Q3 2019 Earnings Call
Good morning, My name is no Colin I will be your conference facilitator today.
He for standing by and welcome to de Janus Henderson group's third quarter 2019 earnings Conference call.
All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period in the interest of time questions will be limited to one initial and one follow up question.
In today's conference call certain matters discussed may constitute forward looking statements actual results could differ materially from those projected in the forward looking statements due to a number of factors, including but not limited to those described in the forward looking statements and risk factors sections of the company's most recent Form 10-K and other more recent.
Filings made with the FCC.
And this Henderson assumes no obligation to update any forward looking statements made during the call.
Thank you and now it is my pleasure to introduce <expletive> Weil, Chief Executive Officer of Janus Henderson, Mr. While you may begin your conference.
Welcome everyone to the third quarter 2019 earnings call for Janus Henderson Group, Roger Thompson, and I will be taking you through the results for the quarter today, after which we'll be happy to take your questions.
As I think you already know, we try and keep the long term focused on our business, which is slightly different than the view implied by quarterly reporting to that extent on the first and third quarter call. Roger provides you with updates on the business and we use the second and fourth quarter calls to address these same items, but also.
To include a more robust discussion of the business and the strategy. We believe that set up a better aligns our calls with the way we manage your business. So I hope that works for you with that said, let me turn it over to our CFO Roger Thompson to walk you through the third quarter results.
Thank you <expletive> and thanks, everyone for joining us.
The third quarter's results can be characterized by three point.
First investment performance remains very strong with at least 70% of assets, beating their respective benchmarks over the one three and five year time periods.
Second total company net outflows improved $3.5 billion, resulting in assets under management decline of 1% compared to the prior quarter.
I'm said the financial results were better than the prior quarter with EPS of 64 cents compared to 61 cents a quarter ago.
Turning to slide three foot thick look at investment performance results.
Overall investment performance relative to benchmarks remains strong we still continued strength in the performance of our equity fixed income multi asset capabilities across the one three and five year, Todd periods and shorts have improvements and alternative I mean tech capabilities.
You have to take performances INTECH has been encouraging but the weakness in longer term performance means we still have business at risk.
The other notable movements in the quarter was alternatives.
UK absolute return strategy, which switched to underperforming at the end of June pretend to outperformance at the end of September 11th strategy remains modestly behind its high watermark.
On the right hand side of the slide.
You can see that I'll relative performance compared to peers, it's very strong, but more than 70% of at U.M. represented in the talk to you morning, Soc hotels or a one three and five year basis.
Now turning to type of company flows.
For the quarter net outflows for $3.5 billion compared to outflows of 9.8 billion last quarter.
The improvement was driven by lower gross redemptions, primarily in the fall known areas of concern that we've previously highlighted.
While we're pleased with this improvement and it's a step into right direction. We're far from satisfied with the result, I'm much work remains in front of us.
Similar to last quarter, we want to spend a few minutes breaking down the flavor. So between known area of concern for the remaining at the business.
Last quarter, we introduced slide five in an effort to help you better understand where we're seeing major headwinds in the business.
We did this because the current concentration of outflows is masking some really great work across the major cross sections of up business.
Even the improving trends in the areas of concern next quarter will likely be the funnel, Tom we break out the flow results in this manner.
First let's take a look at INTECH.
In fact had net outflows of 2.4 billion in the quarter, which is improvement from the prior quarter. However, given the weakness in the longer term investment performance on the low sales pipeline the business remains a key area of concern.
Given these concerns in the lumpy nature of in text predominantly institutional business. We wanted to provide an update on the fourth quarter flows to date.
Thus far in the fourth quarter INTECH has experienced 1.4 billion of outflows, which is disappointing result.
But in emerging markets outflows totaled 200 million in the quarter compared to 2.5 billion in the second quarter.
Last quarter I told you we remain fully committed to the emerging markets asset class and we're very pleased to announce during the third quarter. So we've hired what we believe will be an exceptional Jim team filling a key gap for us.
This will now allow us to compete for assets in this category going forward and we're very pleased with the new team.
The remaining assets in this strategy is still at risk as clients continue to evaluate that positions.
Well, obviously came to retain as much as possible that said, thus far in the fourth quarter, we've seen 400 million of redemptions in the strategy, which leaves 1.9 billion of assets at risk.
Outflows in core plus fixed income, which includes the flexible bond fund with 300 million in the quarter compared to 1 billion in the second quarter.
The result continues the trend of improved outflows as the year has progressed.
Performance is also approved in 2019 relative to benchmark NPS, which is also encouraging.
And finally European equity outflows were 500 million in the quarter compared to 800 million in the second quarter.
Well it's negative this represents continued improvement for this area the business.
While demand across the industry for European equity remains weak investment performance across our strategies continues to improve relative to peers all over the top two quartiles over the one and three year time periods.
The remaining cost of the business continued its upward trend in third quarter.
I would remind you that the reason why this is so important is because this area that business accounts for 80% to the third totally UN.
As you can see in the second Bar chart in the Rice at this slide this area of our business had 100 million of net outflows in the third quarter compared to 1.4 billion of net outflows in the second quarter, a much better results, but still one that's below where we aspire and expects to be.
The improvements over the prior quarter really reflects the continuation of the trends we spoke about last quarter.
We're seeing inflows into fixed income across a diverse set of strategies most significantly during the quarter into European investment grade credit.
Strategic income a multi sector income.
Let's say market share gains in our intermediary business with positive net flows during the quarter in the us and Europe and Latin America.
We're seeing ongoing improvements across a number of us equity funds and continued organic growth globally and the balance Bob.
Well that flows through improved during the quarter, and we're winning new business and gaining market share across a number of regions and capabilities. We do continue to see risks across the four areas are highlighted earlier. So we remain cautious about flow outlook in the near term.
Slide six is our standard presentation of the U.S. GAAP statement of income.
Moving to slide seven for look at our summary financial results.
Adjusted third quarter results compare favorably versus last quarter, primarily as a result of lower expenses.
Average out you ended the third quarter was flat compared to the prior quarter as market gains were offset by outflows at a negative FX impact.
Total adjusted revenues in the quarter remain unchanged compared to the second quarter.
Adjusted operating income in the third quarter of $160 million was up 5% over the prior quarter driven by lower expenses.
Third quarter adjusted operating margin was 37.0 set compared to 35.0 sent in the prior quarter and 38 and a half assets a year ago. When we had a higher average share you web.
Finishing up the financial results adjusted diluted EPS was 64 cents in the third quarter compared to 61 cents for the prior quarter and 69 cents a year ago.
On slide eight we've outlined the revenue drivers for the quarter.
Management fees decreased slightly from the prior quarter as higher a web I'm one additional comment today was offset by lower net management fee margin.
The margin for the quarter was 41.6 basis points, which was down compared to the second quarter driven by mix shift in the business primarily from outflows in higher the equity products.
Performance fees from a positive 1 million compared to $4 million in the second quarter.
Regarding us mutual fund performance phase the third quarter improved to a negative $1 billion from negative 4 million in the second quarter and negative $11 million a year ago.
If were successful in continuing to outperform benchmarks in the fourth quarter of 2019, we will further improve these performance space. This earlier, we'd see positive performance space in this area in the fourth quarter.
Turning to operating expenses on slide nine.
Adjusted operating expenses in the third quarter with $273 million, which were down 3% from the prior quarter.
Adjusted LCR was down 14% from the second quarter, largely due to social security taxes on Vestings in the UK that occurred in the previous quarter.
In the appendix we've provided the usual further detail on the expected future amortization of existing crops, which hasn't changed significantly compared to prior quarter.
The third quarter adjusted comp to revenue ratio was 42.7%, which is in line with the guidance, which we communicated previously.
Adjusted non comp operating expenses decreased 2% quarter over quarter, primarily from the lower seasonal marketing expenses.
With nine months results in the books the guidance on 2019, Noncomp expenses, which is flat to 2018, excluding the 12 million legal outcome in 2018 is still applicable.
Finally, the firm's recurring effective tax rate for the third quarter was 23.8% for the full year. The firm's effective tax rate is still expected to be 20, 325%.
Lastly, slide 10 to look at our capital management.
As you can see on this slide our strong balance sheets and our commitment to returning excess cash to shareholders has enabled us to fund $513 million, the dividends and buybacks over the last 12 month.
Which represents approximately 100% to the cash flow from operations that generated in the period.
During the third quarter, we paid $68 million in dividends to shareholders and declared 36 cents per share dividend to be paid on the 25th November to shareholders of record as at the 11th November .
Additionally, we purchased 4.2 million shares in the quarter or $81 million.
This takes our year to date accretive share repurchase program total to $187 million or 8.9 million shares.
We anticipate the remaining $13 million at the 200 million authorization to be completed in the fourth quarter.
After the completion of this program, we would've reduced the total shares outstanding by nearly 7% since we began buying shares in August 2018.
Looking forward.
Any consideration of new buyback authorization will occur during our annual capital planning process with the board in early 2020 will provide an update during the full year earnings call in February .
And with that I'll back to turn back to the operator for today.
Yes.
Thank you ladies and gentlemen at this time, we will conduct a question and answer session. In the interest of time questions will be limited Q1 initial and one follow up question. If he would like to accept question. Please press star one on your phone now and you will be placed in the queue in the order received.
If you are using a speakerphone. Please make sure your mute function is turned off to allow your signal to reach our equipment.
Once again, please press star one to ask a question well pause for just a moment to allow everyone an opportunity to signal for questions.
And we'll take our first question from Simon Fitzgerald with Evans and.
Partners.
Thank you.
Good morning, Thank you very much for taking my call.
Just refer you to slide 19 way, we can say that this three strategies that teen inflow of them either being fixed income and equities, what you talked a little bit about some of the strategies in terms of fixed income that have been more popular than others or at least the thanks analyzing flaws could you elaborate intensive which sort of jurisdictions you're saying.
So come through in terms of on demand.
Yeah, Hi, Simon.
I think it's one of the strengths of the franchise.
And it's also one of the strengths of the cross selling was starting to see.
So there is a number of areas.
I would look to.
What's called strategic bond in the UK developed bond double will bombed at school in the U.S. That's at the same London team, which is selling very well or in the you in the U.S. or absolute return income funds, that's the team or the Kapstream team in Australia, which is something we've talked about over the last.
Six to 12 months I guess in terms of globalizing baton selling that product globally getting the right products in the right place.
We're starting to see that come through.
And some institutional and some institutional wins in fixed income as well so it's pretty it's pretty broad on their multi asset side. It's the continued strength through the balance funds, we've talked about the the the performance of that found it is a well in the top that's all over overall time periods.
And it continues again to be I need to be a great strengths of the combined from its selling in the U.S.
It's selling in Europe .
Sales a little bit in Asia.
So that's what's driving multi asset there are other things, which we which with.
Yeah.
Confident about for the future, but the but the with the flows you're seeing in multi asset at certain driven by the Pemex fund at the moment.
Excellent. Thank you second question relates to market share that with some comments I'm in the media Steinman animals I mentioned on the call just now that you've seen some increases in market share just wanting to know a little bit is that sort of something anecdotally that you can sort of I'm thinking about intensive youre flies versus others or you seeing some stuff.
Let's take some data that you could share with us intensive how that market shares unfolding.
Yes, certainly I mean, I mean, we look at that yeah, I think the best data for that is is the symphony data.
Which comes out monthly and you'll see again, you're going to look at that or you know in in terms of what we do.
So when we look at and I guess, the one that's we've talked about again consistently.
This is sales of U.S. equity you know we're excited by our U.S. equity franchise, it's a great franchise with some fantastic numbers and if you look at it you know those numbers continue to be exceptionally strong and we should be taking market share. The good news is we are and what we've said is you know we can despite that mark.
But in active equity you know not growing a it is it is a shrinking market, we know that we understand that.
But we can't take market share, we are taking market share and we're actually seeing you know we are seeing actual growth in U.S. equity.
But it's that it's it's the same someday to you're looking at you know I think the other thing that's.
It's notable over the last two over the last couple of months or is that we're backing in flow intermediary in Europe , and Latin America, or obviously, that's been I you know a strong growth area for the for the firm in Ah you know a few years ago. It's been it's had a tough couple of years, but we'll start.
To see positive flows consistently looking out again, it's an important are an important fact, it's not one month.
Or we're starting to see consistent flows in incomes in on the constant or on the last time.
And well move on to my next question from Andre Stadnik with Morgan Stanley .
Good morning can he may occur.
Yeah, Hi, Simon or high foundry.
[laughter] and I don't know all that sits right in saying, yeah, [laughter], but I wanted to ARQ <unk> two question.
One question.
He is a round at me what kind of flows you know you've seen for from Japan, and they'll from day cheap and now the question kind of high level I'm you know it it seems that I think innovation combined organization is clicking together in a bad better than ever in terms of you know so some of the cross sales.
And also you know you you know P.M. departures or send out but from a <unk> mobile can see publicly it's are you getting the San said you starting to you know to really moving ahead with 14 decent from the combined entity.
Oh.
Hi, Andre it's <expletive> Weil I think generally the answer is yes, but it's it's it's progress and were nowhere close to what we believe we can and will accomplish so there's there's still as Roger said earlier in his comments, there's still a lot of work in front of us and frankly, we still we still face in the in the four years, we've called out.
Some continuing real challenges, which is why Roger expressed.
Some shorter term caution so you know the in the broad sweep of time, yes, we're making a lot of progress the firm's coming together we're building the right. The right culture that the talent is applying itself well and we're starting to produce you know improved results.
That's the positive side that the cautious side is hey, INTECH is still faces some challenges in m. equity, we still have a bunch of assets that are that are challenged by the changes their European equities is improving but let's face it it's still not a healthy external environment and it's not a we haven't finished strengthen in the internal record.
And in core plus fixed income we continue to face some challenges. So we're on the right track and we're getting through it but there's there's still substantially more to go in front of us before before we feel like we've we've approached or potential.
I think specifically in terms of Japan a flows were.
Flattish I think yeah basically flat in the quarter you know we continue to to a two to look at new business with Dai Ichi and an asset management. One we took a over the last couple of quarters about the.
The new funds, we launched you have talked about allocation product that we launched a in Japan, and that's saying that's continuing to see some some some small inflow. So again, oh, that's doing exactly what it supposed to do a and their relationship with Dai Ichi remains incredibly strong.
<expletive> you know the political system is around fuel departures.
Yes.
Yeah.
Weird.
We're in good place yes.
Yeah, I I feel like have you.
Well it everyday so the challenge of course, you don't want to take for granted but we have really wonderful people and ER and we feel quite good about the stability of our teeth.
Thank you [laughter].
Well take our next question from at heading with C.L.S. Hey.
Hi, Thanks for taking my questions just firstly on intake there's been a happy to talk about that on the call today and last quarter, you kind of touched on some potential structural headwinds the cone funds to quantify so you still seeing those industry headwinds continued to play out.
We intend to the headwind for them beyond performance.
Yes, Hi, this is <expletive> .
INTECH continues to face difficult market conditions, it's in a lot of different market spaces, and so generalisations are tough, but you know large cap equities in institutional U.S. continues to face or you know tremendous competition and ER and the trend to Barbelling, a portfolios and in Texas portfolios tend to be.
Well controlled on the risk front.
And so people who believed that what the right invest strategy is to either take a lot of risk or to index that can that can be a challenging trend for intact to be held out in the middle they've done an awful lot of product innovation process improvement and other things and we believe in over the long term they'll come through that and start growing again even.
In the U.S., but it's a long road from where they are to their and right now as Roger mentioned their sales pipeline doesn't look terrific and they continue to face some challenges. So the <unk>. The recent volatility over the last three years is put a little bit on the back foot and that continues.
Okay. Thank you and just and just the the the second one you know you've touched on loss period, you talk about your strategic pillars, and one of those paying some new growth initiatives today, you've talked a little bit about some good growth in 16 income and multi asset can you just touched a little bit more on.
Some of the growth initiatives, you've got going on with some new products.
Oh sure so.
The growth initiatives that we identified internally, whether we want it to strengthen our efforts in Asia ex Japan, we wanted to further invest in build out in our F franchise, and you know, we're making progress on both of those but both of those are sort of longer term initiatives. So in Asia ex Japan, we have retooled the team.
And brought in a lot of new talent, but you know most of that is distribution sales talent and it takes a while for folks to the acclimate to a new from and then drive sales. So we're we're confident that the investments we've made in some people in talent will will move us forward in that region and frankly, he will that that's one of the really important source.
As of growth for asset management in the industry and.
You know that's available to the industry and so we've just got to be more successful in that space. We think we're on the right track, but it's it's too early to talk about big results.
The third area was multi asset and we and we had mentioned previously that we'd hired Michael how to lead the effort and that we were trying to push forward. There we've seen some encouraging signs with some new wins and and and substantial client interest.
There's a lot more to do there a lot of what we're doing there tends to be I'm using alternatives tools to to enhance some basic indices and we need to get a also moving forward with some higher discretion a higher fee part of the product lineup as well if we're going to achieve our aspirations.
So there's plenty to do there, but we are seeing progress and and particularly the team in London is seeing some real substantial institutional interests that we hope.
Will bear fruit.
And we'll take our next question from Ken Worthington with JP Morgan.
Hi, good morning.
Maybe first a U.S. performance fees or a bad at breakeven I think that's the best result, since 2011, given that fulcrum fees or are back to that almost breakeven level is there an appetite to restructure the performance fees and it's just something you think might be feasible to either correct. The flaws in the structure.
Or maybe outright work with the fund boards to eliminate them.
Hi, Ken it's <expletive> .
Thanks for the question I have said previously that I am.
Not the largest fan of this particular fee structure and the real reason is because it's a three year lagging analysis. It it looks over the last three years and then sets the fee based on performance. The trouble is folks in a retail mutual fund who may have a three year time horizon in terms of the.
Length of their duration of their investment are generally always paying for somebody else's investment returns.
And that lack of alignment I find really.
Inappropriate and troubling and coupled with that a lot of the distributors finding the variability of the fee a bit hard to deal with because there they have trouble explaining what the fee is going to be on an ongoing basis and so our key partners and distribution in this business the big networks don't particularly loved that fee stretch.
Sure.
So if you know you could press a button and amend the fee structure to something you know more stable.
We would probably do that but the fact remains there's an awful lot of.
Hurdles set out to change that fee structure. There is very expensive uncomplicated investor votes, There's a big a complicated FCC approval process and so we're not on the cost of sort of.
Pushing down that road, the cost and challenge and disruption of transit or the transition of the fee structures.
Isn't our view substantial so you know in a frictionless world. The answer your question would be no and in the practical world in which we live given the hurdles. The answer is we're we're going to stick with this for a while longer but we continue to talk to the trustees, who are really in charge of this they're aware of our thoughts about the fee structure.
Okay, and if it becomes appropriate you know Tim to amend it we would be a willing partner in that discussion, but that's not imminent.
Thank you and then on yen with Ah I think he said the new P. M does a track record need to be built from scratch here or is it does it take a year multiple years, just sort of rebuild the track record so that you're in a better position for sales and then I think last quarter you received no.
Notifications on 800 million up redemptions that you thought would hit in the three Q. It looks like 200 million Max hit did those notifications get cancelled or maybe just postponed to this coming quarter.
There are postponed to taking your second question first their postponed or and and we still expect them to come in the third quarter and obviously there could as as we mentioned in Roger's comments, we're cautious about it because we.
We think there's a high risk that you could get substantially more notifications, there's one big concentrated client in the remaining mix that is Roger whats really in 3 billion, three and and that could Ah. That's certainly a at high risk also so we don't see ER and we're trying to be clear.
In our communications, we see that remaining emerging market asset base as substantially challenged in the short term as we've gone through the transition turning back to the your question about the new team.
It's a hard question to answer it's a good question, we ask ourselves that question. There, obviously, a well known team with a strong track record from their prior employ how much credit.
The client base gives to that and how quickly they are willing to just sort of take a or on an institutional base is taking a consistent view of their track record over time is something that we don't know for sure yet we're optimistic that because a substantial part of that team came over including analysts that that continuity.
It makes the case very strong.
And therefore shrinks the sort of the waiting period.
HM we don't yet have enough evidence to know how well that's going to play going forward, though the thing. We really know is there were a very good team they're already contributing.
To research and understanding on a broader basis, they're integrating well in the from which is kind of an amazing thing to say when they are based in Boston and they've only been here such a short period of time, but theyve made it a their business and gone far out of their way to start the process of connecting in integrating.
They are great people, great professionals were thrilled to have them and Oh.
I can't give you a precise read on how the clients how fast they will adopt it but but we're we're confident that in the medium term there'll be a lot of adoption of what they do.
And we'll take our next question from Mike Carrier with Bank of America Merrill Lynch.
Hi, great. Thanks for taking the question.
First you're seeing good improvement you and the performance you know even on the redemption side, you know that heading lower.
But it seems like on the sale side is still a bit muted and realize you know some of this stuff is industry challenges, but with it improved performance can you give us some color on how you're working with the distribution teams. You did you try to drive sales going forward.
Yeah sure. This is <expletive> again first and foremost on the distribution team. The biggest news is that a we recently hired Suzanne came to be the global head of distribution.
And she is a terrific new talent. In addition to our team she's doing a good job of trying to review the existing distribution and marketing resources and making sure that we're facing off against the opportunities in the right way.
And and we're excited for the for their leadership that she is providing a and we're optimistic that that will get more bang for our.
Our assets in distribution and marketing going forward. The second point I would make us that flows generally lag investment performance. So when you have you know improvement in good investment performance I think the first thing that you see is the redemption slowed down.
And.
Probably the second thing you see is is that continues for a long period of time, you then pick up on the sales and obviously, we have a lot of different products. We're talking about so we're being sort of inaccurately general, but but that's sort of the path. We see so we see that we are gaining momentum in our strong product areas and we think we can continue to do so.
And drive more sales.
That said there are parts of the industry that are really challenged.
The UK is obviously still going through Brexit.
Chaos.
And it's really tough to make a huge amount of progress in that market environment and you put that together, but some of our performance challenges in the in the European equities, that's made that that when tough, but again we are gaining.
Market share in the intermediary business with positive flows in the U.S. Europe and Latin America, you know that's a good lead indicator for us that were on the red trend.
All right. That's helpful. And then on me as a follow up Roger just with the performance improving you can you provide I guess just a general update on the performance fees, meaning like what is the average or like Max potential you can actually see any year versus maybe the more muted you know recent trends just like you have an idea.
Are you know what the potential as you know overtime.
Yeah well.
Yeah, Yeah. She site. It's there's two pieces, we talked about we talked about the U.S. mutual funds.
Moreover, staying a bunch, but a much better a place that than we were ER and we'd like to see that you know that becoming a becoming a positive number we have about $64 billion $62 billion X X. The ex the U.S. mutual funds with performance.
The capabilities. So that's yeah. That's stayed about the same a we've grown some things we've we've we've weve or some other things have shrunk, but about $62 billion has performance fees and it's very broad.
So yeah, <expletive> mentioned to you know, it's a bit but have a risk generalizing on things, but we've got to we've got a portfolio of of assets with performance fees.
They all are they are spread through the year.
Q4 in Q2 of the two biggest years at two biggest courses for those as we've talked about before so we didnt expect and you shouldn't have expected much in Q3, you should expect a bit more in Q4.
Most of those all through year.
Institutional accounts with three year performance fees on them. So we've got 33 months in the bank.
But you know you don't count anything until it's done so yes, there will be some performance fees in Q4. Its no. We're not talking about the levels that you know the combined firms had in 2000.
14, 15, the capability is still there we need to get we need to continue to build out performance in the areas, which you've got the performance fees on them.
But the will be some performance fees in Q4, and you mentioned UK absolute return Yeah. You captured returning I guess is that how the is the other yes swing factor. That's that funds you have sizable fund, which you can track, which pays for which pays quarterly <unk> quarterly performance fees quarterly yeah. It's yeah, it's been.
In a very strong long term.
[noise] before them afterwards for the clients then it's a and has generated significant performance phase in the past its had a tough aloft 18 months and as we've talked about the last 12 months, it's got back above its benchmark or it's still slightly behind its high watermark. So there's a little bit more works guy before that starts to generate prepays again, but but hopefully it will.
And we'll take our next question from Craig Siegenthaler with credit Suisse edgy.
Thank you.
Just wanted to start on the macro actually on Brexit given your large European operations, but what is your view of investor cash on the sidelines in Europe , and pent up demand for risky assets like the resolution and also how does a hard versus soft brackets scenario change your view.
Hi, This is <expletive> I'll I'll start and then handed over to Roger Roger has led our Brexit preparations across the firm so he's exactly the right Guy to address this let me just say.
Regarding the on invested assets I think Europe , you know with negative rates is driving assets out of the banking system [noise].
Ideally a lot of those would come to us.
We don't see that really happening yet there are a the banks themselves are getting products sort of in the middle insurance companies are getting products in the middle and some of the fear that the Brexit process is generating probably stands in the way of a big wall of Uninvested cash.
Coming forward into the active asset management industry. So you know, we're not yet really reaping the major benefits from that possibility, but we still see it hanging out there in the future frankly, not just in Europe , there's tons of Uninvested cash.
In a lot of other markets as well and that's one of the reasons that were sort of <unk> strategically optimistic about our opportunities in this business, but particularly in Europe with negative rates overtime that will drive the whole lot of the money out of the traditional bank deposits and it's gonna have to find somewhere to go and if we do a great job I.
Stick that one sort of the Brexit noise calms down, which hopefully you will do post UK election, et cetera, that'll represent a real opportunity for us.
And Craig.
Typically hard versus soft technically we all built for hard Brexit or you know we've enhanced our cost structure. We've got 17 people in Luxembourg now we used to have five we've done the work to move out branches to be branches of the Luxembourg company, rather than the UK company.
We've launched some products in a in some funds that when seen I'll see cap range, where some Europeans were buying the weeks and potentially might not be able to so weve technically Brexit proof style business yeah. So the issue isn't the technical.
Side as you say, it's much more the macro site or the the flows in the UK have have.
Slightly improved that's outflows, a slightly less but but nothing to write I'm about.
Or you know a not improve yeah. So we got we got time to white yet yeah. The UK is a is it is a tough market to be doing business. It seems that doing a great job, but are you know it's a it's.
It's it's a pretty ugly market out there.
Thanks, Roger and just a follow up here in expenses well what it takes for for Janis to take more proactive stance on reducing expenses and really do you have this lever available. After the significant costs you took out of the business post the merger.
Right, you've always got that lever available.
But I think the most important thing is what are we trying to do.
And I guess I hope, we've been pretty consistent with this that.
We put together this combination to grow this business I'm, we've invested in it to grow this business.
And we continue to do that we will try and do that as efficiently as possible there on natural levels in the business up call a variable comp is is at the at the total company level is.
It is just about fully formulaic, so that will flex up and down with earnings.
ER and we continue to look for efficiencies in the business. This things, we're doing a lot to take costs out.
There are also things we're doing to invest in the business. So.
Yeah, I'll be running yeah, I think that nobody <unk>, yeah, we run of the business to grow and that's because we believe we can grow this business and we expect to grow this business should or should that cannot be the case you'd run a different expense base.
Yeah.
And we'll take our final question, Alex Blostein with Goldman Sachs.
Good morning. This is a actually Ryan daily on for Alex I was wondering if we could spend a moment on the fee rate on specifically the management fee rate. It looked like it declined another so your 0.6 basis points this quarter.
So why do you kind of thing through the puts and takes all the key areas of risk that you highlighted can you give us some sort of near term guidance of what that sort of pressure would ultimately resulting for the fee rate.
Yeah sure, Iran. I didn't think anything's changed from what we've said consistently you know there is fee pressure in the business, we see fee pressure the same as same as others, but we do have high quality products in that probably protects us a little bit more.
In some areas. So the biggest impact is flowing mix.
So yeah, you know the and you've got to an average and average or move a in right. So that's sort of you gotta look at what happened in both Q2, and Q3 and sense of the assets we lost so.
You know we've lost some high fee product in a in in equity in emerging market that could see some of the oldest capabilities, but we've also love some lumpy product in in ER.
In in Tech.
Going forward.
Yeah. It will yeah. It will depend on the mix of product I guess is the answer.
We've we've we've told you that you know we continue to see risk.
Within FIC, that's at the lower end.
We got risk in emerging markets. That's at the higher end should we see continued growth in intermediary.
That's obviously good news for the fee right.
So.
You know it will be driven by.
The mix of business, but there is no there's no fundamental change in.
ER in that you know about that fee pressure a that the industry season, and we see in that comes back to Greg's. Prior question around expenses, we need to continue to be efficiency in how we run our business because we're running a business with the expectation that fee rights will will do what they've done for the last decade.
Which is which is drift down, but it's not a fundamental change that we're seeing or expect to see.
Got it and then maybe just a one more on on intact. You gave us some really helpful color on the E. M concentration do you mind, giving us a an update or a reminder, on concentration that intact in terms of key clients.
Yeah, I mean that that's a pretty concentrated business you know we've got we've got a number of multi billion dollar accounts at INTECH.
And that's why we say that you know it is the most difficult to predict you know or there are out there are opportunities. There is there was a there is a little bit of pipeline. It could be something that comes in but where we are at the moment is is with with a with a challenging performance periods.
Running through 2018, 2009 teens and pleasingly has been much better, but we sit with we sit with three years.
Of a of too much volatility.
And therefore, there is risk in that business or and if a.
And our clients and we talked before now we have very good relationships with those clients that team is excellent and explaining a expanding its performance and working with working with clients and and they've been very patient, but you will notice it if err on the asset side, you will notice if we lose some of those assets.
There are some large concentrations. Yes. This is this is <expletive> that's right. It's I think the five largest strategies at INTECH make up 57%.
I would say you EM.
So.
Yeah. It's a smart question there is a high degree of of concentration and therefore substantial risk that you could see big pieces move the corresponding truth is those tend not to be the highest revenue pieces.
But but it's a good question you've asked.
And ladies and gentlemen that does conclude today's conference. We appreciate your participation you may now disconnect.
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