Janus Henderson Group PLC Q1 FY2023 Earnings Call

Good morning. My name is Candice, and I will be your conference call facilitator today. Thank you for standing by, and welcome to the Janus Henderson First Quarter 2023 Results Briefing. All lines have been placed on mute during the presentation portion of the call to prevent any background noise. 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, certain matters discussed may constitute forward-looking statements. Actual results could differ materially from the projections in the forward-looking statements due to a number of factors, including, but not limited to, those described in the risk factors section 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 this call. Thank you. It is now my pleasure to hand the call over to Ali Dibadj, Chief Executive Officer of Janus Henderson. Mr. Dibadj, please go ahead.

Welcome everyone and thank you for joining us today on Janus Henderson's first quarter 2023 earnings call. I'm Ali Dibadj, I'm joined by our CFO, Roger Thompson. In today's call, I'll start with some thoughts on the quarter before handing it over to Roger to run through the details. After Roger's comments, I'll provide a progress update against our strategic initiatives. And then we'll take your questions following those prepared remarks. Turning to Slide 2. Market conditions have remained volatile and difficult to navigate. Recession fears, higher interest rates, banking sector worries, particularly regional banks, and increasing cautious market sentiment have all contributed to an uncertain market environment. Even with this market backdrop, we are pleased to have delivered a good set of results this quarter. Assets under management increased 8% to $310.5 billion due to positive markets, FX and $5.5 billion in net inflows. The quarterly flows are from improvements in all channels. Significant inflows into the institutional channel are the result of the hard work and dedication of teams across the firm, as well as nascent confidence among some of the most sophisticated clients and consultants in the world that our firm is on the right track. Last earnings call, I said that we would expect to deliver intermittent quarters of neutral to positive net flows as an indication that our strategic plan is taking hold, which is what happened this quarter. And while we are encouraged by the net inflows, one quarter does not make a trend. We are not at a point where we can consistently deliver positive flow results from quarter-to-quarter yet. For example, we need to rebuild our institutional pipeline, which takes time. Our retail flows continue to be negative, and as part of our fuel for growth, there will be pockets of unprofitable AUM that we will look to exit, which will impact flows negatively. Again, there is reason to be encouraged by the efforts of our talented and hard-working Janus Henderson team as manifested by our flow result this quarter, and there's still much work to be done to deliver organic growth over the long term consistently. We continue to expect one to two quarters of positive flows over the next one to two years. Turning to investment performance. It is solid in aggregate with 70% of assets ahead of benchmark on a three-year basis. It's during difficult times like these when our clients and their clients need our differentiated insights, investment discipline and world-class service the most. We are in a period where money is no longer free and going forward, differentiating between the good companies and bad companies, the haves and have-nots, will be the key to generating alpha. This is what our world-class investment teams in equities, fixed income, multi-asset, alternatives and more around the world do and it positions us well to deliver the best possible investment outcomes for our clients and their clients. Net-net, our financial results are good. Our strategy is starting to take hold. We have much work to do to become consistent, and we have a strong and stable balance sheet. I'll now turn the call over to Roger to run you through the details of financial results.

Thank you, Ali, and thank you again to everyone for joining us on the call today. Turning to Slide 3 on investment performance. Investment performance versus benchmark is solid and improved over Q4 with at least two-thirds of assets beating their prospective benchmarks over all time periods. While we're pleased with the results, which includes the balanced strategy moving back above benchmark on a one-year basis to go along with its strong long-term performance, the one-year fixed income performance still has work to do. Fixed income performance has improved over the first three months of 2023, but the one-year number continues to be impacted by the historically tough year for bonds in 2022. Importantly, the longer term periods remain very strong. Investment performance compared to peers continues to be competitively strong with 70%, 61%, 81% and 90% of AUM in the top two Morningstar quartiles over the one, three, five and 10-year time periods. Slide 4 shows company flows. As Ali mentioned, net inflows were $5.5 billion compared to $11 billion of net outflows last quarter. This is our best quarterly result in quite some time. Although, we're pleased with the results, our goal is to deliver consistent organic growth over time, and we're not there yet. Turning to Slide 5 for a look at flows by client type. Net outflows for the intermediary channel was $700 million compared to $3.4 billion in the fourth quarter. The improvement is attributed to significantly better results in the U.S. whilst EMEA declines compared to the prior quarter. We've told you that U.S. intermediary is a key pillar in our strategy of Protect & Grow, and Ali will give you some more detail and information about that later. This quarter, several strategies were positive, including the AAA CLO ETF, Global Equity Income, our mortgage-backed security ETF, overseas and U.S. mid-cap growth. For U.S. mid-cap growth, we previously told you that performance was strong, and this return to inflows with the first quarter of positive flows since the fourth quarter of 2019. In the EMEA region, a risk-off sentiment and higher interest rates are impacting results, particularly in the UK. Institutional net inflows were $6.9 billion. Recall on last quarter's earnings call, I said that we are winning new business in institutional and that I had no new large redemptions to tell you about. The gross sales came from a number of sophisticated institutional investors into several different strategies including $4.1 billion across a range of enhanced index mandates from sovereign clients, $1.7 billion into Australian fixed income from a large global reinsurer and $1 billion into global multi-sector fixed income from another sovereign investor. Reiterating what Ali said, the quarterly fundings represent a meaningful portion of the late-stage pipeline and the team is working to replenish and build a sustainable pipeline, but it will take time. In addition to the strong gross sales, the quarter included unusually low gross redemptions. We’d anticipate a higher redemption rate going forward, all else equal. Finally, net outflows for the self-directed channel, which includes direct and supermarket investors, was $700 million. Slide 6 is flows in the quarter by capability. Equity net inflows in the first quarter were $3.3 billion compared to $7.5 billion of outflows in the prior quarter. As I mentioned on the previous slide, the result includes approximately $4 billion from an institutional funding into enhanced index strategies, which are part of our diversified alternatives capability. This was partially offset by continued but significantly lower equity outflows from our retail channels. Net inflows for fixed income were $3.6 billion compared to $1.9 billion of outflows in the prior quarter. We are encouraged that despite the challenging short-term investment performance in fixed income, we have a breadth of product that is able to capture flows across multiple channels and regions. Several strategies contributed to positive fixed income flows in the institutional channel, including Australian fixed income, global multi-sector fixed income, U.S. buy-maintain credit and multi-asset credits. In the intermediary channel, fixed income ETFs had positive flows of $780 million in the quarter led by the AAA CLO ETF and our mortgage-backed securities ETF. Total net outflows for multi-asset were $800 million driven by the balanced strategy within the retail channels. While the net outflow is in part due to 2022 short-term performance, the medium and long-term performance remained very strong and as I said, the one-year metric is now back above benchmark adding to its very strong long-term numbers. Finally, net outflows in the alternatives capability were $600 million, primarily from the absolute return strategy in the UK and continental European retail. Moving on to the financials. Slide 7 is the U.S. GAAP statement of income, and on Slide 8 we explain the adjusted financial results. Adjusted revenue decreased 5% compared to the prior quarter, primarily due to lower seasonal performance fees, which were partially offset by higher adjusted management fees. Net management fee margin for the first quarter was 49.8 basis points, which is lower compared to the prior quarter. The decline is due to mix shift resulting from the large institutional wins being at lower fees than our blended fee rate. In the near-term, our success in institutional will impact our blended fee margin, but over time we continue to anticipate a stable net fee margin as we execute our strategy. Compared to the same period a year ago, the net management fee margin increased 0.4 of a basis point, which compares to the fee rate declines at other peers. First quarter performance fees of negative $15 million are due to U.S. mutual fund fees. Outside of U.S. mutual funds, we have minimal AUM subject to performance fees in the first quarter. For the second quarter, we estimate aggregate performance fees of negative $5 million to negative $10 million. This includes approximately negative $15 million from the U.S. mutual fund performance fees, which are partially offset by other performance fees driven primarily by UK investment trusts. Looking at the full year, all else equal, we estimate aggregate performance fees could range towards the more negative of our current range of negative $35 million to negative $45 million. This includes roughly negative $60 million from U.S. mutual fund performance fees. Clearly the result will be dependent on future performance. Continuing onto expenses. Adjusted operating expenses in the first quarter were $278 million down 1% from the prior quarter. Adjusted LTI was up 17% compared to the prior quarter, largely due to seasonal payroll taxes triggered by annual vestings in the quarter. In the appendix, we provided the usual table on the expected future amortization of existing grants for you to use in your models. The first quarter adjusted comp to revenue ratio was seasonally higher at 50.1%. This higher rate is primarily due to the payroll taxes on annual LTI vestings at the beginning of the year, reset of payroll taxes and retirement contributions in addition to lower performance fees. Adjusted non-comp operating expenses decreased 8% compared to the prior quarter, primarily due to lower G&A expenses, partially offset by the anticipated increase in marketing spend. Lower than anticipated non-compensation cost in the quarter is due to timing of our expenses. Full year 2023 operating expense expectations remain unchanged. They are adjusted compensation ratio in the range of mid-40s, adjusted non-compensation percentage growth of mid to high single digits compared to the prior year, which suggests significant acceleration in our non-compensation costs for the remaining three quarters of the year as we execute our strategy. Lower first quarter non-compensation expenses are temporary as savings realized to provide Fuel for Growth have occurred sooner than the reinvestment in the business. Going forward, we anticipate non-compensation expenses to increase, reflecting areas of opportunity we discussed last quarter, including marketing and advertising in our U.S. intermediary business and investment supporting our other strategic initiatives. Additionally, we expect amortizing previously capitalized costs through the G&A line of our P&L related to the order management system transformation project once the project goes live late in the second quarter. Moving to adjusted operating income for the first quarter, that was $106 million down 14% over the prior quarter. First quarter adjusted operating margin was 27.5%. Finally, adjusted diluted EPS was $0.55. The quarterly EPS benefited from mark-to-market on seed capital and other investments coupled with interest income. Skipping over Slide 9 and moving to Slide 10 and look at our liquidity. Our balance sheet remains very strong during this period of market volatility. Cash and cash equivalents were $830 million as of the 31st of March, which is down from the end of 2022, primarily from the payment of annual variable compensation. The first quarter cash position is typically our lowest given seasonal cash needs. Compared to the same period a year ago, our cash and cash equivalents are 6% higher, reflecting our conservative and purposeful approach to capital management in order to maintain balance sheet flexibility during this uncertain economic environment. We have a strong liquidity position and will continue to balance the capital needs and the investment opportunities of the business with returning capital to shareholders. Based on the ongoing market volatility and opportunities we see in investing in the business organically and inorganically, at this time, we do not anticipate buying back shares via an accretive program in 2023. We’ll continue to return cash to shareholders through a strong quarterly dividend and the Board has declared a $0.39 per share dividend to be paid on the 31st of May to shareholders of record as at the 15th of May. With that, I’d like to turn it back over to Ali to give you an update on our strategic progress.

Thanks, Roger. On Slide 11, we provide an update on some of the progress made during the quarter against our three strategic pillars of Protect & Grow our core businesses, Amplify our strengths not fully leveraged and Diversify where clients give us the right to win. In Protect & Grow, we’ve talked previously about the importance of protecting and growing our U.S. intermediary business. As Roger mentioned, we are encouraged by the early progress in the U.S. intermediary business, including the first quarter flow results. In April, we launched a national and local brand campaign. I know some of you have already seen or heard the advertisements that will span print, digital and other media. Promoting the Janus Henderson brand is something new for us and a change from what we’ve done in the past. The data analyzed tells a compelling story that brand matters. There are a lot of great funds out there, but if the brand isn’t relevant, it’s difficult to capture flows. The national brand campaign will be active through the end of the year and we’re excited by its potential. Additional progress made in U.S. intermediary includes selectively upgrading the talent and increasing wholesaler client engagement, including the acquisition and use of data. Under Amplify, we’ve talked about our institutional and diversified alternatives businesses before. In the institutional business, we’ve been restructuring coverage to be more aligned to different client types, helping us to better serve their needs through greater specialization. We’ve already made some new appointments and other professionals are joining in the coming months. In diversified alternatives, which includes multi-strategy hedge funds and enhanced index funds, we talked last quarter about a strong pipeline entering 2023. This pipeline translated to double-digit percent growth in AUM compared to the fourth quarter of 2022. Now turning to Diversify. We continue to look actively to buy, build or partner. We have a strong pipeline of activity and the current environment is creating opportunities. As I’ve said previously, we will be disciplined in identifying where to buy, build or partner. We want people who are like-minded in terms of culture, investment mindset and client service. Finally, underpinning our strategy are cost savings to provide the Fuel for Growth. We are committed and on track to deliver the $40 million to $45 million of the previously communicated cost savings and have concrete plans to reinvest the savings back into the business on behalf of our clients and their clients. This includes the examples I discussed of the recently launched brand campaign in the U.S., selectively upgrading and adding talent across the firm and better aligning our client coverage. As Roger mentioned, these expenses will accelerate in the coming quarters. In conclusion, I’m proud of the progress manifested this quarter. We delivered positive net flows, solid investment performance, good financial results, and continue to execute on our strategy, including providing the Fuel for Growth to reinvest back into the business. The quarterly flow results, while encouraging, are not an inflection point yet and we still have much work to do. We are in the early days of executing our strategic plan and the path to achieving consistent results will not be linear. Our focus continues to be on controlling what we can control to deliver desired outcomes for our clients, shareholders, employees and all our other stakeholders. Let me turn the call back over to the operator to take your questions.

Thank you. So our first question comes from Mike Brown of KBW. Your line is now open. Please go ahead.

Great. Thank you for taking my questions. So Ali, you noted that the pipeline of M&A activity is robust here. Can you just contextualize what you’re seeing there? What you’re thinking about from a strategic perspective in terms of opportunities? And how are seller expectations progressing here? It sounds like the opportunity set is quite good, but just curious how those conversations have been evolving this year? Thank you.

Thanks, Mike. So yes, the M&A activity is quite high these days. There was a little bit of a lull, I think I mentioned that a couple quarters ago. And now very much to your point, there is a lot of opportunity that’s out there. Expectations are becoming a little bit more realistic, not everywhere, not for everybody, but certainly we’re seeing some opportunities out there. Now remember, we’re going to be looking at many things, almost everything that comes through. There’s probably not a deal that happens that we don’t at least know about. But we’re going to be very, very disciplined in deciding what we buy, what we perhaps build internally or certainly what we partner with external folks as well. And the reason for that isn’t just to make sure we deliver for our clients, to make sure we deliver for our shareholders as well. It’s very, very important to make sure we are client-led in our M&A plan. You’ve heard me say that before. We want to make sure that we diversify where we have the right to win and that’s really going to be client-led. So it is robust out there. It’s tough to obviously determine what timing, if something will happen. But we are hopeful that something matches what our clients' needs are and what our abilities are, and so we’ll bring that forward. Now, I don’t want to suggest that M&A in and of itself is a strategy. It most certainly is not. It’s supporting our strategy around Protect & Grow, Amplify and Diversify. But what’s really important, really exciting is we don’t need M&A to grow. We don’t need M&A over time, right, again, set this quarter aside, but we don’t need M&A to get to where we want to be in terms of our growth trajectory. That’s because we have great businesses internally. Think of our U.S. equities franchise that we have as an example that has shown externally good performance over short, medium, and long-term. We can build that business and improve that. So M&A is a useful tool to support our strategy, but we have a great set of core businesses we want to expand and grow, and you’re seeing signs of some of that right now.

Okay, great. And just switching gears to the outlook on the fixed income side for the industry. Clearly we’re seeing flows picking up there. How are you thinking about that opportunity for Janus and how are you positioning the firm to win your fair share of the industry flows?

Sure, I can start and I’ll pass over to Roger for more details. You’re correct. Fixed income is a big topic of conversation with our clients. If you think back historically there have always been three reasons why one would invest in fixed income. One is diversification, two is for regulatory or capital charge perspective, purely for insurance companies, and three is yield. Now for a number of years now, we all know that yield was not one of the drivers of investing. And so now it is and it’s exciting. It’s an exciting time for us that has a very high performing, particularly over the medium and long-term performance measures fixed income business. Our clients are asking us about it and we have a broad suite of products across the board in fixed income to deliver on our clients’ needs, whether it be in a short duration form like JAAA or vanilla ETFs, whether it be in core plus areas like flex bond, developed market bonds, even JMBS, which is another ETF that is CMBS, RMBS type or just riskier assets, multi-asset credit, multi-sector income, those types of forms. So we have a panoply of products to deliver on our clients’ needs in a world where fixed-income is becoming much more relevant and we are very much positioned to deliver that to our clients in our strategy.

Yes. I don’t think there’s a lot more to add on that. Ali as you say, it doesn’t seem to be a sort of common thread on where we’re seeing demand from clients, but the great news is that we’ve got products that align with their demand in many areas.

Okay, great. Thank you for taking my questions.

Thank you. Our next question comes from the line of Patrick Davitt of Autonomous Research. Your line is now open. Please go ahead.

Good morning, everyone. Ali, I thought your comments on the redemption rate being abnormally low were interesting, which is not exactly what we’ve seen from some of your peers. What do you think drove it looking so much lower and then why are you so confident it might get worse again?

Look, it’s a great question. So if you take a step back and disaggregate the quarter and the drivers of what we see it was clearly from a flow perspective, a solid quarter. And you can decide that in a few ways. So some things will be repeatable. Some things we don’t think will be repeatable until we are consistently delivering on everything that we need to deliver for our clients. One of them, as you mentioned, is very much lower outflow rates. We have to just look at our history to see what we’ve been outflowing and you can do that as well as I can. And this quarter was a little bit better. Is it all because of all the great hard work that we’re doing from a business perspective and we have been doing hard work, we have been improving our interactions with our clients. I think you could say that, for sure, there’s some element to that. But one has to admit that there’s some serendipity in that as well, serendipity in terms of timing of inflows, but also serendipity in terms of clients in some ways waiting and seeing. Waiting and seeing what we’re doing from a business perspective and what the new strategy is going to bring. I would say that some of the benefits of the inflows came from clients who were waiting to pull the trigger, waiting to see if the strategy is on track. And I think at least in this quarter, they decided that some folks who were waiting that our strategy is on track and they’re willing to pull the trigger. So look, we’ll see what the go forward suggests. We’re not suggesting that, as I mentioned a moment ago, that one quarter creates a trend, but we’re pleased with the hard work across our firm. We’re pleased with the interactions we have with our clients, the activity levels. We’re seeing some improvement in some of the underlying markets from market share perspective. But it’s going to take some time.

All right, cool. Helpful. And then a broader question. I’m sensing in my conversations over this quarter that Australia’s coming up a little bit more in money in motion, and Australia’s becoming a bigger and bigger opportunity but with a lot more barbell between passive and alternatives. So I think Janus is kind of uniquely positioned to take part in that. Are you seeing the same thing? What products do you think are best positioned to benefit from that? And then on the other hand, any large back books of AUM there that you think could be at risk from that money in motion? Thank you.

Patrick, yes, we are seeing Australia have money in motion. We want to make sure we capture our fair share of that. We do have both local, so to speak, products that are catered to that marketplace. Think about our Australian fixed income business, think about some of our sustainable products that are down there as well and others. We think we can certainly deliver on some of the needs and take advantage of some of that money in motion, and we’re getting some of that money in motion. To be fair, we’re also getting some of those products being exported to very sophisticated clients outside of Australia as well given the strength of the skillsets that we have from an investment perspective in Australia. There’s clearly going to be areas where we’re going to lose out on that as well. We’re going to lose out on folks looking for other things than what we have. But we think the net-net of it is that the Australia business is extremely strong. We continue to deliver on what our clients’ needs are and we do see opportunity from money in motion, particularly at our market share in that region.

Our next question comes from the line of Daniel Fannon of Jefferies. Your line is open. Please go ahead.

Thanks. Good morning. Wanted to follow-up on your comments about exiting some unprofitable AUM and maybe talk about what strategies or what regions that that’s coming from. And then also given the kind of success in the institutional channel of this quarter, and you mentioned lower fee, but if you could put some framework around how to think about some of these mandates in terms of that relative to the overall fee rate.

Sure. Thanks, Dan. So first on the culling, so to speak. Look, we’ve always had an ongoing discipline at Janus Henderson of looking at different mandates, different pieces of the business and getting a sense of whether they’re profitable, whether they’re as efficient as they should be, and looking at that very carefully over the years. I think as you’ve heard from us before, with Fuel for Growth, which is creating fuel to be able to invest back into the client, we want to make sure that we’re even more disciplined on that, even more focused on the ongoing review of profitability and efficiency across the firm for different mandates. We are going to be surgical, we’re going to be deliberate, but we want to call it out as it’s not something that’s insignificant. To your point, does it have a fee rate correlation to it? It might, but it also depends on how much costs to service some of these functions and strategies. So we just want to be mindful of that and call that out for you all.

Just to add to that. As you said, the decline is due to these large fundings from some sophisticated institutional clients into some lower fee products, which is where we are today. Over time, we expect to see that continued success in institutional that will be in a blend of products. And as we see continued growth in our intermediary business over time we’d expect to see our fee rate normalize or stabilize as it has done. And again, I’ll just remind you, over the full year, our fee rate is actually up 0.4 of a basis point from this time last year.

Understood. Thank you. And then, I guess, Roger, just a follow-up or clarification on the guidance for performance fees. Are you assuming the performance is flat from here as you think about the full year guide? Or is there some assumptions of beta or improvement?

Yes, we assume relatively flat performance from here. So, yes — performance will be what it will be during the year, but that assumes basically flat performance.

Understood. Thank you.

Thank you. Our next question comes from the line of Craig Siegenthaler of Bank of America Merrill Lynch. Your line is now open. Please go ahead.

Good morning, Ali. Congrats on the strong flow quarter. Can you walk us through the plan you’ve developed to build the institutional pipeline? Like what I’m looking for is have you reallocated resources between different client verticals? How are you interacting with consultants differently? Have you tweaked product pricing? And also, which funds or retail funds have you relaunched into the institutional channel?

Hey, Craig, thanks for the question. Yes, so institutional is a big focus of us from a strategic perspective. And we most certainly have changed the way we tackle institutional. The great thing is, and I’ll kind of answer that last part of your question first. We have a great set of products that we can bring to the institutional channel. They’re institutional quality products with institutional quality performance, processes and long-term track records that we just didn’t take to the institutional channel in a disciplined manner, particularly in North America. And so, seeing that opportunity to amplify those strengths based on our U.S. equities franchise, our fixed income franchise in the U.S. and elsewhere around the world looks like an interesting opportunity. Again, not one that turns overnight, you all know the sales cycle and the development of a client relationship cycle takes a while. But it’s certainly something that we’re very focused on and very excited about. And you’ve seen some of the fruits of that labor come through in this quarter. From a more practical perspective, you’re exactly right. So we have reorganized that business, reorganized the regions. We brought in extraordinarily strong new talent to the team over the course of the past, call it roughly a year — people with relationships, people who have been doing this for a while, people who can get us in front of institutions. I’ll give you a very clear example. A client said, “I didn’t know that you had these products in institutional, I thought of you more as a retail business,” and we ended up winning that mandate with the institutional client. So you are seeing a lot more of an organizational structure that is conducive to bringing some of our products that we’ve had for a very long time to institutional. You’re seeing that in our activity levels — our activity levels are up quite significantly in institutional. We talked about that actually, I think last quarter or so, and that continues. The word is getting out there. The word is getting out there among our large sophisticated institutional clients and consultant partners that we have something that can deliver our clients' needs and we are starting to deliver that. So again, we are very energized by what we’re seeing so far from the team.

Thanks, Ali. And just as my follow-up, how are you viewing the dividend now? I know you’re covering the dividend, but dividend coverage is on the low side as the market declined last year. And this is somewhat impacting your ability to build excess capital, which I think you want to do, and opportunistically buy back stock when it’s low.

Do you want me to start on that one, Ali? Yep. So as you say, I mean, our dividend is fully and well covered. Dividend yield is strong. Our dividend methodology or our capital methodology is unchanged. We have a hierarchy of needs which is to ensure that we have the regulatory and working capital that we need, that we then invest in the business both organically and inorganically. And should we not have a better use of capital, we’ll return it to shareholders. And as you say, we’ve successfully had both a strong dividend and a buyback over the last few years. As we stand here today the dividend, as I say, remains well covered, but we’re seeing some opportunities in what Ali’s been talking about, both in terms of organically and inorganically investing in the business. And also particularly given the volatility in the markets, we are very happy with the dividend as it stands. And as I said, have not put forward for a buyback for this year. But should those things not come about in terms of that investment needs then we would obviously be looking to return cash in that consistent manner.

Thanks, Roger.

Thank you. Our next question comes from the line of Nigel Pittaway of Citigroup. Your line is now open. Please go ahead.

Great. Thanks for taking my questions. Just first of all, on the LTI expense, I hear what you’re saying about and it's usual obviously about the first quarter having that payroll tax impact. But it does sort of strike me at around a third of what you’re expecting the full year expense to be, it is relatively high. Is there any particular reason for that?

Both Q4 and Q1 include some mark-to-market as obviously if the market has risen. So the full year number, which we’ve given you in the appendix assumes flat markets from here. But other than that, yes, it is just the calendarization of that first quarter. So it was four more — there’s about $4 million of mark-to-market in the first quarter as well.

All right. Okay. Thanks. And then maybe just coming back to one of the previous questions just on performance fees, I mean, previously you said that you do have a number of funds at or above their high watermarks. So it seems as if you’re not allowing for much in terms of performance fees over and above the negative drag from the fulcrum fees. I mean, do you think you’ve been conservative in the assessment that the guidance you’ve provided today on full year performance fees or how should we view that?

I’ll tell you what — yes, as I said, things can go either way. We saw some very strong things come through late in the second half of last year in terms of performance fees, where our excellent investment teams delivered some very strong performance. And obviously that can happen. But we have significant AUM in performance fees in the second quarter, particularly in the CCAP range and the absolute return strategy in the UK. But most performance there is sort of at or around benchmark and high-water marks at the moment. So no, we’re not currently anticipating that based on current performance. There’s only a couple of months to go, so it would be a pleasant surprise. But I think it’s the correct answer to assume relatively low performance fees from those — in Q2. Obviously, Q3 is then a relatively quiet period, and then we have some performance fees that come due in the fourth quarter. Obviously that’s a little bit further away and we’ll update in future quarters.

Okay. Thank you.

Thank you. Our next question comes from the line of Andrei Stadnik of Morgan Stanley. Your line is now open. Please go ahead.

Thank you for taking my questions. Can I ask firstly around the timing of the institutional flows? Did they come early or late in the quarter? Just in terms of helping us to think about the base management impact?

They were blended through the quarter, really.

No, I was going to say the same thing. They were several of them. They came throughout the quarter. I don’t know if that helps you.

Probably — thinking about it — probably a little bit earlier. There’s probably more in January. So that does make that fee impact through the quarter.

Thank you. And my other question was around how long were you in discussion for with the various managers that you ended up winning? Were they fairly recent? Or were you talking some of them half a year or even longer? Like how long were they in the pipeline for?

It varies when you look at what came in. I think if you want to disaggregate it more broadly there was certainly a certain amount of serendipity of things falling into the same quarter. There’s no question. But there were folks who were new and funded relatively early and we could, from an operational perspective, get some improvements that we’ve done to fulfill that for them. There was a subset exactly as you described, Andrei, that were — as I mentioned a little while ago — wait and see. They saw and they didn’t wait, and so they pulled the trigger, so to speak, to trust us with their capital. So I’m not sure there’s a perfect answer to this. Generally speaking, these things are — I don’t know, call it nine months in the making typically in terms of when you actually hear to when you actually go through in the funding. But some of these relationships are 3, 4, 10 years old. So there’s not a great answer to that question. These were a mix of all.

Our next question comes from the line of Alex Blostein of Goldman Sachs. Your line is now open. Please go ahead.

Great. Thanks. Good morning, everybody. Ali, a little bit of a strategic question for you. So when you guys talk about buy, build or partner it sounds like the activity rates on the buy side are picking up. But if you were to think about over the next kind of 12 to 24 months, which one of these areas are you likely to be most active in? And I think we can all kind of picture what buy looks like, but when you’re talking about build or partner, what are some of the key areas that you’re looking to do that in?

Sure. Thanks for the question, Alex. So look, first and foremost, our priority is to grow the business that we have. That’s what the Protect & Grow and Amplify legs of our strategy are all about. We talked about institutional, we talked about some of the improvements in U.S. intermediary, etc. And then of course, yes, there’s a diversified piece, which is the buy, build or partner. Look, I would argue that the build and particularly the partner areas are looking relatively fruitful. An example of kind of a combination of a buy and build is what we did with our emerging market debt team. I remember we brought them on board in September. They had zero assets, so it was kind of an acqui-hire, so to speak. And then we’re close to over $1.5 billion, almost $2 billion of committed capital to that. So that’s an example of the type of thing we could do that sort of melds the buy and the build. And there’s some really interesting opportunities to partner as well. I think our strengths are very, very clear: we have a phenomenal client base and world-class investment acumen, and we can marry that to deliver on our clients' needs in a partnership form as well, which could be quite interesting.

Got it. Okay. And then a clarification question on the institutional pipeline. When you guys are talking about rebuilding it given strong fundings this quarter, can you help quantify where the institutional pipeline of unfunded mandates stands today and the composition of the pipeline?

So we don’t actually talk about the pipeline historically at Janus Henderson. What I will say is that, I guess three things. One is, there are many things in the pipeline and as I mentioned in an answer to another question, we’re all very enthusiastic about the team that’s there and the activity levels that are there, bringing our best-in-class investment strategies to clients. That being said, it’s going to take time, especially as certain clients who were waiting did pull the trigger this quarter, as you saw in Q1. It’s going to take a little bit of time to rebuild that. But there’s a lot of interest, whether it be in global or international businesses that we have, in emerging market debt, as I mentioned a second ago, in alternatives and fixed income. We have a real great palette to offer our client base there. So we’re excited about the opportunity in institutional to continue over time.

Thank you. Our next question comes from the line of Ken Worthington of JPMorgan. Your line is now open. Please go ahead.

Hi. Good morning. Thanks for taking the questions. Maybe first — you’re having improved success in your ETF business, particularly fixed income ETFs. Are you seeing success on particular platforms? And if so, why? And then what are you doing from a marketing perspective here to sort of continue and broaden the success that you’re having?

Thanks for the question, Ken. There’s no particular platform that I’d say that is disproportionately driving some of those flows. What really comes down to is we have a marriage of a really unique set of investment capabilities around the securitized world in particular, whether it’s JAAA, whether it be JMBS, others, vanilla. And then matching that to our client needs, particularly in an environment on the short-duration side for most of the needs here in this fixed income environment. It's a great marriage that we can deliver through partnerships with our U.S. intermediary platform partners in particular. On the marketing side, there are a few things. Number one, and I'll mention this more in a second, we are doing the broader brand marketing, which we'll get to. But from an ETF perspective, a lot of it is about education — education in an environment where yields are where they are and the uncertainty is where it is. We have the opportunity to bring these clients through our U.S. intermediary partners. The opportunity to invest in these types of products, which are quite unique to us, and so it's a lot of education. Now that being said, we have spent time on marketing. It's something that's a little bit different than we used to do in the past, as you heard in our earlier remarks. And what we found from the data perspective is that Janus Henderson has a good level of brand recognition. But we have to get into a broader consideration set for advisers and partners — consultants or institutional or U.S. intermediary partners. Part of what we're trying to do with this marketing is to say we have something to say now. We have something to say: we are a great firm, we have differentiated insights, disciplined investments and world-class service. Our purpose statement is 'invest in a brighter future together.' The data suggests if we get that in front of folks, consideration becomes broader. Brand actually matters according to the data. The last thing is we're doing this as an experiment. We have analytics behind what we're doing from a marketing perspective to measure ROI, where we'll use it and what products will be benefited by some of this brand marketing. We're going to iterate and test and learn in a rather sophisticated manner going forward.

Great. Thank you. And then institutional win rate increase this quarter, how does the fee rate on the business won this quarter compare to your overall institutional fee rate? Is this business coming in at similar, higher or lower fees? Is price a factor in winning business?

So as we said, there were some very strong mandate wins this quarter from sophisticated institutional clients, which were in areas of lower fee products, particularly around enhanced index. So that is what's come through the pipeline this quarter. That is what has brought the fee rate down a little bit this quarter as I said. That broad pipeline Ali's been talking about and the persistency and that is what we've got to build out. That's a blend of product. Our liquid alternatives business is a mix of a multi-strategy business and an enhanced index business. This quarter, we saw some very sizable flows coming in enhanced index, but multi-strat is an area where we've seen and we've talked about where we've seen a lot of client and consultant interest around the world and that obviously is a higher fee business. And we've got a range of things in that pipeline. But this quarter, yes, there was a range of enhanced index and fixed income product from larger clients in the institutional space at lower fees. So it was lower than our institutional rate this quarter.

Roger said it well, Ken.

Yes. I hear that. What I’m really after is, are you using price to win business? Is that part of the strategy? Were the products priced the right way before or maybe they weren't priced the right way before and you're using price as an adjustment?

Absolutely not, Ken. I appreciate the clarification. No, there is no apples-to-apples pricing pressure at all. It's all based on mix. The natural mix effect of ebb and flow between channels showed up in the quarter. We should continue to expect our fee rate will be flat to going up over time. If you look at the fee rate over a longer period, Q4 had a little bit more ebb than flow in some of these lower fee mandates and this quarter had a little bit more flow than ebb in channels that drove the fee differential. So to answer your question directly, pricing is not part of our strategy to get more business.

Awesome, thank you.

Thank you. Our next question comes from the line of Brian Bedell of Deutsche Bank. Your line is open. Please go ahead.

Great. Thanks. Good morning. Thanks for taking my questions. Maybe just back on the institutional side, as you're marketing to the institutions, do you see them shifting money from other asset classes or from other managers? How are consultants playing a role versus your direct effort? And then more broadly, given the improved traction in the institutional channel versus the AUM that you do intend to exit because it's unprofitable, should we be thinking of this as a net growth avenue on the institutional side even considering exiting some unprofitable mandates?

Thanks for the question, Brian. Let me disaggregate that into three areas. First, what's happening from our client base and what are they looking at. One of the most important themes our clients are thinking through is that the past ten years were relatively easy to get returns, particularly through passive mandates. Going forward, our more sophisticated clients are saying we need to figure out how to create alpha out of the haves and have-nots. Whatever we invest in — equities, fixed income, alternatives — how do we accentuate alpha creation between haves and have-nots? The good news for us is that's what we do every day at Janus Henderson. That's why we have hundreds of people in our investment teams to pick the haves and have-nots. That is increasingly relevant to our clients and the broader industry going forward. We are clearly seeing a shift from many clients who were allocating a lot to passive back to active managers like us to get differentiation. Some of that is manifested through products like enhanced index — a passive underlying with an active overlay — which has been successful. Some clients are going even further into active strategies in fixed income, equities, and other areas. Second, on consultants, we didn’t have as concerted a consultant servicing effort until relatively recently. We now have a global head of consultants and a long-tenured North America head of consultants. Partnership with consultants is extremely important and we are focused on those relationships. They don't turn overnight, but over time they do, and we’re seeing some early benefits. Third, on whether this is net growth even after exiting unprofitable mandates: it’s tough to predict flows, obviously, but we’re pleased by institutional results this quarter. There will continue to be ebbs and flows. The outflows were lower than our historical run rate this quarter and we expect outflow rates to normalize toward historical levels over time. The path to consistent growth will take time, but we believe institutional is a meaningful growth avenue over the long term.

Okay. Great. And then just quickly on the adviser side, are you gaining more traction with individual advisers at firms, or is future growth more about onboarding new platforms and adding products onto those platforms? And on the branding campaign, is there a retail component so retail investors might gain brand recognition and ask for Janus products as a result?

It’s both. We have broad reach to many U.S. intermediary clients but often don’t have many of our products on their platforms. We're known for certain things and as a trusted partner and that opens the door to offer more products. We're focused on increasing product distribution across platforms and gaining deeper adviser relationships. The U.S. intermediary team where we've made personnel changes is showing signs of improvement on both dimensions. On marketing, yes, we are experimenting and measuring everything. We're seeing advisers recognize the name and engage more. Anecdotally, that’s already happening and we expect to continue testing and optimizing the campaign to drive adviser and intermediary engagement.

Thank you. Our next question comes from the line of Ed Henning of CLSA. Your line is now open. Please go ahead.

Thank you for taking my questions. Just the first one, did you expect only one to two quarters of positive flows over the next two years? And in that, can you highlight where you think the biggest headwinds on the flows will be for your business over the next two years?

Sure. Our guidance hasn't changed. We indicated we would expect one to two quarters of positive flows over the next one to two years as evidence that our strategic plan is taking hold. We just had one such quarter and we still expect one to two quarters, including this one, over that period. It takes time to consistently generate positive organic flows in asset management. The major headwind is the underlying industry growth rate — active management is not a rapidly growing business, so net flow headwinds from industry trends are a factor. We are addressing our own company-specific challenges, but industry-level flows are a broader headwind.

Yes. And do you expect to still see outflows in equities and potentially inflows in fixed income? How are you viewing broad outflows from active managers into ETFs or private assets as a headwind for you and the industry?

From an industry perspective, we believe the environment ahead will emphasize differentiation because money won't be free, so haves and have-nots matter more. That should favor active managers who can deliver true alpha. Whether that means a wholesale shift from passive to active is uncertain, but our most sophisticated clients are increasingly seeking active solutions to differentiate returns. We see opportunity across equities, fixed income and alternatives. Our goal is to position Janus Henderson to capture those opportunities where clients want active, differentiated solutions.

I’ll add that we’ve talked a lot about institutional. Another important point is the improvement in the U.S. intermediary business that Ali mentioned, including strong improvements in equity. We’ve seen significant improvement in the performance of mid-cap growth, which had strong long-term numbers. In Q1 we saw a dramatic turnaround in flows into that strategy as well as improvements in overseas and global equity income. So we are seeing some strong flows into equity in certain places.

Our next question comes from the line of Bill Katz of Credit Suisse. Your line is now open. Please go ahead.

Thank you. Good morning and good afternoon, everyone. Just coming back to expenses for a moment as you think through your initiatives to reposition the platform across your three initiatives, where are you in terms of that spending cycle? Is that something that you would expect to complete this year or would you expect that spending pace to continue into next year? And then if so, how might you fund that?

It's a good question. Our non-compensation expenses are low in Q1, and the guidance we've given of mid to high single-digit year-on-year growth in non-compensation costs still stands, which means we'll accelerate in Q2 to Q4. We've realized much of the $40 million to $45 million of cost savings earlier than anticipated, and that's allowed us to reinvest in strategic initiatives. The brand campaign kicked off in April, so you'll see that acceleration through Q2 to Q4. If we see success from these investments, we'll continue to fund through efficiency. Otherwise, we're at a good level. There are inflationary pressures and currency impacts built into the guidance as well.

Okay. Thank you. And then, Ali, maybe one for yourself. You mentioned a couple of times throughout the call in the Q&A that the M&A pipeline is seasoning nicely. If you were to think about two or three key areas of focus to complement your existing book of business, what might that be? And how should we think about sizing or seizing specific opportunities in that pipeline?

Thanks, Bill. Our M&A view hasn't changed: we acquire things our clients want. We’re not trying to get bigger for the sake of size. We want to buy capabilities that materially expand the skills we can provide to clients. The emerging market debt example was an acqui-hire that quickly attracted capital and is illustrative of our approach. We are particularly focused on areas under the private rubric, such as private credit, where clients are increasingly looking for solutions. We will be judicious given the market environment and look to buy or partner with groups that want to grow with us and fit into our distribution and client base. We’re unlikely to enter pure private equity at scale, but we might participate in creative ways. The main focus is broader private opportunities that expand what we can offer clients.

Our final question of today comes from the line of John Dunn of Evercore. Your line is now open. Please go ahead.

Thank you. Maybe just a quick one on ETFs. Is there an outlook for more launches given how well AAA and MBS have gone? And then maybe outside ETFs, any other launches on the horizon you would highlight?

Sure. We have over $6 billion of AUM within ETFs in a relatively short period of time and we are very pleased with the success there and expect continued success. Our philosophy is to be client-led. If we have investment skill sets that clients want in ETF wrappers, we will provide them. ETF is a vehicle that lets us bring institutional-level products to broader investors. The broader scope is around securitized skill sets in our fixed income lineup, which we’ve leveraged. Have we filled out the suite? No, but we see more launches likely given team success. Outside of ETFs, yes, we will continue to launch new products where it makes client-led sense. We will be disciplined and not throw spaghetti at the wall. We’ll be judicious and build on our existing investment processes and capabilities.

Got it. And then regionally, you mentioned a pickup in U.S. intermediary and a bit more muted European retail. Can you frame Asia channel-wise maybe outside of Australia?

Asia outside Australia is relatively steady. There is some wait-and-see from clients on geopolitical issues. We don’t see massive money in motion at this point, but we see opportunity over time. Market share gains in that region will be an important part of our plans going forward.

As there are no additional questions waiting at this time, I'd like to hand the conference back over to Mr. Dibadj for closing remarks.

Well, thanks, Candice. Thanks everybody for joining. Hopefully, this quarter's results suggest that the Janus Henderson team is working extremely hard, aligned with our strategy, making changes to deliver for our clients, our shareholders and our other stakeholders. Over time, we'll continue to deliver progress like this. Thanks very much, everybody.

Ladies and gentlemen, this concludes the Janus Henderson first quarter 2023 results briefing. Have a great day ahead. You may now disconnect your lines.