Janus Henderson Group PLC Q2 FY2023 Earnings Call

Good morning. My name is Sam, and I will be your conference call facilitator today. Thank you for standing by, and welcome to the Janus Henderson Group Second Quarter 2023 Results Briefing. All lines have been placed on mute to present 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 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 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. Now, it’s my pleasure to introduce Ali Dibadj, Chief Executive Officer of Janus Henderson. Mr. Dibadj, you may begin your conference.

Welcome everyone, and thank you for joining us today on the Janus Henderson Second Quarter 2023 Earnings Call. I'm Ali Dibadj, and I'm joined by our CFO, Roger Thompson. In today's call, I'll start with some thoughts on the quarter before handing over to Roger to run through more detail. After Roger's comments, I'll provide an update on our strategic initiatives, and then we'll take your questions after those prepared remarks. Turning to slide 2. Markets remain uncertain. And while second quarter and year-to-date market returns have been positive, the rally has been extremely narrow, led by a few megacap stocks. Persistent headwinds, including an opaque economic outlook, higher interest rates, uneven inflationary pressures, and recession fears, notably in the UK and Continental Europe, are contributing to a difficult market backdrop. Even amidst macro challenges, we're very pleased that Janus Henderson continues to make progress, executing our strategy and again, delivering good quarterly results. Assets under management increased 4% to $322.1 billion due to positive markets and are up 12% since the beginning of the year. The quarterly flows were negative $500 million this quarter. While just negative, the result is the second-best quarter in nearly three years. Taking a step back to look at the broader picture, our results this quarter clearly show significant improvement from where we were a year ago. Inflows for the first half of 2023 were $5 billion, a marked improvement from the $14 billion of outflows during the first six months of 2022. Let me just say that again. Last year in H1, we were sitting at negative $14 billion in net flows. Now, we're at a positive $5 billion in net flows—clear progress. To remind you, we've also said that our flow trajectory won't be linear, and we're not yet at the point to be able to promise consistent positive flows despite the tangible improvements. As we begin the second half of the year, we need to rebuild our pipeline which takes time. Our retail flows continue to be negative, especially in EMEA, and there are a few pockets of internal transition that will make us a stronger firm for the long term, but will negatively impact our flows in the near term. That being said, remember that last year's total annual net flows were negative $31 billion, and we expect to show great improvement from that and believe we are on our way to sustainable organic growth in the future. In particular, we remain encouraged with the momentum and sales activity levels in the business and conversations we're having with clients, given our investments in client service, greater accountability and collaboration, improved selling processes, and investment performance. Given long lead times in this industry, our expectation continues to be that we deliver one or two quarters of positive net flows over the next one to two years, as an indication that our strategic plan is taking hold. Turning to investment performance. It is solid in aggregate, with 68% of assets ahead of benchmark on a three-year basis. The ability of our world-class investment and distribution teams across all our capabilities to deliver differentiated insights, investment discipline, and world-class service positions us well to navigate these uncertain markets and deliver the best possible investment outcomes for our clients and their clients. In summary, we are clearly showing progress on our strategic path to deliver consistent organic growth; there's still much opportunity for improvement, our financial results are solid, we're generating good cash flow and we have a strong and stable balance sheet. I'll now turn the call over to Roger to run you through the financial results.

Thank you, Ali, and thank you again to everyone for joining us on today's call. Turning to slide 3 and investment performance. Investment performance versus benchmark remained solid with over 60% of assets beating their respective benchmarks over all time periods. Short-term fixed income performance versus benchmark improved this quarter, and the longer-term time periods remain very strong. Investment performance compared to peers continues to be competitively strong with 70%, 61%, 78%, and 87% of AUM in the top two Morningstar quartiles over the one, three, five, and ten-year time periods. Slide 4 shows company flows. As Ali mentioned, net outflows were $500 million this quarter, and while we're pleased with year-to-date flows compared to the prior year, our goal is to deliver consistent organic growth over time and we're not there yet. Based on the items that Ali discussed, we wanted to provide an outlook for third quarter flows. As we sit here today, we expect net outflows in the third quarter to be in the range of negative $3.5 billion to negative $5 billion. Turning to slide 5 for a look at flows by client type. Net outflows for the intermediary channel were $1.6 billion compared to $700 million in the first quarter. The quarterly decline was primarily from the EMEA and LatAm regions as higher interest rates and recessionary fears are weighing on flows. This is not unique to Janus Henderson and the industry in general has experienced a challenging flow environment in those regions. US intermediary flows were virtually flat, supported by strong positive flows in several strategies including the AAA CLO ETF, our mortgage-backed security ETF, and US Mid-Cap growth. We told you before that US intermediary is a key initiative under our Protect & Grow strategic pillar, and we're pleased that we've showed a significant improvement in net outflows in the first half of 2023 compared to the same period a year ago, and that we are capturing market share. Institutional net inflows were $1.9 billion versus $6.9 billion in the first quarter. Pleasingly, the quarter included a $3 billion enhanced index mandate from a global insurance client adding to flows in Q1 from sovereigns and other insurers. In addition, in Q2, we had our largest emerging market debt mandate funds to-date. We are not anticipating any similar sized fundings in Q3, in line with our comments on last quarter's call that our distribution team is working to replenish and build a sustainable pipeline and that this will take time. Redemptions were normalized in Q2 after a benign Q1. Finally, net outflows for the self-directed channel, which includes direct and supermarket investors, were $800 million. The US Direct business is a strategically important pool of assets, and to better deliver for our clients during the second quarter, we started to offer an investment advisory service to our direct investors in the US. This is a service we haven't offered previously and helps us guide our direct clients so that they are better positioned to achieve their desired financial outcomes. Slide 6 shows flows in the quarter by capability. Equities flows were breakeven in the second quarter compared to net inflows of $3.3 billion in the prior quarter, a good result considering the challenging environment for active equities. Net inflows of fixed income were $1 billion compared to $3.6 billion in the prior quarter. We remain encouraged that despite the challenging short and medium-term investment performance in fixed income, we have a differentiated breadth of products that is able to capture flows across multiple channels and regions. Several strategies contributed to positive fixed income flows including emerging market debt which had $600 million in net inflows for the quarter and has crossed the $1 billion mark of assets under management. Elsewhere, fixed income ETFs had positive flows of $870 million in the quarter, led by the AAA CLO ETF and our mortgage-backed securities ETF. For the year, our fixed income ETFs have gathered $1.7 billion in inflows and our ETF AUM has grown to over $7 billion. Total net outflows for multi-assets was $700 million driven by the balanced strategy within the US retail channel. Whilst the net outflow is in part due to short-term underperformance back in 2022, the strategy is currently outperforming versus benchmark and peers across one, three, five, and ten-year time periods. Finally, net outflows in the alternatives capability were $800 million, primarily from the multi-strategy and the absolute return strategies in the UK and Continental Europe. Moving on to the financials. Slide 7 is the US GAAP statement of income. And on slide 8, we explain the adjusted financial results. Adjusted revenue increased 5% compared to the prior quarter, primarily due to increased management fees on higher average AUM in addition to seasonal performance fees. Net management fee margin for the second quarter was 48.5 basis points compared to the prior quarter of 49.8. The decline is primarily due to the impact of large institutional mandate fundings during the first half of 2023. All else equal, we anticipate the net management fee margin to stabilize in the third quarter. Second quarter performance fees were negative $6 million and included negative $17 million of US mutual fund fees, partially offset by performance fees, primarily generated from the European Smaller Companies Investment Trust. As we sit here today, based on our current investment performance, our estimate of aggregate performance fees for the full year remains unchanged towards the lower end of negative $35 million to negative $45 million. This includes roughly negative $65 million from US mutual fund performance fees. Clearly, the result will be dependent on future performance. Continuing on to expenses. Adjusted operating expenses in the second quarter were $280 million, up 1% from the prior quarter. Adjusted employee compensation, which includes fixed and variable costs, was up 5% compared to the prior quarter, primarily due to higher variable cost accrual. Adjusted LTI was down 30% compared to the prior quarter, largely due to seasonal payroll taxes attributed by annual vestings in the prior quarter. In the appendix, we've provided the usual table on the expected future amortization of existing grants BTUs in your models. The second quarter adjusted comp to revenue ratio was 45.6%, in line with expectations. Adjusted non-comp operating expenses increased 13%, again in line with expectations compared to the prior quarter, primarily due to higher G&A and marketing expenses. Adjusted operating income increased 15% over the prior quarter to $121.5 million in Q2. Second quarter adjusted operating margin was 30.2%. Finally, adjusted diluted EPS was $0.62. Updating on our expectations for full year 2023 operating expenses. We continue to be disciplined on costs and are always looking for ways to operate more efficiently. We now expect to deliver at least to the high end of the $40 million to $45 million in previously communicated cost saves to provide fuel for growth to strategically reinvest back into the business. Our compensation and non-comp guidance remains unchanged. We expect our adjusted compensation ratio to be in the mid-40s. We expect adjusted non-compensation expense percentage growth of mid to high single digits compared to the prior year, which implies an acceleration in our non-compensation costs for the second half of the year as we continue to execute on our strategy. This will include our previously mentioned brand campaign; increased but very disciplined T&E expenses; and the amortization of capitalized costs associated with our OMST project, which just began following the successful go-live of this important project in June. Skipping over to slide 9 and moving to slide 10 and a look at our liquidity. Our balance sheet remains very strong. Cash and cash equivalents were $966 million as of the 30 June, an increase of approximately $137 million, resulting primarily from strong cash flow generation, partially offset by capital return and strategic spend. We've maintained a strong liquidity position and we continue to balance the capital needs and the investment opportunities of the business with returning capital to shareholders. As I stated on last quarter's call, given the opportunities we see in investing in the business organically and inorganically, we do not anticipate buying back shares at this time. 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 30 August to shareholders of record as of the 14 August. With that, I'd like to turn it back over to Ali to give an update on our strategic progress.

Thanks, Roger. Turning to slide 11. A reminder of our three strategic pillars: Protect & Grow our core businesses, amplify our strengths not fully leveraged, and diversify where clients give us the right to win. We are in the execution phase and we believe this strategic vision will lead to consistent organic revenue growth over time. In Protect & Grow, we've talked previously about the importance of protecting and growing our US intermediary business and have been investing in and supporting this channel. We've appointed a new Head of North America Client Group, launched a national brand campaign, selectively upgraded talent, aligned org structure and compensation with the growth strategy, and increased wholesaler client engagement. Progress has been tangible. Significantly improved net positive flows into our adviser group is pleasing to see and has been offset by negative flows in the typically lumpy retirement channel, resulting in an overall negative 1% annualized organic growth rate for the first half of 2023, a strong progress compared to a negative 6% organic rate for all of 2022. As Roger mentioned, importantly, we are capturing market share in this channel. Under Amplify, we've previously talked about our institutional and diversified alternatives businesses. In the institutional business, which is almost $9 billion of positive flows year-to-date, we've restructured coverage to be more aligned to different client types, helping us to better serve their needs through greater specialization. We've made many new appointments and other professionals are joining in the coming months. Diversified alternatives, which includes multi-strategy hedge funds and enhanced index funds, has experienced 35% growth in AUM in the first six months of 2023. We also continue to launch new products and vehicles based on what our clients are telling us. For example, in 2023, we've established a Global Property Equities fund in an OEIC, the sustainable credit active ETF in Australia, additional SMA strategies in the US, and an Emerging Markets Innovation Fund in a CCAP. Under our diversified pillar, our emerging markets debt team, which we brought in last September, now manages $1.2 billion in AUM after starting at zero, less than a year ago. Finally, we continue to look actively to buy, build, or partner to diversify where clients give us the right to win. As an example, we announced a Joint Venture with Privacore that looks to take advantage of the democratization of private alternatives into the retail channel. Moving to slide 12 for more background on Privacore. In June, we announced a new joint venture with Privacore, which is an open-architecture distributor and trusted adviser for alternative investment products tailored to Private Wealth clients in the US and aligns with our strategic ambitions to diversify and grow our business. Privacore taps into the fast-growing market with a strong leadership team in a strategically important segment of the industry where Janus Henderson's clients have asked for help. The initiative positions Janus Henderson to grow with our clients and further strengthens our credibility as a future partner for strategic M&A in Private and Alternative asset classes, which are a focus for our firm. Very importantly, it allows us to do all this without distracting any part of our firm from our core businesses. We recognize that the democratization of alternatives among Private Wealth clients is still in the early stages, and this trend represents a significant opportunity for firms with strong relationships with retail intermediaries, like we have at Janus Henderson, to provide a broader range of alternative investment solutions for clients. Alternatives as a category represents a $12 trillion market today with assets expected to roughly double in size over the next five years. High net worth investors command $80 trillion of assets globally and are expected to account for much of the growth in private markets. We expect that Privacore with Janus Henderson will play an integral role in bridging the gap between managers of alternative assets and investors through diligence, investor education, portfolio construction, and client service across private equity, debt, real estate, infrastructure, and other non-traditional asset classes. Privacore's mission, to partner with the best-in-class managers of alternative investments, paired with extensive relationships at wirehouses, broker-dealers, and RIAs creates value on both ends of the value chain, accelerating GP fundraising and bringing differentiated, institutional-quality investment opportunities to a set of clients that are notably under-allocated to alternatives today. Privacore is led by two principals: Brendan Boyle and Bill Cashel, a pair of industry veterans each with proven track records of building dynamic alternatives-focused businesses. Brendan and Bill are truly the best in the business. And Janus Henderson's robust heritage, combined with this new entrepreneurial team, demonstrates our commitment to ensuring our clients come first, always. Turning now to slide 13, for a reminder of a few of the things each and every person at Janus Henderson has pulled together to accomplish over the past year. We've made a significant amount of positive change in just a few short months that are showing tangible progress and setting us up for the long-term success of the firm despite some volatility in the short-term, reflecting my first impressions from last summer. There was and continues to be a strong foundation in place at Janus Henderson. They are very talented people who want to win. We are an investment powerhouse with world-class client focus, global corporate functions, and infrastructure, and underpinning all these attributes is a strong financial position including a fortress balance sheet. We leveraged this strong foundation through a new strategy and focused execution with increased collaboration, accountability, and urgency with the intent of repositioning Janus Henderson to meet our clients’ and their clients' needs and thus for our future growth. We established a strategic leadership team that created and is now executing on our new strategic plan. We have seven new board members including a new Board Chair, and their exceptional breadth and depth of experience will be critical in leading Janus Henderson. We've created Fuel for Growth to reinvest in Janus Henderson's strategic growth initiatives on behalf of the client. The operating model has been upgraded and simplified including the order of management system transformation project that went live smoothly in the second quarter. This multiyear effort is a monumental step forward in our technology evolution and will help our clients and their clients achieve superior financial outcomes. And finally, we've added talent and promoted from within across the firm while removing layers within the organization. Attracting and retaining the best talent enables us to deliver for clients and execute our strategy over the long-term. Notably, of the talent coming in, many are high-caliber former employees who have taken notice of the positive changes happening at Janus Henderson, see the great opportunity at hand, and want to come back and be a part of it. Net-net, we have a solid foundation, the core team is nearly fully in place, and our plan is in motion. The element about our team, our people is so key given we want an enduring culture of performance built upon our stable and client-focused processes at Janus Henderson, and we are well on our way. Moving to Slide 14, which shows how we're enhancing our culture through our company-wide mission, values, and purpose or MVP. I'm a firm believer that a strong MVP is essential to the success of a company. This shows that firms with a clearly defined MVP are more successful in the long-term and generate better returns than those companies that don't. We introduced our MVP earlier this year to define who we are and what we stand for as a collection of individuals and a firm, not just for today, but what we want to be in the future. It gives us a clear North Star. Importantly, we developed our MVP much like we did our strategy inclusively and from a bottom-up as opposed to top-down, a truly crowd-sourced and thus bought-in articulation and aspiration. The feedback internally has been overwhelmingly positive. I've been extremely encouraged by how quickly colleagues have embedded our mission, values, and purpose into their daily work. Our MVP, coupled with our strategy on a foundation of creating Fuel for Growth, guides our decision-making and prioritization and allows all colleagues to move together in the same direction to help us win in this competitive landscape. Wrapping up on Slide 15. I'm proud of the progress made this quarter, building on the progress of past quarters. Net flows are positive $5 billion year-to-date. Investment performance is solid, financial results are good, and we continue to execute on our strategies, including providing more Fuel for Growth to reinvest back in the business. Success will not happen overnight, and progress will not be linear, particularly as we rebuild our institutional pipeline; retail flows remain negative, and we go through pockets of transition over the next few quarters, which, when taking an aggregate, will lead to negative flows in at least the third quarter. Even so, 2023 flows are set to be significantly improved versus 2022. We are in the early stages of executing our strategic plan. And as we have shown, progress is starting to bear fruit. We believe our strategy will lead to organic revenue growth over time. Our focus continues to be helping clients define and achieve superior financial outcomes and to deliver desired results for our clients, shareholders, employees, and all our other stakeholders. Let me turn the call back over to the operator for your questions.

Thank you. Our first question comes from Ken Worthington from JPMorgan. Ken, your line is now open. Please go ahead.

Hi. Good morning. Thanks for taking the question. In relationship with Privacore, what are the Janus alternative products that seem best positioned to succeed with this relationship? I think you mentioned that Privacore is really a US-focused distribution strategy or platform. But I also think your biggest alternative products like Absolute Return are sort of registered in Europe. So what existing products seem better positioned to sell well on this platform? And how much assets do those products have today? And will you be developing new alternative products to kind of maximize this relationship?

Hi, Ken. Thanks very much for the question. So, look first off, we're very enthusiastic about the potential of Privacore. We firmly believe in the democratization of private alternatives and the broader democratization of sophisticated investment products. And we certainly believe that this is going to be a very exciting way that Janus Henderson can participate in with our joint venture with Privacore. Because it does serve, and this will start to answer your question, Privacore does serve to deliver on both ends of the value chain. A set of clients who have told us that they want more access to alternative investment capabilities, but perhaps don't have the ability to have client service from those alternatives capability managers. On the flip side, the GPs, the actual investment managers, want to get access to private wealth, given that $80 trillion of wealth is sitting there and that many allocations are lower relative to where they should be from a broader alternative perspective. And so the investors want to get access there, but they don't have the scale to develop the client service that the clients need. So, Privacore sits right in the middle and answers both of those questions, answers both of those needs. And coupled with the Janus Henderson brand and our ability to reach out to the retail channel starting in the US, we think that's going to be a really interesting and exciting opportunity for us to deliver for our clients and for our shareholders. So, that's the broad view. Now to your question, very specifically Privacore is an open architecture platform. Its point, its value proposition, it's not just the client service part, but it's also selecting the best-in-class alternative asset managers, then delivering that to the client base that is in great need of access there. We may have products currently. You're exactly right. If there's anything that's closest that will be in our liquid alternatives businesses. But right now, we don't have necessarily the right products to Privacore, which is why it's open architecture and why the team of Privacore has a great experience that it has, in selecting the best culture of managers out there to deliver to the clients. Over time could we have more capabilities that we can bring to clients via Privacore to your second part of your question? Absolutely. That's part of the plan. And in fact, having a relationship with Privacore legitimizes us even further for potential M&A down the line in the liquid alternatives and illiquid alternatives area. Thanks for the question, Ken.

Okay. Yes. Understood. Maybe as a follow-up, outflows for the 3Q, you mentioned EMEA. Any rationale for the redemption or redemptions? And can you compare the fee rate to the assets being lost versus the fee rate in the larger mandates that you've been winning in recent quarters?

So, let me start, and then pass it over to Roger, just to give you the context. So, look in our guidance for Q3, you'll see it's a little bit different than consensus, not massively. We just want to make sure a few things. One is that people don't just project forward the past couple of quarters of our delivery here on net flows into Q3 and beyond. We said it won't be linear. We've also mentioned last quarter and this quarter that, we have to replenish the pipeline. We certainly talked about intermediary being challenging. That's especially an EMEA comment for us, particularly, in an environment where rates in that market are quite high. There's a lot of uncertainty about the economic outlook. EMEA intermediary seems to be pulling back a little bit. And obviously, we're going through some transitions that are internal in nature that will make us a better firm for the longer term. What I would say though, is that we continue to see our market share look better and better versus peers. And if you take a step back for the year, we certainly expect significant improvement versus 2022 numbers, despite what we expect to be outflow in Q3. Now, let me hand over to Roger for more comments there or broader on the fee rate.

Yes, sure. Okay. Yes, I mean, remember that last quarter we told you that in the near term, our success in institutional would impact the fee rate because we were winning with those large sovereigns and insurance clients. But over time, we'd anticipate the stable fee margin as we execute the strategy. And importantly, we're not discounting business in order to win. I think when I look at our 10 largest strategies, our inflows and our outflows are actually at almost identical management fee levels. So, it's not a pricing story. It's around where the inflows have been. And in the first half of the year, we've been really pleased to see those sizable inflows in institutional, but we'd expect so that makes sense that the fee rate has fallen by about a basis point in Q2, but we'd expect that management fee rate to stabilize going forward.

Great. Thank you.

Our next question comes from Craig Siegenthaler from Bank of America. Craig, your line is now open. Please go ahead.

Good morning, Ali, and congrats on another better-than-expected flow quarter. And it's also nice to see some of your stars returning like Marc Pinto. My question is on the flow side. I realize there were a few large institutional mandate wins in the second quarter number, but if you could really attribute two or three factors to the second better-than-expected net flow quarter in a row, what would those factors be?

Thank you, Craig. I believe the progress we’ve made at the firm is a result of various efforts, and I'm optimistic about our continued development in this area. Over the past 12 or 13 months, I have been very pleased with the contributions every individual at Janus Henderson has made for our clients. I wouldn't have anticipated this level of advancement; a year ago, if you'd told me we'd achieve over $5 billion in inflows during the first half of this year compared to negative $14 billion last year, I would have been surprised. This indicates a genuine improvement cycle, and it has translated into positive results, whether regarding earnings per share or client inflows. One significant factor in this improvement is the increase in client activity. We've engaged with more clients recently, and the feedback has been encouraging. They are eager to work with us and are happy to see us actively involved again. Clients who previously adopted a wait-and-see approach are now satisfied with our transition, expressing their confidence in our direction and delivery to them, which has led to good inflow quarters. However, I want to emphasize that we're not completely past the challenges we face; I cannot guarantee continuous positive inflows going forward. Nonetheless, we have observed a substantial rise in our market share, particularly in the US intermediary space. While our US intermediary business was down 6% last year, we've improved to a decline of just 1% this year due, in part, to fluctuations in the retirement sector rather than the core wholesaler-driven intermediary business. This indicates tangible progress, largely due to the excellent work our team has accomplished over the past year, and we hope to maintain this momentum. However, as Roger mentioned, I wouldn't expect this trend to continue into the third quarter, especially since we are not anticipating significant institutional inflows during that time. Our focus remains on the intermediary channel, and we’ve also noted the challenges in the intermediary sector in EMEA, where improvements seem to be lagging compared to the US. I hope this answers your question, Craig. Many factors are aligning favorably for us.

Helpful, Ali. My second one is on the momentum you've been seeing with your insurance clients. And I want to get a read on the appetite for Janus to take this one step further and form a partnership with an insurance company that could provide strategic benefits to both parties? I know you have a lot of experience with it.

So look, we think that there's a real opportunity to provide our skill sets to a broader insurance clientele. We have very strong clients in the insurance market right now that we've had long-standing relationships with. And we're actually increasing the number of insurance clients that we have very sophisticated global insurance clients, most recently particularly in Europe, where we have been able to deliver for them, and we believe that we have the skill set to deliver them even further. You're right that historically, I've had some interactions with insurance companies and relationships there that have been mutually beneficial, and we have been quite active in speaking with insurance companies and seeing if there's something that we can do together with them. There's nothing to talk about today. Again, we're focused on our clients and our clients' clients, whether it be insurance clients or otherwise, we think we can continue to deliver great product to them from a performance perspective and a client service perspective on the strong foundation Janus Henderson has, and broadening that client base, insurance and otherwise, is certainly part of our focus.

Thank you.

Our next question comes from Dan Fannon from Jefferies. Dan, your line is now open. Please go ahead.

Thanks. Good morning. Wanted to follow up on a comment you made around the pockets of internal transition I think impacting flows. So maybe talk about some of the headlines we've seen, but ultimately where you are in this process? And as you think about the guidance for 3Q for flows, how much of that potential disruption is part of that? And whether you think that's going to continue for a few more quarters thereafter?

Dan, thanks very much for the question. So look, the transitions are specifically things that we're doing that may increase volatility in the short-term for sure, but are definitely the right things for the future and the right things for the future particularly for our clients. All of these transitions, at least the ones that are control or client-led. And so far as our clients entrust us to manage their well-being, their money, and we want to take that responsibility even more seriously than we have before and very much make sure that when we're managing the money, we're entirely focused on managing their money from a colleague and employee perspective. The specific transitions are going to be surgical, very focused on delivering again for client needs, and they typically take two flavors of broad transitions. One is—and every company needs to do this whether it be in our industry or other industries—look at the products that they have and look at them to make sure that performance expectations are being met, compliance, making sure that there is real growth in those businesses, and making sure there's real profitability in those businesses overall. We've done the bulk of that to your question from a Fuel for Growth perspective already, but there are a few stragglers here and there. The easiest decisions are when things don't meet performance and aren't particularly big and clients don't like it; those are some easy decisions. But some of the other decisions come through as well when only one or two of those criteria are met. The bulk of that again, as I mentioned, have been done. What I would say is there's a second flavor, obviously, which is more typical, right? So, typical turnover in this industry which happens quite a bit. Just I'd ask you to think about your client base and how that turns over. We've been fortunate, Janus Henderson, that we had less than industry turnover across the board for us, but we have turnover nonetheless. Typically, those things are retirements that are expected. Usually, there is lots of time to manage that. And the great news is that because we have really great tenure and we have 330 investment professionals around, we have long-standing processes that each of the investment teams hold to. We have risk overlays, we have portfolio construction tools, we have all sorts of other things that make the transition even more seamless, let alone obviously a very clear succession plan in bench. We believe that these transitions will be somewhat seamless across the board. And again, over and over again, they're going to be client-led in every instance that we can deliver.

Thanks for that. I appreciate the color. And then another kind of clarification on your longer-term view of one to two positive quarters over the next one to two years for flows. And so thinking about institutional being the swing factor and then having, as we think about intermediary showing steadily improving in the US and still may be challenged outside the US and direct kind of being stable, just trying to think about how you think about that progression in that scenario of one to two positive quarters over the next one to two years?

Yes. So look, just to clarify even further the—remember that the first quarter of this year was positive and we anticipate one to two more quarters between this year and next year. We've established our strategic road map, we're focused on the longer term. We're implementing that strategy with a revamped and a very focused team and the strategic plan has taken hold. To your point, we're seeing progress in these intermediary channels. We're seeing progress in institutional. We've had $9 billion of net institutional flows this year. Again, we can't—don't want to project that going forward. There's a long cycle for those but certainly the signs are positive. In other areas, where we're focused like diversified alternatives, we've seen 35% growth in the first part of this year. All those things are very much pointing us in the right direction. What I would say is, and you know this better than anybody, right, this isn't going to necessarily be linear and we've said that before. So we can't yet promise consistent organic growth. We can see significant improvements certainly relative to last year. We believe we're on our way to sustainable organic growth, but I don't want to overpromise at this point, given to your points on the challenges in EMEA and some of the lack of clarity at this point in the pipeline that we have on the institutional side.

Thank you. That’s helpful.

Our next question comes from Nigel Pittaway from Citigroup. Nigel, your line is now open. Please go ahead.

Great. Thanks very much. Just a quick question if I could on the comp ratio guidance. So obviously, you've had, I think, 50.1% first quarter, 45.6% second quarter, but you're still guiding to the mid-40s. So that obviously implies that it does come down a bit in the last two quarters, is that a reasonable assumption?

Yes, that's reasonable, Nigel. The first quarter is always high given timings, particularly in the US, but that guidance of mid-40s still applies.

Right. So, presumably that means, it's going to come through the comp expense, right? Because your LTIP guidance really hasn't moved. So, is that the way I'm looking at it?

Yes.

Okay. Yes. All right. And then a similar vein, just on the tax rate, obviously, you're reiterating that at 24% to 26%, even that it's 22.2% this quarter? And any reason why it was particularly low this quarter and reverts back up again?

Yes. It's really that how it's calculated. You need to exclude the NCI. If you exclude NCI, our ETR in the second quarter is 23.9%. So, it's basically at the lower end of our guidance of 24% to 26%. And again, I'd stick with that guidance of 24% to 26%.

Okay. Great. Thanks.

Our next question comes from John Dunn from Evercore ISI. John, your line is now open. Please go ahead.

Good morning guys. You talked about EMEA and some of the drag there. But can you just talk about maybe where you're seeing gross sales overseas, both regionally and then strategy-wise?

Sure. So, look, we are seeing a significant pickup in institutional business overseas, particularly in actually the EMEA region. I mentioned earlier on large institutional clients in the insurance world entrusting us with their and their policyholder's capital. Hopefully, we'll be good stewards of that. Similarly, very, very sophisticated sovereign wealth funds, for example, in the Middle East have looked to us for help. We're very proud to serve them and their citizens. And we're finding also in Asia some interest from the institutional side as well and also intermediary flows looking relatively better in those regions. The core kind of issue for us, as we mentioned before, is in the intermediary space. And again, we are setting ourselves up for when the wind is at our backs with increased activity, with great products, with fantastic performance, and with great world-class service from our salespeople. Right now, the win is at everybody's space, including ours. The good news is, even in that market, we're not losing share. In fact, I would argue we're gaining a little bit of share in that marketplace. So again, we're setting ourselves up for the future. But the macro headwinds are clearly there in the EMEA intermediary area, and we just want to remind for that.

John, if I can add to that. If you look on slide 5, you can see the gross flows in intermediary are pretty constant at around $9 billion. So, as Ali said, we've seen very significant improvement year-on-year in the North American intermediary flows, which for Q1 and Q2 are basically flat compared to $3 billion and $2 billion out in the first couple of quarters of last year. And in EMEA, both in the UK and on the continent outflows. It is a tough market as Ali said. But again, we think we're at least holding and possibly taking a little bit of market share in what is a very tough market.

Right. Okay. Cool. And then, you have a lot of experience building in business, Ali, and the JV is definitely a step in the right direction. Can you kind of frame what you think the next couple of years of building that out could be?

Absolutely. So we are very, very involved, as I've mentioned over the past several quarters, and we saw each other live as well in the M&A landscape on private credit. I think one has to make sure from an institution perspective, from Janus Henderson perspective, what one's skill sets are and what can do inorganically, organically, or through some combination of partnership. From an investment skill set perspective in the private world, particularly in a private credit world, we do think, John, that M&A has to be part of the story. So we've been very active in the M&A landscape. I will suffice it to say, any deal you've seen occur, big or small, we've looked at. The M&A team has been very active and very strong looking through this. And if we're not involved in the final culmination of a deal, it's because of our decision either on valuation or potential to grow or fit with our business from a cultural perspective or client need. And so we would expect M&A to continue to factor into growing our private credit business whether it be through partnerships like a Privacore or wholly owned businesses in private credit, but we have to make sure most importantly it's the right team to deliver for our clients. The flexibility we have, just to remind everybody, is very easy to see if you look at our balance sheet. So, we have real ability to leverage our balance sheet to grow— to acquire inorganically and grow in that way. And then, of course, the value that we bring, inclusive of Privacore, is our distribution capabilities to grow any M&A partners that we sign and targets that we bring on board both in the retail channel in the US and globally as well as the institutional channel on a global basis. So, we would only buy things we think we can grow and we will only do it at the right price. And of course, probably the most important thing, I think I mentioned this a couple of quarters ago, we'll only do it if the cultural fit is there, i.e., investment focus and client-led.

Thanks very much.

Our next question comes from the line of Anthony Henning from CLSA. Anthony, your line is now open.

Thanks and good morning. I just had two questions. Firstly, thinking about your net flows, if we're thinking about gross sales versus redemptions in the past couple of quarters, at a high level at least, it looked like you've seen improving trends in redemptions. Is there anything deliberate that you've done in there or is that simply an outcome around market trends etc.? And going forward, how are you thinking about that?

So let me start and maybe pass it over to Roger. So, I think there are a couple of things that are going on from redemptions perspective for sure. One of them is we have certainly delivered better performance consistently across the board and better performance from a long-term perspective, most importantly. And that is being recognized more and more as we talk to clients, better performance over the longer term, yes or maybe expect the volatility across that, and you may have seen that last year for example where it was quite a unique market with bonds and stocks going down to significant amounts. But over the long term, we can deliver that performance and I think that's something that clients are seeing and entrusting us with. So, the short-term volatility and performance, Anthony, doesn't really impact the redemption as much. The second thing is that clients were waiting and seeing a little bit in terms of what the changes are at this organization, and change is often a worrisome term for clients. But I think what clients are realizing is that the change that we're making here is for them. The change that we're making here for Janus Henderson is for our clients, and we can certainly deliver stability, but I don't agree to any client to deliver stagnation because it's not good for them. So the changes that we're going about here I think are seen very, very positively. The last thing I'd say before I hand it over to Roger is that our client service folks—talents that we have in the field that are interacting face-to-face with clients—are thinking about our clients, our clients’ clients, are world-class and continue to be improved from a talent perspective as we bring more and more people in. I think that goes a long way to delivering on our clients' needs and thus curtailing some of the redemption. So I'd argue those three points: performance, waiting on the positive change that they're now seeing, and the client service personnel that we have and the upgrade that we've brought to bear. Roger, I don't know if you have more detail maybe to bring to bear to Anthony.

The performance of our small and mid-cap growth in the US faced challenges in 2021 but rebounded strongly in 2022, and the current numbers reflect that strength. While it takes time for flows to stabilize, it's encouraging to note that small-cap growth has seen positive flows this quarter. Our balanced capability, our largest at about $40 billion, had a difficult start to 2022 but is now outperforming the benchmark and ranks well in the top quartiles across various timeframes, yet it still faces outflows. We hope to see a similar recovery as we've experienced with small and mid-cap growth. Our European equity performance is also solid. As mentioned, focusing on activity and engaging with clients is key, and we believe that flows will follow the performance we've demonstrated, particularly in small- and mid-cap growth.

Great. Thanks for that. Can I ask also a follow-up question just around your dual listing on the Australian exchange? It looks like currently, you only have about 5.5% of your shares listed on the ASX, which is a decline of around about 25% just four years ago. How you think, how are you thinking about maintaining this dual listing? How costly is it for you to maintain this?

Yes. But the ASX listing has been a long and valued part of our ownership structure for many years. But yes, I think it's currently at a low point. But as I said, it's been a very valuable holding for a long period of time.

And there are no further questions. I will hand back to the management team for any closing remarks.

Well, thank you, operator. Thanks, Sam, and thanks everybody for joining today. Janus Henderson is clearly gifted with a solid foundation. Our core team is nearly fully in place. The plan is in motion, and hopefully, this is another quarter where you're seeing some of our clear progress based on those factors. Thanks for joining, and we'll talk to you a little bit.

This concludes today's call. Thank you for joining. You may now disconnect your lines.