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Friday, January 25, 2013

Three Things to Know from Janus' Earnings

Reported by Tommy Fernandez

Like an airplane pilot informing his passengers that the plane has passed through severe air turbulence and is now entering clearer skies, Richard Weil, chief executive of Janus Funds [profile], is telling the investing public that his company is experiencing a turnaround.

Whether that is indeed the case for the long term remains to be seen, however, the firm has produced some decent numbers for the latest quarter.

For instance, Janus reported 17-cents earning per share for the fourth quarter of 2012, up three cents from the previous quarter. These earnings calculations included a $5 million non-cash charge that was equivalent to 2-cents per share.

Meanwhile, the company's revenue of $216.6 million represented a 4 percent increase from the previous quarter. Operating expenses declined 2 percent to $158.6 million due to lower compensation expense, offset by the $5 million impairment previously mentioned. Operating income improved $10.1 million to $58 million, reflecting higher top-line revenue and lower expenses.

However, fourth quarter average AUM was $155.6 billion, which was virtually flat to the third quarter driven by market strength and offset by net outflows. Also, performance fees on their mutual funds were negative $21.9 million for the quarter, slightly better than last quarter. Due to the three-year nature of this calculation, the company expects negative performance fees to continue for the next several quarters.

If you peruse SeekingAlpha's transcript of Weil's earnings call, as well as Janus latest quarterly earnings report, you'll note three takeaways underlying Weil's optimism, as well as two other points worth considering for the company over the next year.

The optimism takeaways are:

POINT#1: Janus is Seeing "Green Shoots" in Equities as the Market Favors Again the Firm's Sweet Spots
POINT#2: Janus Expects The Markets To Further Favor Equities, and Active Managers, This Year
POINT#3: Janus' INTECH Division is Feeling the Love Again
Other points that will be discussed later are: Janus's Alt Expansion is Going Gradually, and Dai-Ichi's Seed Investments Will Rev Up in 2013.

But first, some elaboration on Weill's three pillars of optimism.

POINT#1: Janus is Seeing "Green Shoots" in Equities as the Market Favors Again the Firm's Sweet Spots
Yes, Weil did use the term "green shoots," repeatedly, during the conference call:
I think there are green shoots appearing with respect to increasing equities in retail and institutional increasing interest in equities.

I don't think I could call a leader in the race back to equities between institution and retail. I think it's happening. There are green shoots on both sides, but I don't think I'm well enough informed to really articulate which one's moving faster. Retail tends to move in smaller jumps on daily basis, and institutional tends to move in bigger lumps on quarterly basis. And so, there's some of that difference between the cycles and the business that you can see in industry data.

There were some green shoots in the first quarter of last year, there's some green shoots again in the first quarter of this year, but how those things grow and on what best is not something I can predict for you.

To be sure, this flowering of Janus' investments can be perceived in the firm's recent investment performance:
From my perspective, if you look back on the full year 2012, the most important thing that we do is deliver investment performance for our clients. In 2012, we had, particularly on the Janus domestic platform, an exceptionally strong year. 100% of our Janus domestic equity funds outperformed their benchmarks in 2012 and finished in the top half of their peer groups, the Morningstar peer groups.

70% of the global equity Janus funds outperformed their benchmarks in '12 and finished in the top half of their peer groups. This was obviously a much-needed strong year from the Janus equity platform in the face of what is still some medium-term underperformance.

Looking back on how that played into our distribution in the marketplace, while we experienced net outflows in some of our largest strategies that were dragging some medium-term negative performance, the Janus Triton debenture and the flexible bond funds were all top decile net flow gainers in their respective Morningstar categories, confirming I think that when we gave our team strong results in important categories, they can deliver excellent flows.

POINT#2: Janus Expects The Markets To Further Favor Equities, and Active Managers, This Year
Weil saw the market continuing this move favoring Janus's sweets spots for the rest of this year as well:
And in the past year, it's been a much more constructive environment for active management. That has some, and we expect that, candidly, going forward. As we discussed last year, we didn't think that correlations were going to stay at extraordinary high levels because, a, it hasn't in history; and b, there's a logical reason why pressure builds up the longer that persists. And eventually, individual company results drive stock prices. So we have seen an improvement in the environment, which we expected, but we carry around this legacy that passive looked really good for the past couple of years, and I think that's going to be a challenge for all active managers. For forward-thinking investors, I think there's a lot of reason to believe that active managers are now going to have a really good period, vis-a-vis the past of indices because of these correlations. So that's the external environment. The internal environment, as Jonathan Coleman and the team at Janus made some significant changes to focus people on a more rigorously defined set of tests and style definition, product-promised definitions, better alignment with analysts. And these sort of internal more technical steps, I think, contributed to the outcome as well. So it was a combination of factors that led to better results. We think we have great people. We think they're very capable, particularly in markets that have reasonable correlation levels of generating consistent outperformance over the index. And we're very optimistic about continuing to build on the success we had in 2012, but there's still a lot of wood to chop.

POINT#3: Janus' INTECH Division is Feeling the Love Again
This aligning of the stars was even felt in Janus' quant shop INTECH, which saw a change of senior leadership near the end of last year. Weil described the INTECH's karma thusly:
INTECH is experiencing some pretty strong investment performance. I think 87% of the firm's strategies were outperforming their respective benchmarks on a 3-year basis, once again confirming something we've talked about in prior quarters, which is their investment process works. It's valuable because it is differentiated. It's risk-controlled and it's liquid and proven over decades, and not particularly capacity-constrained. So I think they have a very valuable process, and they're doing a good job. They've been through some tough waters. A, clients, institutional clients in their marketplace have been reducing their exposures to equities in general over the past couple of years. Second, there has been a particular focus on active equity. Third, there has been a particular negative focus on quantitative managers. And fourth, during some of that period, they had put a pretty modest, but medium-term underperformance for a little while in that period, and a penalty function for that was particularly severe. So they've been through some rough roads, and we haven't seen the turn yet in the net flow numbers that we're reporting. However, I think their process is coming back more into favor. I think people talked about this potential for a great rotation back in equities.

However, regarding Janus' earnings, it's important to note two other points.

For instance, even as other firms start to go gangbusters in alts, Janus's Alt Expansion is Going Gradually. Regarding the speed of the rollout for his firm's various proposed alt products, Weil said:
The strategic or the competitive context for each is pretty different. So in global bonds, we have more of a track record, but it takes more of a track record in that space. It's an established asset class with established competitors, and it takes some time for that to build momentum in most of the channels, particularly institutional channels. So we're further down the road there, but it also is a longer road. In the case, for instance, of our new diversified alternatives fund, it's a pretty new asset category. It's a pretty new opportunity set. There aren't many folks in the world that have long-established track records. And what it is also is essentially an asset allocation across component parts. Each of the component parts can be analyzed separately with pretty well academic -- pretty well-known academic and practitioner research around what those track records are. So it's probably a faster takeup than the traditional 3 years plus for a product like that. Similarly, INTECH's low volatility, it's a newer asset category. I

Another point to note, the ongoing seed investing by Dai-Ichi Life Insurance, which now owns more than 15 percent of the company, will rev up this year.
Well, as you know, Dai-ichi committed to invest about $2 billion of its own capital with us in a range of things. They are about 25% of the way there, at this point a little bit more in equities than in fixed. And we would expect that they'd get fully invested over the next -- over this year essentially. That, with respect to the first part of your question, which is their own money. In terms of what they're able to help us do in the marketplace in primarily in Japan in the first instance, primarily through their 50%-owned affiliate, DIAM. We manage currently about $925 million in assets for DIAM. That has been a substantial positive that certainly Dai-ichi Life has made material contributions to already. We're looking forward to growing the size of that relationship on a go-forward basis, but it depends. It's not by any means entirely in our control or in Dai-ichi Life's control or even in DIAM's control because DIAM distributes through banks and other folks in Japan. And so, we're going to put our shoulder to the wheel and try hard to move that forward as well as we can, but it's not really possible to give you a prediction on how that looks going forward. It's only possible to say it's already a significant success, with $925 million of assets being managed for DIAM, and that we're looking forward to increasing that with Dai-ichi's help over time.

Check out the SeekingAlpha's transcript of Weil's earnings call, as well as Janus latest quarterly earnings report for yourself  

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