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Rating:Three Things to Know From Janus' Earnings Not Rated 0.0 Email Routing List Email & Route  Print Print
Wednesday, April 24, 2013

Three Things to Know From Janus' Earnings

Reported by Tommy Fernandez

Nearly two weeks after enduring a 15 percent pay cut, Richard Weil outlined for investors his plan for pulling Janus out of the doldrums.

The vision outlined by Weil, who serves as the company's chief executive, director and chairman of its executive committee, includes bringing in a ringer, paying more attention to customer relationships and watching every dime.

First, the basics. It is important to note that Janus is 15 percent-owned by the Japanese insurer Dai-Ichi.

If you peruse the company's earnings information and the earnings call transcript on SeekingAlpha, you'll see that Janus reported first quarter net income of $28 million, or 15 cents per share, compared to $22.6 million, or 12 cents per share, a year ago.

Analyst consensus for the quarter was 15 cents per share.

Moreover, Janus' total AUM, as of March 31, 2013, was $163.8 billion compared with $164.0 billion at March 31, 2012.

At least three themes are important in the earnings release and conference transcript.

They are:

POINT 1: The Bleeding Continues
POINT 2: Janus is Concentrating on the Customer, and Bringing in a Ringer
POINT 3: Janus is Being Really, Really Careful about Its Books

Now to drill down on this points.

POINT 1: The Bleeding Continues
Janus' AUM increased this quarter, but this was driven by market appreciation of $11.0 billion, which was in turn offset by long-term net outflows of $3.9 billion. Fundamental equity and mathematical equity long-term net outflows totaled $1.8 billion and $2.4 billion, respectively, while fixed income long-term net inflows totaled $0.3 billion.

There was good reason for the flows. As of March 31, 2013, only 57 percent of the firm's fundamental equity mutual fund assets ranked in the top half of their Morningstar one-year rankings, while only 24 percent did so in the three-year category. Only 38 percent did so in the five-year bracket.

Weill described the situation in this way:

We had a tough 2010 and '11. We had a much better 2012. Even after the first quarter on a trailing 12-month basis, most of the funds look pretty good. But on a 3-year basis, the challenges are significant. And this affects us, as you know, both in terms of performance fees over a medium horizon, and in terms of net flows.

POINT 2: Janus is Concentrating on the Customer, and Bringing in a Ringer

Like any executive facing a customer exodus, Weil is doing all he can to figure out how to their frown's upside down.

He describes the customer situation in this way:

And that remains our primary focus, make sure that we're doing everything we can do to strengthen and achieve excellence in our investment performance for our clients.

In this quarter, we saw a growing confidence in our client base, more interest and enthusiasm for equity investing, certainly, which, as Bruce details on the numbers, led to better gross flows for our equity products, particularly for those equity products that have put up a strong performance over multiple years.

In addition to focusing on investment performance, we're also focusing on our other strategic priorities. We've called our strategy, "intelligent diversification," and we continue to drive forward as we have over for the last 2 years.

But when we sum up our priorities for this year, we start with deliver long-term investment performance, we move to building a more client-centric organization, we want to expand and diversify our investment and our distribution capabilities to better serve our clients, and then we want to continue our disciplined focus on operational and financial matters, balancing our investments with the necessary discipline to fund those investments.

Part of this effort involves bringing in a ringer, in the form of Enrique Chang, formerly president and CIO at Munder Capital Management, and EVP and CIO at American Century Investments, who will serve Janus in the newly-created position of CIO for equities and asset allocation.

There's a problem though, Chang won't be able to work for Janus until September. Weil describes the situation in this way at various points in the conference call.

It's as an intention to join us because he is the subject of gardening leave, a contract promise at his current employer, and so he's not actually able to start in our business until September. And that's a little frustrating to wait for him, but we're very excited to have Enrique joining us, and we think this will help continue our efforts to make sure we have the best possible investment performance for our clients.

Perhaps, I should say one more word about what Enrique Chang will be doing when he arrives and how that fits into our efforts to improve performance. As we've talked about our prior quarterly calls, at the beginning of 2012, we implemented Project Focus and the Janus platform, with the intent to making sure that our process with clients were clear, that our actions were aligned with those promises, and that our resources were aligned with both our actions and the client promises. And we took some steps that we previously discussed to strengthen the team.

We view the addition of Mr. Chang as a very positive contribution along those same lines. He's philosophically aligned with what we're trying to do, and he can help us strengthen and improve and sharpen our process, but he doesn't represent a change of significance in our investment philosophy or where our alpha comes from. As a proven people and process manager, he's going to help us make sure we deliver the highest possible level of excellence to our clients, but again, he doesn't represent a significant change in investment philosophy or what clients can expect in terms of client promises from us.

He'll have the management of the day-to-day equity investment team and contribute across multi-asset portfolios, new product development and firm-wide leadership.

Again, we're a little bit hamstrung in the sense that he is a contractual commitment, which requires him to have a gardening leave through into September, and he can't start with us until that date, and we're very much looking forward to his joining at that time.

POINT 3: Janus is Being Really, Really Careful about Its Books
Janus is pretty much being careful about every dime, be it capital investment, compensation, what have you.

Janus CFO and EVP Bruce Lewis Koepfgendescribed the situation in this way.

There are 3 other topics of considerable interest that include capital deployment, compensation and performance fees, and I will take them in order. Based on past earning calls and recent discussions with many of you, it is clear that there's interest in better understanding how we look at our capital structure, with an emphasis on how management determines when and how to return cash to shareholders.

On Slide 14 [of the conference presentation], you can see the hierarchy of cash uses and how we go about our capital-planning process. We start by reserving capital as required by regulators to run our business, as well as a liquidity buffer to maintain flexibility. While the business is not capital intensive, this step does require that we maintain minimum capital levels in all of our entities.

Second, we look at our upcoming liabilities and set aside capital for contractual obligations, recurring programmatic payments and planned debt repayment.

Third, we look for areas in which we can invest in our business. We plan for both organic and inorganic investment opportunities, which can include seed funding, distribution or investment team build-outs, advertising spend and/or acquisitions to name a few.

Lastly, after all these factors, we look for ways to give capital back to shareholders through dividends, stock buybacks or debt retirement.

As an operating principle, you know that we believe a strong balance sheet aligns the interest of all of our stakeholders.

Since the financial crisis of 2008, we have been in a phase of de-leveraging in order to strengthen our balance sheet and regain and maintain an investment grade rating.

Over this time, we have reduced debt outstanding by $583 million. Although we believe this was the right decision, it has constrained our ability to return cash to shareholders through other means.

Having said that, in parallel with debt reduction, we have, nevertheless, gradually increased our dividend.

For more information, turn to Janus' earnings information and the SeekingAlpha.  

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