by product and clients, but including the $4 billion mentioned above, we still expect negative flows from institutions over the remainder of the year. Finally, net outflows for the self-directed channel, which includes direct and supermarket investors, were $900 million. Slide 7 shows the flows in the quarter by capability. Equity net outflows for the second quarter were $5.8 billion, compared to $3.8 billion in the prior quarter. The outflows were driven primarily by U.S. SMID and mid-cap growth and small and mid-cap value strategies in U.S. retail, in addition to the institutional outflows I previously mentioned. Given the strong recovery in performance of U.S. mid-cap and SMID, enterprise, for example, is now in the top quartile over 1 and 5 years. We did see outflows slow over the quarter and into July, and we're pleased to have reopened the SMID and small-cap Triton and Venture funds, which have been closed for several years. Second quarter net outflows for fixed income were $3.3 billion, reflecting the $2 billion Sterling Buy & Maintain institutional redemption and the prevailing market conditions for bonds, which impacted the retail side of the business. Total net outflows from multi-assets were $900 million, driven by the balanced strategy within our retail channels. Whilst the net outflow resulted from short-term performance, the medium- and longer-term performance remained strong. Alternative inflows were $2.2 billion. This is a result of the $3.7 billion global commodities win in institutional, which was partially offset by the $1.3 billion outflow related to the sale of the U.K. property fund. Moving on to the financials, Slide 8 is the U.S. GAAP statement of income. In the detailed 10-Q, you'll see an investment loss of $109 million below operating income, which has reversed out in NCI. This is a result of the mark-to-market losses of a fund, which we were required to consolidate this quarter, but these figures net out in net income and EPS. Slide 9 is a look at our adjusted financial results. Adjusted revenue decreased 11% compared to the prior quarter, primarily due to lower average AUM. Net management fee margin for the second quarter was 49.2 basis points compared to 49.4 basis points in the prior quarter, excluding INTECH. This slight quarterly decline is due to a mix shift from weaker markets and net outflows primarily in our higher fee retail channels. Second quarter performance fees include negative $15 million from U.S. mutual funds, which were partially offset by performance fees generated from the European smaller companies investment trust, the global multi-strat fund, the multi-strat hedge fund, and the SICAV Pan-European Fund. Looking at the second half of the year, all else equal, underperformance will continue to impact performance fees. As we sit here today, based on current investment performance, we estimate aggregate performance fees for the full year could range from negative $35 million to negative $45 million. This includes roughly negative $60 million from U.S. mutual fund performance fees. Clearly, the result will depend on future performance, but these negative performance fees will cause a significant delta to revenues compared to 2021. Moving to expenses, adjusted operating expenses in the second quarter were $278 million, down 7% from the prior quarter. Adjusted employee compensation, which includes fixed and variable costs, was down 12% compared to the prior quarter, primarily due to lower variable costs given the lower pre-bonus profit as well as favorable FX and the closing of the INTECH transaction at the end of the prior quarter. Adjusted LTI was down 3% from the first quarter. In the appendix, we've provided the usual table on the expected future amortization of the existing grants. The adjusted compensation to revenue ratio was 42.6%, which is flat compared to the first quarter. Adjusted non-comp operating expenses were also flat compared to the prior quarter. Finally, our recurring effective tax rate for the second quarter was 25.7%. For the full year, the firm's statutory tax rate is still expected to be in the range of 23% to 25%. Adjusted operating income in the second quarter of $149 million was down 16% from the prior quarter, driven principally by the lower average assets, which were partially offset by corresponding lower variable compensation. Second quarter adjusted operating margin was 34.9%, and adjusted diluted EPS was $0.63. In looking at the remainder of the year, I do want to provide an update on expectations for 2022. Average AUM in Q2 was 9% higher than closing AUM. All things equal, you should therefore expect management fees to be lower by this amount in Q3. In terms of guidance, we now anticipate a compensation ratio in the range of 44% to 45% for 2022. The change from the previous low-40s expectation is a result of difficult markets and net outflows negatively impacting AUM and the revenue line. Additionally, as discussed, performance fees are also trending negative, further impacting the comp ratio. For non-compensation, we are proactive in managing our discretionary expense base, and we'll look to slow down spending on items like marketing and T&E. With this disciplined approach, coupled with favorable FX on non-U.S. dollar-denominated expenses, we anticipate the non-compensation expense growth to be in the low to mid-single digits, down from the previous guidance of low teens. Our philosophy has always been to maintain strong financial discipline and invest in the business where it strategically makes sense while looking to operate more efficiently to provide the fuel for growth. That will not change, as we still have investments we need to make in our business. However, with the ongoing market turmoil, we will be even more prudent in our expenses. Finally, skipping over to Slide 11 and a look at our liquidity. Cash and cash equivalents were $848 million as of the 30th of June, an increase of approximately $66 million, resulting primarily from strong cash flow generation, partially offset by returning cash to shareholders. We returned $121 million to shareholders via dividends and share buybacks. We purchased 2.1 million shares of our stock for $56 million and have $144 million of buyback authorization remaining to be completed by next year's AGM. Since the inception of our accretive buyback program in the summer of 2018, we've reduced our outstanding share count by 17.3%. Finally, we paid $66 million in dividends during the quarter, and declared a $0.39 per share dividend to be paid on the 24th of August to shareholders of record as of the 8th of August. With that, I'd like to turn it back over to Ali.

Thanks, Roger. As I said at the start of the call, there's a lot to like and much work to do. Although having been here for only about a month, I'd like to share some initial observations after spending some time with global colleagues, clients, investors, and members of our Board. As I've delved into the company, I continue to be impressed by the talent, our people's values, and the opportunities ahead, but the challenges facing us and the industry are steep. First, Janus Henderson's overall branded performance remains good, but both could be better. Too often, we're not garnering our fair share of client interest and engagement. While the clients who know us truly appreciate us, many potential clients don't know who we are and the value we can provide. We are too often losing out on brand awareness and consideration despite having good investment performance. We need to be more differentiated, creative, and focused in order to serve our clients better. Second, Janus Henderson became a global company upon merger, but it is roughly back to 2017 merger AUM levels, excluding INTECH. Our total shareholder return metrics have not delivered, while the broader market and asset management peers have performed much more strongly. Opportunity remains to take more advantage of this global company. Third, we have a good foundation of culture and people on which to build, but delivering our firm collaboratively and with a sense of accountability and urgency has been missing. I'm sure many of you are eager to hear financial details about our future. The answer is that it's still early days. I expect the diagnostic and corresponding strategy articulation to take several months. So I'll give you more details on my findings and clarify how our path should evolve over the next few calls. We have, however, already begun to gain deeper insights into our business, and I'm working with my team to turn the opportunities we see for Janus Henderson into a strategy with a winning execution plan. But I can tell you from our initial analysis is that our strategic framework is surfacing. Our business has been and will be all about helping to define and serve our clients' needs in a dynamic and competitive asset management landscape. There are three areas that we just need to get right. First, we need to protect and grow our core businesses. Second, we need to amplify the strengths we already have but haven't fully leveraged. And third, we need to diversify where we have the right to win. All of this is on behalf of our clients, their clients, our employees, shareholders, and other stakeholders. There are many opportunities that already exist to protect and grow our core businesses by addressing our market share losses. For example, in 2021, we delivered $25 billion of U.S. active long-term mutual fund gross sales, but that only represented a small sliver, less than 1% of $3.5 trillion in industry gross sales. We are punching well below our weight. We are a top 20 asset manager out of many hundreds of firms in key markets where we operate in the intermediary space. Yet, we have an AUM market share of 2% or less in each of those markets in the intermediary channel in active management. There is real strength in each of these regions. And at the same time, there's plenty of opportunity to grow and win. We can better align distribution resources to faster-growing channels and markets. There are many opportunities at the individual investment strategy level, too. We have many quality investment strategies in categories where we have outstanding investment performance that have AUM share of less than 1% in that category. Examples like this offer tangible opportunities to grow our core franchise. In terms of amplifying our strengths, I look around the organization and in every corner I turn, I see a lot of interesting expertise. We've launched some exciting products over the past 3 years, which draw on our core strength as an investment powerhouse and provide a truly differentiated way of meeting clients' needs. For example, our AAA CLO ETF has grown to $1.4 billion in AUM and has seen net flows of $1 billion year-to-date. It offers retail investors a rare opportunity to access the CLO market and resonates in a rising rate environment. Our biotech hedge fund leverages our investment expertise in our traditional global life sciences strategy and offers our clients a differentiated product at a typical hedge fund fee structure. We globalized our award-winning North American portfolio construction strategy capability by broadening the offering to Europe and Asia. The asset allocation tool helps our adviser clients by applying portfolio solutions analysis to deliver better outcomes for their clients. We extended our longstanding U.K.-only global sustainable equity strategy to a SICAV and then a U.S. 40 Act fund, which has helped AUM almost triple over the period. We need to and can do more of these types of innovative product launches and vehicle extensions to fully unlock the talent demonstrated by our investment and distribution teams to deliver for our clients. As I mentioned earlier, there are gaps to fill in our product offerings, so that we can better meet our clients' needs. Our clients tell us they want to do more business with us. This is not about being all things to all people, and we need to pick what we do as a firm, but we are not adequately represented across faster-growing asset classes, channels, geographies, or vehicles where our clients want to see us. For example, during the quarter, we announced the inorganic addition of an emerging market debt team, adding this capability diversifies our existing strength in emerging markets credit, global bonds, and emerging market equities. We believe it is a critical component of our premier global asset management platform. My team and I have and will continue to identify those areas complementary to our firm where we believe we have the right to win, whether that be by filling gaps in investment teams or capabilities, or within channels or regions. Said simply, we are unexposed to trillions of dollars of asset management addressable AUM, where we have or can have the right to win. I've done exactly this before, and we can do it here. I'm confident that we'll be able to deliver the full potential of the company to our clients and all our stakeholders, but it will take time. Given I'm only a month in, we'll get back to you with more views on the financial outlook and transition timing. But in this industry, as you know, each change one makes takes a long time, typically more than a year to deliver signs of progress. We are in a transition period of upgrading leadership, reinvesting in the business, and improving how we work. As part of that, we need to create fuel for growth by driving increased efficiencies in the business. So in summary, I think there are a lot of opportunities for the business to unlock over the long-term. I'm excited by the talent, client focus, and the strong financial foundation. This team and I are certainly up for the challenge. I strongly believe that over time, not overnight, Janus Henderson can and will win again to deliver consistent organic growth with attractive operating margins. Let me turn the call back over to the operator for your questions.

And our first question is from Dan Fannon of Jefferies.

Congrats, Ali, on the position. I wanted to just kind of expand upon your comments. I know it's early, and you talked a lot about what you've seen and are focused on. But in the context of the industry and the consolidation that you're seeing at scale that people are pursuing and what your firm has pursued as well, how are you thinking about both inorganic potential growth in the context of some of the things you've highlighted here that you obviously seem to be focused on improving what you have?

Dan, thanks a lot. I haven't done anything yet, so hold that. Look, I think if you think about M&A in the industry, my view hasn't changed for a very long time around it, which is it has to be client-focused, that is, client-led M&A. In other words, scale for the sake of scale is unlikely to deliver better results more often than not for the client. What you found is if the main vector of M&A success, right, is cost-cutting in a deal, then the likelihood of success is relatively low. On the flip side, if it's augmenting capabilities for a firm, so that firms can deliver better for a client, those are generally more successful. M&A is always probably risky, but those are generally more successful. And so that's how I think about it. That's how this firm will be thinking about M&A to fill some of those gaps we talked about before, and again, all being client-led.

Understood. And then just a follow-up on kind of the institutional activity and maybe feedback, I guess you're hearing from clients and intermediaries based on the transitions within the management realm. I think, Roger, you kind of commented on the outlook for this year, maybe being negative, just broadly for the institutional component. If you could get more specific in terms of either regions, asset classes, or specific mandates or sales channels, that would be helpful.

Let me kick off that in terms of the specifics of my comment. Yes, what we're saying there is we've got a fairly broad pipeline of opportunities across different capabilities and around the world as well. But there are, as we talked about on the last call, one large redemption from a U.K. insurer into buy-maintain credits, $2 billion of that was gone in the quarter, and $4 billion of which will come out in the remainder of the year. Including that, we expect the net to be negative for the year overall, but we are obviously expecting some things to fund. We've seen some things that are starting to come through in Q3. But net-net, what I'm saying is, including that $4 billion, we'd expect a negative number. Ali, do you want to comment on anything on just overall client views?

Sure. Sure. I've been speaking with clients, and I guess I separate out into two areas, Dan. One is more broadly the clients who know us, our real clients, clients that we serve. Look, they, generally speaking, are rooting for us, right? They want us to win. They want us to do more business with them. They'd like us to have more stability. I'm probably part of that. They like to have more stability for sure. But our clients value us, and we certainly value them enormously and are doing our utmost to serve them. Then there's the potential clients, I guess, I call them. They don't really know us; they don't know what we can bring to them. They don't know the abilities that we have across asset classes, equity, fixed income, multi-asset alternatives. They don't know the client service model we bring to them, which is over-delivering for their needs and not just for them as a client, but for their clients as well. So I think that's an enormous amount of opportunity that we have, but we have to tackle it.

And our next question is from the line of Elizabeth Miliatis, Jarden.

The first one is just on the potential for inorganic additions. In terms of potential size and your capacity there, would you sort of be more focusing on smaller bolt-on acquisitions to perfectly fit within the existing franchise, or would you be looking for something potentially larger that would hopefully also fit in? And then also, in terms of capacity, obviously, there's a decent amount of available cash on the balance sheet at the moment. But would there be any appetite potentially to raise funds to support any sort of larger acquisitions as well?

Thanks, Elizabeth, for the question. Look, it's a little early to be able to tell exactly. I think philosophically, you've heard how I think about M&A, which is it has to be client-led. That generally means that I'm agnostic to size if it delivers on the outcome, which is better results for our clients. We certainly have flexibility in my mind in terms of the balance sheet. We certainly have the opportunity to do deals. Now could that be a set of smaller deals that deliver on client needs? Or could it be something bigger if that fits? Possibly. It's a little bit too early for me to give a convicted answer about that.

Okay. Great. And then just another question in terms of your cost base. Obviously, you pulled back on the non-comp growth rates, which is fairly sensible given where markets are today. But in the event that it's still quite challenging for the next perhaps year or two, and obviously, you've just come on board, and you want to make some changes within the business. In terms of finding that capacity to make the investment within the teams and across the business, how should we think about sort of the growth rate if markets remain challenging, but you're obviously wanting to spend a bit more to improve the team? Would it be sort of a reshuffling of the existing costs or potentially some cost growth in the next few years?

So obviously, there's an alignment of timing, right? You explained it appropriately, Elizabeth. There are clearly outside pressures in the environment. You've seen the markets; that puts pressure on our margins. We have a base of fixed costs, obviously, and so we deleverage, as does everybody else in this industry and many others. There is that outside pressure, which is one point. The second point is, absolutely, you're right; we need to invest back in the business. There are many investments that we are making currently that are a high priority for us, and we're going to continue, and they're going to be more. Again, we need to deliver for our clients in the way they want to be serviced and expand to other clients and other regions and other investment strategies that we have the right to win in. You have those two things. And of course, we'll do our best to manage our expenses and create the fuel for growth, but the timing will align. You'll have to invest. Hopefully, the cost savings will happen over time as well. I'll let you think for what that means for your margin and EPS models in the short term, but those are the mechanics of reality.

Our next question comes from the line of Ken Worthington of JPMorgan.

Ali, welcome to Janus. Maybe first, given the decline in assets and the outlook for revenue over the next couple of quarters, the dividend payout looks quite high as we get into the second half of the year. Does the high payout make sense? And is the dividend at this level something you think Janus should support?

Ken, thanks for the question. As you can imagine, it's something we're thinking about a lot in collaboration with the Board and thinking through. Our priority has always been and continues to be to invest in the business to grow the business. Then, our priority is to give sustainable, progressive dividends, which we've been doing and then programmatically buy back stock along the way. I think that makes sense. But again, as I've mentioned before, there aren't any sacred cows at the firm. That being said, the cash flow of this industry and of our business is actually quite good. It is, of course, volatile given the markets, but the cash flow is good. So we're going to take everything into consideration as we lay our strategic plans from here. We want to ensure we have the right balance of good dividends, good repurchases, that also allows us to invest for growth for the long-term, both organically and inorganically, as well as provide for shareholders. So we want to remain very steadfast and prudent with our cash usage. That has been our cash usage historically. Anything we decide to do, as I mentioned at the outset, will be collaboratively between the board and the management team.

Okay. Great. And then I mean this question sincerely. If we look at Janus over the last 22 years, the peak of the markets in 2000, Janus had $330 billion of AUM despite a big deal between then and now assets are lower than what has been a pretty big bull market run over that period of time. Trian is your biggest shareholder. It has previously disclosed that the asset management industry could benefit from consolidation. So I guess, are you here to sell Janus? And how long is it reasonable to try to fix Janus until a sale becomes the right solution for your shareholders?

Yes. I appreciate the question, and I do not ever doubt your sincerity, Ken. Thanks for saying it. Look, I asked myself those questions a lot before I took this job and conversations with everybody that you mentioned and others. I am here to fix this business. I'm here to look at the strengths that we have, which are its incredible investment prowess across categories and strategies. I am here to build on that, build on the client-centric mindset that we have, and build on the high quality of people throughout the organization. As I mentioned earlier, nothing is perfect. We're not perfect, but there's enormous opportunity to improve the business. I think there's too little collaboration and transparency throughout the business, and we can build and improve that for the sake of our clients. I think historically, you mentioned a long time period, and certainly, I am a student of the history of this firm as best as I can in a short time. But we maybe weren't as decisive as we should be around several points that we should be decisive about now and can grow this business significantly. There is an element of accountability and urgency that needs to be brought to the organization that is my mandate. So my mandate is to improve this business. Nothing in me suggests that this business can't be the consolidator and become a real impact to the industry at this point. I'm very excited about what I'm seeing. I'm pleased about what I'm seeing. It's not going to be an easy road, but we could be a leader in this industry. There's no doubt in my mind, Ken.

And our next question is from the line of Alex Blostein of Goldman Sachs.

This is Brian Bailey on behalf of Alex. Ali, congratulations and welcome. I really like the analysis that you ran on Slide 14, the concept based on the illustrative example you had. What do you think the reasons are that Janus hasn't been able to generate better market share across the categories where you had better performance? And then I'm trying to tie that into the concept of gaining market share with some of Roger's comments about prudently managing marketing expenses, and I think that was something specific about marketing. So how would you tie those two together, managing marketing expenses relative to driving better market share?

Yes. Thanks for the question. First off, as you look at Slide 14, and you think about the Protect & Grow category, that's really building, protecting, and growing the base of our core businesses. To your point, it is all about market share. When you think about having a great product to sell, we have plenty of great products, but unfortunately, we haven't been gaining market share. A lot of it comes down to the view of distribution and what we've done there. I think we have a lot of opportunity to improve that. When you think about that, or frankly, anything else in an organization, there's always a push and pull. I'm not sure we've got the balance right yet. What I mean by that is, in any sales organization, you all know this on the call, it's about metrics monitoring and money, to put it bluntly. Figure out the right metrics, like market share, monitor that metric, and then compensate on the metric, reward that metric. So that’s the push element. I think we certainly do a better job focusing on areas of growth, focusing on channels, focusing on clients who are growing more than others, making sure that we are putting our sales, so to speak, in the right wind area. So that's the push part. But then there's also the pull. And that's around purpose — thinking around not just our clients, but our clients' clients and how we serve them better. That's around a strategic vision that we're developing. It's really both of those things, the push and pull elements. Not going to change overnight, especially the pull side of things. But those are things that successful organizations have to be in place. I think that will deliver better from a growth perspective. Tying it to your second comment around T&E marketing, which is client-facing. Again, it goes back to saying before, we ought to focus on areas where the ROIs are better. I'm a pretty analytical guy; I look at our ROIs on things. There are areas where we're spending where the ROI isn't strong, but there are areas where we get great ROI. Let's do more of that.

Understood. And this perhaps ties into some of the questions. You had said something about selectively upgrading the leadership team with the specific capabilities that you think Janus Henderson could benefit from.

Broadly, right? You've seen that there are some open roles given some changes in the organization; those are places we're casting a wide net. I think there are some areas like ESG and others that we need to bolster our current knowledge base and expertise. Broadly, though, I've been very impressed by the talent here; it's been quite high caliber. Look, I'm still listening and learning about things. But if I'm very comfortable with the team I have around me right now, people have to have more accountability and targets, and time will tell a little bit, but I'd be surprised if there's a need for headline-required changes to leadership at this point.

And our next question is from the line of Brian Bedell, Deutsche Bank.

Great. And congrats and welcome, Ali, as well. Maybe just to go on to the recent line of questioning, maybe just on the distribution side. Do you think some of the problem has been with the gatekeepers at the distribution organization, or rather more of a sales capacity issue? Like you said, the performance has been very good, and you're punching below your weight. So is it more of those two things? Or is it capacity in different distribution channels, where you think you're underrepresented? And if I could add one more flavor to this, is it important that you have a message that Janus Henderson is not for sale and that this is a firm that's going to grow organically. Is that a very important message to deliver to your distribution partners?

Thanks for the question, Brian. Let me start backwards. Absolutely, clients look for stability, and there was a lot of change in the organization. One of our priorities is to bring that stability back. Yes, clients want stability, and we have to deliver that for them. That's the message we want to bring to them. On the first part, my short answer is both, and it depends, right? Just as you'd imagine, I’m starting to dig into this with our team and trying to better understand it, but so far, I've seen both, and it depends on the region.

Right. Okay. And then maybe just more holistically, the — like you said, the underlying culture is very strong. What do you think has been holding people back from executing better just across the firm in terms of either collaboration between Janus and Henderson and across investment teams, or has it been leadership in the middle ranks? What do you think is sort of the main thing you need to repair to enhance the culture and the effectiveness?

First off, it is going to be Janus Henderson; it is. We're one firm, and that's something that is embedded in ways into people's mindsets and that has to continue to be the case. If you imagine, I'm still in the diagnostic phase, but as I've looked at it… I've seen many reasons why strategies and executions fail. In my view, there are a few common issues, and there are probably three that come to the top for this firm. One is what I call the denominator problem, which you see over and over again, which is really having a great perspective of what is the size of the universe you're playing in. If you take a very narrow view with blinders on, that means you're just going to do the same thing over and over again. A broader perspective gives you more degrees of freedom, and we can better serve our clients as opposed to what we know how to do. The second issue is that typically when a strategy is purely top-down, you miss really good ideas. People internally have heard me say this. I want folks' ideas. And it's just become too rigid; there's not a lot of buy-in or accountability. The strategy and execution can't be just top-down. The third issue is you have to explain the why behind what we're doing. Clients are first, and the logic behind what we're doing is key as is broader vision and purpose for what we're doing for our clients. You put all that together, and that’s on the right track for our strategic vision. But there’s also execution, right? If you have the right buy-in, it goes a long way, but it's about accountability and urgency. My mandate is to have both for this firm, and I'm already starting to see a willingness to change and willingness to march in that direction, as we've built in a short period of time.

And our next question is from the line of Ed Henning of CLSA.

I appreciate your time. A couple of questions from me. Firstly, if you go back to Slide 16, do you see more issues with — and there are lots of holes on this slide. Do you see more issues with a lack of capabilities or the lack of distribution avenues there? And are there any quick wins in this? Or is it really just a long-term play on both sides of the fence?

It's a great question. I wouldn't call anything that is a quick win. Some may be quicker than others, but there certainly aren't any quick wins. I think on the distribution side of things, there are quicker wins to implement. Let me give you an example. We're taking some investment strategies we have and we're putting them in vehicles where clients actually want to see these strategies. So think of the global sustainable equity example. We've rolled that up into other 40 Act funds where clients are looking for that, but they want to have the right vehicle. So it's a packaging change. Those aren't overnight either, right? There are steps you have to go through; but those are things we can effectively switch on. There are many other examples like that. Yes, absolutely, we need to build investment capabilities, and I think some of them may be organic, but we do need to do some inorganic additions. We've seen that with the addition of the emerging market debt team recently, which is a classic example of client-led inorganic addition from a strong team with great pedigree. So, the answer is it will be both, but yes, there are some earlier things to address along with investment capabilities.

No, that does. And then just a second, just hopefully a quick question. If you look at what Roger mentioned before, AUM is going to fall on an average basis. If you look at where the flows are going, do you anticipate the margin to continue to trend down just given the mix that's coming through in the next couple of quarters?

We've given you the information that Roger shared. I'll let you manage your models. I don't think that's unreasonable, given the mix effect of our business.

And our next question is from the line of Andrei Stadnik from Morgan Stanley.

I wanted to ask two questions. The first one, just around the strategies. Are you happy with the size of a big strategy to portfolio Janus has at the moment?

Sorry, I can't hear what you said at the outset. What kind of — what strategies?

The strategies currently in the seeds development stage?

We have a lot of really interesting strategies in the seed stage, yes. The pipeline is quite full. I have to spend some time looking through it and candidly, triaging some of it. I think we have a lot of opportunity to deliver for what the clients want and what we have in our coverage. That doesn't mean we shouldn't do more. We shouldn't think broader in the way we think about things, but yes, there are some really interesting potentials in seed right now.

And my second question. I wanted to ask around Quant because with the exit of INTECH, quants become a bit of a gap in terms of the broader capabilities for Janus Henderson, and it's still an area of interest and demand for clients. Is that something you think is a matter of urgency in terms of repealing that gap?

Quant is very broad, right? We have to define what Quant is for us and where we have the right to win. The landscape, the inventory of Quant internally is high. We use Quant tools across the board, think of what we do from an ETF perspective. Think of what we do in terms of helping our portfolio managers look at their portfolios. So, we utilize Quant broadly with many tools in our inventory. The key will be to ensure we have the right to win in whatever we do, including Quant. So we have to make sure we have the right to win in what we provide our clients, and Quant just has to fit into that as we think about our strategy overall.

And our next question is from the line of Patrick Davitt of Autonomous Research.

Congratulations, Ali. Good to hear your voice again. I have just one kind of more philosophical question for you, and I'm sure you thought this through as you made a choice to take the job. I appreciate all the comments you've made about the opportunities you see to turn things around, and I hope you're right, obviously. But aside from a couple of years heading into the merger, Janus has been inconsistent and mostly experienced significant outflows for more than 20 years. I think that's probably just as much or maybe more a secular issue than anything Janus specific. Why are you so confident that you and the firm can ultimately buck that broader secular trend, particularly now that it looks like the current environment is actually accelerating the secular trends against active managers like Janus?

Yes. Great to hear your voice, Patrick. Thanks for the thoughtful question. Well, Janus Henderson has — if you look at the performance, if you look at the investor base, if you look at how we're serving clients, a very special combination of product and client service that you rarely find elsewhere. I would put what we have up against anywhere else. The challenge has been for quite some time a significant focus on the business that we only do today, again, tying back to the denominator question without thinking of other ways to serve our clients. As you all know, Patrick, it's something I've done before with at least some success. I think it can be done here as well, bringing in a holistic investment strategy and service model to our clients. It’s something we just haven't done as a firm yet. So there's enormous potential; that doesn't mean it's an overnight success. That doesn't mean it's easy. Everybody is on board for that. Our Board and others are behind that. But the opportunity here, the foundation is great to build off. The resilience of this organization is extraordinarily high, and that's my belief, Patrick. I will do my best to prove it to everybody on the phone. Everyone else at this firm will try to prove it. My belief is that we have a foundation for success over time. Again, it's not easy, but we can get there because in this industry, its complexity is simple. We need the right products that our clients want, and we need to get them to them. That’s the trajectory we’re going to be on.

And our final question today comes from the line of John Dunn of Evercore ISI.

All right. You talked about how Janus's global reach. Can you maybe talk a little bit about some low-hanging fruit through that lens, the regional lens where you can affect the most change and then maybe even areas where you can extend that global reach?

Thanks for the question, John. There are lots of areas that, again, I’m still diagnosing, right? But there's a lot of areas where I'm seeing opportunity. For example, some of the easiest things are best practice sharing. That's not just global but intra-regional. Why is this distribution person having success with this fund? What's the message? Let's figure that out and apply it elsewhere. We have really interesting examples where we're successful in EMEA with a particular product, and we’ve tested that messaging elsewhere in the world, and guess what? That resonates. I think there are those kinds of best practice sharing opportunities. Some of our clients are just global; they want to be served globally. Until recently, we didn't have a global Head of Institutional, right? Many of our clients expect that from a consulting perspective. Finally, there are investments that are interesting to clients; they reside in strategies in parts of the world where we need a presence. So best practice sharing, serving our global clients globally, and having access to broader investment strategies are just a few opportunities that we can bring. I'm going to disappoint you. I really don't have soft targets for a year, things I'd like to do. I need to delve into that a little more. We do have things that we've seeded; the biotech hedge fund is one. The AAA and BBB ETFs are examples. We also talk about global sustainable equity. There are other pieces. But I don't want to rush it for the non-investment strategies. I mentioned portfolio construction as a tool for advising clients. That’s important to think through, but we have other things too, and we need to invest in those. I hope that’s been clear, and it will take time, but we think we have a competitive advantage to bring to the market.

And we have no further questions today. So it's my pleasure to hand back to Mr. Ali Dibadj for his closing remarks.

Well, thanks very much, Harry. Thanks to everyone for joining and for your engagement with us and for coming with us on this journey. As I said a couple of times during the call, there's a lot to like at Janus Henderson and there is much work to do. So bye for now.

Thank you to everyone who's joined the call today. This concludes the Janus Henderson Second Quarter 2022 results briefing. You may now disconnect your lines.