Q3 2021 Janus Henderson Group PLC Earnings Call
Good morning, My name is grant and I will be your conference facilitator today. Thank you for standing by and welcome to the Janus Henderson Group third quarter 2021 results briefing.
All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period.
In the interest of time questions will be limited to one initial and one follow up question.
And 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 filings and other more recent filings made with the SEC.
Janice Henderson assumes no obligation to update any forward looking statements made during the call.
Thank you.
Now it is my pleasure to introduce <expletive> Weil, Chief Executive Officer of Janus Henderson. Mr. Weil, you may begin your conference.
Welcome everyone to the third quarter 2021 earnings call for the Janus Henderson group.
I'm, <expletive> Weil and as usual I'm joined by our CFO Roger Thompson.
In today's presentation I'll start with the progress, we're making towards delivery of our strategy of simple excellence I'm going to give you an update on our view of the sector and how that influences our growth initiatives and then as usual I'll hand, it over to Roger who will take you through the results with more precision.
As always following our prepared remarks, we'll take your questions.
Turning to slide three.
Five years ago. This month, we announced the merger of Janus and Henderson.
At the time each firm belief that we needed more scale and by that we mean, we needed to be more global and have more product breadth in distinct areas to compete successfully in our shifting asset management landscape.
Long ago, we successfully completed the integration of these two firms.
But this five year milestone provides a useful opportunity to reflect on where we've come from and where we're going.
Our combined company is vastly better positioned than either of its predecessors, where five years ago.
Our enhanced platform has allowed us to invest in people.
<unk> technology, and systems, which improves investment distribution and compliance outcomes and it enables us to drive strong operating leverage.
We built a strong unified company culture with a shared purpose.
That has contributed to our success in attracting exceptional talent at all levels of the organization and that is of course, the key to our business.
We've continued to make significant progress executing our strategy across the four pillars you can see on this page.
As a result, we're seeing momentum building in our business, which we've laid out on the next slide.
We have first class investment teams delivering active investment excellence and differentiated performance across the breadth of liquid asset classes backed by a strong legacy of fundamental research engagement and investing with conviction.
Our solid investment performance forms the foundation for growing distribution momentum.
We've globalized, our distribution teams and scaled our presence across institutional and intermediary client channels.
We've broadened our capability set by product and geographic reach for example, our balanced strategy, which was to traditionally strong in the U S continues to be a net inflow in all regions of our business. The strategy has grown from an AUM of 19 billion at time of merger 248 billion today.
Our global strategic fixed income strategy managed out of London has more than doubled in size since the merger to over 10 billion in AUM and has seen consistent inflows now in the U S. We've also made significant progress in the last three years towards our near term aim of positive net flows excluding quantitative equity.
The organic growth rate over the last 12 months, excluding quant equity is almost flat as you can see the graph on the top right of this page.
We've built a resilient high margin business.
We've been driving towards best in class operating leverage and growing profitability in the business. Our adjusted operating margin for the quarter is 46.4% and 43, 5% year to date.
Our average net fee rate has expanded by 2.6 basis points over the last two years in a time of fee compression and the broader industry.
Let's turn our attention from flows to revenues think about that for a second year to date, we posted $3 3 billion of net outflows. Excluding quant equity. This has actually delivered almost 10 million of positive adjusted revenue on an annualized basis as a result of replacing lower fee assets with higher fee assets.
So despite the fact that we're frustrated with flows not being as positive as we would like the revenue effects of our net flows are positive and we're very proud of that we're focusing on the right kinds of business and our clients are valuing our services. So why are we acknowledged the positive impact of markets and changes.
And the underlying asset mix, we're succeeding in selling high quality assets and that's showing up in our business results. This then filters through to higher profitability and also to cash flow generation.
Speaking of cash flow, our balance sheet is resilient and we've been disciplined with our capital.
This gives us the financial stability and the flexibility to invest in our business and pursue growth organically and Inorganically, we've generated over 800 million in cash flow from operations in the last 12 months.
We've also been returning excess cash to our shareholders, both through a stable and progressive dividend as well as share buybacks.
We've made tremendous progress in the delivery of our strategy of simple excellence, although we still have much more work to do.
We've also dramatically improved our flows and trajectory, but we're still not yet consistently delivering the growth that we plan.
Lan and aspire to deliver.
We acknowledge also that our quant equity faces significant challenges.
We also recognize that the majority of our business operates in mature markets are areas of strength are poised to gain market share, but are not necessarily aligned with the high growth vectors in asset management.
However, the strong base that we built through simple excellence in our very strong cash flow generation from our core franchise.
Gives us the strategic and financial resources required to invest in our business to deliver growth.
We know that the market continues to evolve and there are several trends that we're observing in relation to our business I'd like to call out for in particular that we discussed with our leadership team and board.
First the importance of ESG continues to accelerate changes in the investment landscape and is critical for competitive positioning in active management.
In our core retail channels technologies, enabling growth in packaged and customized solutions delivered through multi asset class portfolios accompanied by the growth of Etfs as the preferred vehicle for tax and transparency reasons.
Third the world continues to need high quality income solutions, and uncorrelated returns and we expect to see increased allocations to alternatives across virtually all clients sub channels.
Finally, while still in a nascent stage increased institutionalization and evolution and deployment of solutions developed on blockchain technology and digital assets will.
It will be an opportunity for asset managers, who are able to participate.
The good news for US is we have a strong foundation and we've made progress which means we're well placed to capture growth opportunities both organically and inorganically.
Very importantly, our clients value us as a trusted partner I sit in meetings with some of our biggest institutional and intermediary partners.
And they tell me that they trust us they value our relationship and they want to grow with us.
They want to do more business and more areas with us. They tell me that they want us to do more in alternatives and private debt and more in model portfolios. Our clients want to do more business with us, meaning we have an opportunity to broaden our capabilities, where we can deliver and succeed in higher growing areas.
We also have the board's full support in the execution of this strategy. So you can expect us to be more aggressive in responding to the delivery of future growth. Let me now turn it over to Roger who can take you through the results in some more precision. Thank.
Thank you <expletive> and thanks, everyone for joining us I'm pleased to report another strong set of financial results.
Looking at the third quarter investment performance remains solid with 64% or more of assets, beating their respective benchmarks over the 135 and 10 year periods.
Market strength during the quarter provides a good backdrop for Abbott J U N and revenues for the quarter average AUM increased 3%, but market weakness at the end of September left closing, our AUM down 2% from June net outflows of $5 2 billion, while disappointing were concentrated in our quantitative equity capability.
The overall flow figure most positive flows in our intermediary business and continued strength in our multi asset fixed income and alternative capabilities.
Adjusted EPS was $1 16 flat to the strong prior quarter and up significantly compared to the 70 since the same period a year ago. Finally, we returned $140 million of cash to shareholders joined the quarter via dividends and share repurchases.
Turning to slide eight to look at investment performance.
Investment performance remains solid with at least 64% of firm wide assets, beating their respective benchmarks over all time periods at the fascia for September.
This quarter, we've begun providing 10 year investment performance against benchmark and peers in an effort to provide greater transparency into investment performance. We hope you find it useful.
Short term relative performance compared to peers improved joined the quarter with 47% of AUM represented in the top two Morningstar quartile is on a one year basis compared to 33% in the prior quarter.
As stated at the top of the page the longer term important Morningstar metrics show that almost one half of our AUM is in the top quartile against the competitive universe on a three and five year basis, a further improvement from the second quarter.
Now turning to total company flows.
Net outflows were $5 2 billion compared to 2.5 billion last quarter.
These outflows with dominated by quantitative equity outflows as I've said and over the next few slides I'll discuss some of the many encouraging trends we're seeing in the business.
Slide 10 shows the breakdown of flows in the quarter by client type.
Net inflows for the intermediary channels are positive 1.2 billion, resulting in a 2% annualized organic growth rate.
By region intermediary flows were positive in EMEA, Latin America, and Asia Pacific and these were partially offset by small unimproved outflows in the U S.
And looking closer at the regions for EMEA and Asia Pacific third quarter flows Mark the sixth consecutive quarter of positive flows for each region.
Within both regions, all major geographies with positive, including the U K and Continental Europe for EMEA, and Australia, Japan and Asia in APAC.
It's important to note that the management fee margin in EMEA, Latin America, and Asia Pacific intermediary is higher than other areas of the business and these flows are contributing to our strengths in the management fee rate as Dave just mentioned.
In U S. Intermediary, we're staying a diverse set of products generating inflows in fixed income we had more than 10 strategies with positive flows during the third quarter led by multi sector credit.
Jay AAA, which is our AAA CLO E T F.
Developed world Bond.
Elsewhere, the balanced strategy continues to gather flows.
These areas of momentum are being offset by the impact of the 'twenty 'twenty performance challenges and all smid and mid cap growth strategies, but we note that investment performance has improved in 2021.
Moving to institutional the five 8 billion of outflows in the third quarter were primarily driven by quantitative equity outflows elsewhere, we've taken steps and globalizing, the institutional team and bringing on talent, including a new head of North American institutional and head of North American consultant relations.
I've talked about a strong and diversified pipeline in prior quarters and whilst funding. This quarter has been modest we remain confidence for 2022.
Finally, net outflows for the self directed channel, which includes direct and supermarket investors with $600 million for the quarter, a further small but sequential improvement.
Moving to slide 11, and the breakdown of flows in the quarter by capability.
Equity net outflows for the third quarter with $2 $6 billion.
Quarterly outflows were driven primarily by small and mid cap growth strategies in the in U S retail as well as a billion dollar global enhanced index institutional redemption.
Areas of strength included contrarian global sustainable equity and overseas.
Flows into fixed income was $700 million positive in the quarter compared to a negative 100 million in the prior quarter.
The results included a $1 billion in intermediary flows across a wide range of strategies, including multi sector income tactical income in Australia global strategic fixed income and asset backed securities in the U K.
Total inflows for multi asset by $800 million driven by continued inflows into the balanced strategy across North America, EMEA and Asia Pacific.
Cost of equity outflows in the third quarter were $4 $4 billion.
Finally, alternative inflows with $300 million flat to the prior quarter the.
Inflows were driven by our absolute return and multi strategy products.
We continue to see growth in our higher fee alternatives business showing another benefit of our diversified product set.
Slide 12 is our standard presentation of the U S GAAP statement of income.
Moving to slide 13, which shows the strong set of summary financial results.
The solid green on the right hand side of the slide shows the improvements in our financial results from just one year ago.
With EPS flat to a very strong prior quarter.
Total adjusted revenues decreased 10% compared to the prior quarter as higher management fees were offset by seasonally lower performance fees.
Adjusted operating income in the third quarter of $253 million was down 6% from the prior quarter, but is up 56% from the same period a year ago.
Third quarter adjusted operating margin was a very strong 46, 4% compared to 44, 6% in the second quarter and 36% a year ago.
Lastly, adjusted diluted EPS was $1 16 for the quarter up 66% on a year ago.
Turning to slide 14, which outlines the revenue drivers for the quarter.
As I've just mentioned the biggest drivers of the quarterly change in adjusted revenue with higher management fees from average assets, which were more than offset by seasonally lower performance fees.
Net management fee margin for the third quarter was 47 basis points, which is down very slightly from 47.1 basis points in the second quarter, but up compared to 45.8 basis points a year ago.
The strength in net management fee margin was due to both positive markets and changes in underlying asset mix as <expletive> just discussed inflows are coming into higher margin areas, such as EMEA and Asia Pacific intermediary without flows being in relatively lower fee margin areas, including quantitative equities.
Performance fees was $600000 in the quarter versus 77 million in the prior quarter when they were more accounts and funds eligible for fees.
Turning to operating expenses on slide 15.
Adjusted operating expenses in the third quarter with $292 million, which is down 13% from the prior quarter.
Adjusted employee compensation, which includes fixed and variable costs was down 14%, primarily as a result of lower variable compensation on lower revenues and particularly lower performance fees.
Adjusted LTI was down 30% from the second quarter, largely due to mark to market and fair value adjustments related to certain LTI Awards. We've provided the usual table in the appendix to allow you to model LTI for future years.
Just to lower variable compensation and market adjustments to LTI to third quarter adjusted comp to revenue ratio was 36, 9%.
Through the first nine months of the year the ratio was 43% and for the full year, we still anticipate the ratio to be at the low end of the 40% to 42% range demonstrating the operating leverage in our business with higher assets under management.
Adjusted non comp operating expenses were 1% lower compared to the prior quarter.
As higher marketing was offset by lower G&A.
For 2021, we now anticipate non comp operating expense growth to be at the upper end of mid single digit expectation, we previously communicated.
This implies significant growth in the fourth quarter as we invest in the business through technology brand and marketing for example in supporting the recent launch about five sustainable E T S.
And finally, our recurring effective tax rate for the third quarter was 21%.
The lower tax rate included $2 $1 million in one time benefits, primarily due to a state tax refund.
Turning to slide 16, which is a look at our liquidity.
Cash and cash equivalents were $931 million at the 13th of September a decrease of 34 million a strong cash flow generation was offset by capital return and see capital funding.
The funding included approximately $160 million into five sustainable Etfs launched in September.
This shows our strong commitment to investing in the business, where we see opportunities for growth, including in a T. S. N E. S. G.
During the third quarter, we paid approximately $65 million in dividends to shareholders and declared a <unk> 38 cent per share dividend to be paid on the 24th of November to shareholders of record as at the 18th of November under the quarter. We purchased one 8 million shares of our stock for a total of $75 million.
As <expletive> mentioned since we started our buyback program in Q3 2018, the stock buyback program has been 15% accretive.
Now I'd like to turn it back over to the operator for Q&A.
We will now begin the question and answer session.
I ask a question you May press Star then one on your Touchtone phone.
Youre using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Our first question comes from Ken Worthington with Jpmorgan. Please go ahead.
Hi, good morning, and thank you for taking my questions.
Our non comp can you give us some more examples of what you're investing in.
Beyond five Etfs.
Maybe the technology products and other initiatives.
Is the spending likely to continue at that fourth quarter pace.
Through 2022 or should it fall off or even accelerate thank you.
Hey, Ken it's Roger Thanks for that yes, Q4, certainly included some catch up in one off items.
We're investing in a number of things, where we think we can accelerate that strategy <expletive> talked around around collections are they're getting to just be a better more efficient.
Or accelerating future flows so yes, we're putting money behind those ETF launches in several other launches we're doing.
We are doing a little bit more marketing.
We're also investing in technology that's.
That's more around small bits of kit to make sure that we've got all our teams with exactly the right.
It infrastructure technology for them and in this new agile world.
So there is a little bit of catch up in Q4, So I expect Q4 to be higher.
In a regular quarter.
Okay, great. Thank you I'll.
I'll try to dance around this tricky question, but try and has reported a big position and Janice and interestingly it it continues to grow.
<expletive> if possible can you talk about how you're working with trying to drive shareholder value I think they're part of their investment thesis is consolidation and this morning, you began your comments with the merits of the Henderson transaction.
Does are you signaling or do you continue to think that maybe further consolidation.
It can be really value added to Janus as we look forward over.
The coming three to five years.
Thanks, Ken Yes, taking your second part of your question first I think we're trying to state plainly that.
That we're going to look hard for opportunities that are both organic and inorganic.
<unk>.
To enhance our growth prospects.
And we've tried to give you a sense of some of the trends that we're looking at responding to in this communication.
So I don't really think about that as consolidation.
But you know we can I'll tell you a lot of different words torch towards those ideas and there will be you know a significant number of things that we can and should do organically.
There also may be some opportunities to do some things inorganically, we'll have to see.
So that that I hope, we're stating plainly and clearly as we can.
Oh.
On triad.
Let's try and as our largest shareholder and we work hard to try and communicate on a regular basis with our large shareholders and that certainly includes China. Their situation is a little complicated as they sit on the board of a competitor.
And as a consequence.
You know theyre not.
Probably perfectly positioned to two.
Have the detailed sorts of conversations with us.
That that they might otherwise be but we're very anxious to hear their ideas and other shareholders ideas about what's the best way to enhance shareholder value and deliver the growth that we're aspiring to deliver so.
You know, we're an open communication with them, we're enthusiastic listeners to their ideas as well as other people's ideas and we.
We don't care, who the author is we just want to win.
Okay awesome. Thank you so much.
Our next question comes from Ed Henning CLSA. Please go ahead.
Thank you for taking my questions two from me.
You talked about today about shooting more aggressively the growth strategy can you just talk a little bit more in detail what you're talking about there is sharing a little bit more aggressively and as a second question. If you look at your gross sales of the last few quarters. It declined in equity and fixed income is.
Is this a concern for you.
Second one thank you.
Yeah on the.
The first one.
No.
I don't know how specific much more specific I can be we've tried to point you towards the fact that we see ESG, we see change in retail distribution, we see some product opportunities in <unk> and income.
And we're hard at work in trying to find the very best organic and inorganic ways.
To get in front of those trends and do the best job to position us for growth in another part of our comments, we mentioned we mentioned.
It's in private debt and model portfolio. So these are things that are right at the top of our list that were.
Working hard on and interested in.
In developing.
But it's not just what do you want it's also.
Some about whats pragmatically.
Good opportunity in the marketplace and sometimes conversations can even come down to things like what are the prices for paying for some of these organic and inorganic development show.
I think we've been as specific and clear as we can be with you at this point.
But.
If you have a better idea of how to help my response.
We refine it.
Maybe another way of asking that is what do you think you've run through a number of things.
What are the more near term opportunities.
The potential for you as opposed to more medium term opportunities.
Yes.
Well you know by saying this it's not it's not like we're going to have an announcement in these areas tomorrow. These are areas that we're working on but.
One never knows how fast one can deliver change in those spaces. So.
My Crystal ball is imperfect.
But these.
These are areas of high energy and high focus.
What I can tell.
Let me, let me pick up on the second part on gross flows you really need to split that into into intermediary and institutional.
When we look at our intermediary gross flows.
Look at it on a trailing 12 month basis.
Gross flows are actually up I think it's 30%, we're seeing really strong growth should intermediary.
And we're seeing it in a number of different areas as I said, we talked about I talked about in my script.
Around the growth by geography, but if we look at that in product areas that includes great growth in our global.
Global and global sustainable to includes growth in European equity that we haven't seen for a while and include strong flows in fixed income.
Obviously include strong growth and balanced.
It includes growth in areas like our Etfs, so our AAA AA.
AAA.
Hello.
$135 million in the quarter Classic now office.
It could go a high yielding.
And we've got prelim registration Fujayrah Hubei.
Intermediary flows gross sales are strong and they are increasing.
But we haven't seen this year.
A significant amount of funding on the institutional side.
Yeah, that's a little frustrating.
But they're all you know there are a number of really good things going on under the things.
A bit of delay in funding.
But thats, what thats whats driving that overall level of gross numbers youre, saying that you need to split it down into two pieces.
Intermediary has gone very well institutional I'm going to wait a little bit longer for things to fund.
Okay, but the pipeline in institutional is still there, it's just taking a little bit longer or are there some issues there on the institutional side.
Now we've always said this investment for us to do any institutional again, we've talked about how we global lifestyle, how we strengthen that in the loft. We brought on a new people you can stop in relation heads we are continuing to develop our products in that area. Some of the things Dick's talked about around drug variance would also improve our institutional offering but yeah. We've got a number.
A number of things with with slightly delayed funding.
Okay. Thank you Robin.
Our next question comes from Elizabeth Noe.
No up milliet us with Chardan. Please go ahead.
Thanks for taking my question. The first one is just on income.
Obviously, it's been part of the different questions are going for a number.
The outside that you.
Like nice today.
Disappointing I find it curious as well that.
On your momentum slide you can look at the business ex intake at what point in time My Isaacs, you can say that.
Potentially divesting that business and England.
All parts of the business and what are the inorganic things you might also find.
Thank you Elizabeth.
Look <unk> is facing some really challenging situations.
China has been facing negative flows its performance. This year is not what we needed it to be and it's fair to say that I'm working really hard with the leadership of in tech to SaaS. What are the best opportunities what are the ways you might reinvest in the business what are the ways you might reinvigorate that business because clearly it's going through an extraordinarily.
<unk> challenging.
Period of time.
And and.
Adrian and I and the other leaders of that firm are in.
Very intense communication.
What are the best ways.
To help and to move forward into a better direction, but it's fair to say, they're there they're facing difficult circumstances and this year their performance.
It hasn't.
Been as good as we would have hoped and needed it to be so I think those difficult we're not through the difficult period.
There's more to go.
Picking up the specific Todd on your question, what we've said is that all in.
Intention aspiration, but intention.
Was to be positive consistently positive flows ex contract with <unk>, because we knew that would take a little bit longer.
That's why we separate it out I think they are a bit.
And I think most people realize this is that the average fee rate to 45 basis points that includes that includes the quant equity business in the high teens.
We just like that number in the Q4 results.
The average fee rate, but that's why we why we split it out we own the whole lot.
But we are we can and we havent an intention aspiration.
Could be positive flow ethics that we all positive revenue on flows, but we're not yet positive AUM flows ex contract with Ts.
And we are headed the right way, but we're not quite there yet.
Okay got it.
And then my second question just on the non compensation Gary on sort of a follow on question see earlier on your guidance does suggest a pretty big step up in the fourth quarter, but I believe that sales and also if you could give color on that and then looking out to FY 'twenty two.
Sure.
Small heightened costs coming through just in a post COVID-19 world.
Yeah as I said, yes, there is some one offs in Q3.
Sorry.
Is that telling you about now that will come through in Q4.
There are as you say there are costs that you would expect to come through.
In 2022.
As hopefully the world returns to a normal more normal more normal base. We go live.
To adapt so.
I'm not expecting at CNA built it to be at the same level it was pre COVID-19.
But hopefully will increase from where it is now as we got to see more clients.
Certainly demand to do that both from us and from our clients. So yeah, you're right. There are some some things which are have been low for the last couple of years you'd expect to come through but we'll get we'll get guidance from next year with 22 results that's already with 2021 full year results.
Yes. Thank you.
Yeah.
Our next question comes from Dan Fannon with Jefferies. Please go ahead.
Hi, Thanks, just wanted to follow up on the inorganic discussion, where you've obviously you've been a little bit more forthright in terms of thinking about that today and in the press release and on the call. So I guess curious just more about why now we're obviously seeing of this industry is seeing a lot of consolidation the value of scale.
Just wanted to get a sense of how you are thinking about size or appetite for a larger transaction versus bolt ons or a little more context around the inorganic opportunities that you are looking at.
Sure Dan.
With respect to scale I think we've talked about this in prior quarters.
That's helpful. If it comes with excellence.
And diversifying excellence, even better still in many cases, but.
Not at all helpful just to get bigger and get more mediocre scaled saved the day, if youre not excellent.
And so the problem that a lot of mergers run into is excellence doesn't always run and hand in hand with scale.
And you've got to be careful about that tradeoff. So any transaction any inorganic thing that we would look at would be primarily aimed at enhanced excellence more than just scale, but if you have that enhanced excellence scale can be extremely helpful. And we have benefited from the increased.
Gail that we've had to make all sorts of investments across our business.
And so it can be helpful. It influenced the quality level.
We've maintained in terms of the.
The rest of what we're looking at I think.
Ben is articulate about that as I can be at this point.
And Youre right the prices for some things that you might otherwise like to do.
To the point, where you probably won't do those things at this price. So it's an intersection of Av.
You know cost and benefits.
And you got to weigh the costs as well as the benefits and in the World. These days the price of transactions is definitely higher than it wasn't from prior periods so that counts.
In the equation and it's definitely something we think about.
As we look to execute but if something is really good and the right people and the right fit.
Small differences in price or.
Or something that.
Bankers can can work hard to bridge gaps while we.
We really want to find is we want to find the right fit in terms of excellence and in terms of culture. That's always a hard thing to find you always have to describe that as sort of a tail risk the middle of the bell curve is.
Don't find a lot of those opportunities they're hard to find its hard to find really good.
Thanks.
Our inorganic most of them.
Maybe good in their own right, maybe good in a different context, but won't fit you. So it's hard to predict but what we're signaling I think very clearly on this call as we're looking.
Understood and then Roger just to follow up on some commentary around kind of the institutional stuff and it did kind of the outlook for flows as you look into 2022, you seem to be a bit more optimistic or have you also mentioned a few hires so maybe just a little bit more context in terms of wood wood wood.
As you look at either performance or products or some of the momentum or maybe less of the redemption kind of issue as you think about the near term curious just more more around the outlook and the positive tone as you think about next year.
Yeah, I mean, institutional will always be always be more lumpy than.
Then the intermediary business.
Q4 last year when we when we had some really strong really strong gross flows.
And.
On the Suzanne kinds leadership, Nick Adams, specifically around global institutional right.
That's a team we've been building out.
Say, we've we brought on this year and you very strong global head of consultant relations.
This quarter we've.
<unk> added a new head of global North American institutional that scenario. We are just we're just Mrs. Johnston.
So yeah.
There is there will be more work to do.
We've added a new head of.
U S comp consultant relations.
Well.
And they can say we are working really hard there are some really interesting things, but as I say it.
Institutional is that as I.
I guess more of a rifle shot type.
<unk> gain.
We need to continue to diversify that pipeline.
And that's what the team are working on.
That's correct.
Give more specifics than that sorry.
Understood. Thanks.
Okay.
Our next question will come from Patrick Davitt with Autonomous Research. Please go ahead.
Hey, good morning, everyone.
Oh for sure last year around this time you started to indicate concern about the performance in those smid cap growth strategies, Andy the flows did get worse.
This year, we're seeing a similar decline in the one year performance in the multi asset bucket is there something about the balanced strategy that you think could make it more resilient than the equity side or is it just that the three and five year numbers are still pretty good.
Yes, I think the balanced if I'm not mistaken in the balance remains ahead of its benchmark.
Although perhaps not as far ahead as some of its peers, but over in the short term, but over medium and long term and very long term. It's exceptionally strong has a track record and I do think.
Imbalanced in multi asset portfolios, sometimes clients can be slower to move.
Those tend to where the asset allocations.
They can be slower slower to move so I think I think both things that you point to our true and have an effect.
On balance, but balances still leading inflows across.
Every region for us so.
It continues to be a girl.
Oh, sorry.
Great.
And then second one I'm sorry, if I missed this somewhere in the materials, but could you give an update on how much you.
Do you believe is kind of true ESG or impacts and how flows have been tracking there.
So I guess.
We didn't give that.
Patrick because yes.
It's a difficult one a significant amount of our assets.
Our ESG influenced.
We're working through that the sort of taxonomy as to what that is as you know the whole industry is sort of regulation is grappling with.
Specifically, we've got a global sustainable equity product, especially at <unk> have the same manager for a decade.
And has fantastic fantastic numbers.
And it is growing very well.
Around the world that is a about a $4 billion strategy.
We've launched a number of.
New specific ESG article eight an article nine funds.
And we will register.
A number of more such that about half of our AUM.
European range in our Luxembourg range.
We'll be we'll be specific and it will be registered ESG.
Hopefully by January next year, we've been very cautious, but I think we've talked about this in the past we do think some people.
Jumped.
Two.
Count as much as they can as you would expect hopefully from us we've been a little bit more cautious around that we wanted to do the right thing we will do the right thing from our clients and we want to do the right thing with regulators.
So we have been we have been cautious around that.
Again. Another example would be the five ESG Etfs that we've launched this quarter.
We've taken all.
Our investment teams as you know.
If managed money.
With a breadth of.
Style, we don't have one investment discipline.
I will talk down strategy, if you like but.
But we do have a an integrated ESG team, we've taken that from four people.
That is.
Rising to around 15 people working very closely with that with our investment team. So it's an incredibly important area.
We're moving fast.
And we have a base as I said of.
50 years.
Being involved with ESG so.
We've got a we've got a really good foundation, we just want to make sure we leverage that properly.
Other than jumping to some things that.
You might be seeing elsewhere.
I can figure that out.
No I'd just underlying look ESG is is not going away. It's for real it's here and it's growing climate.
Scientists are scientific thing I read suggests the climate challenges are going to continue to increase.
And as a consequence I think.
We will rise and importance in regulators minds and client mines.
So I think this is something that our industry and the world is looking to integrate and reconcile with in the right way.
And Theres, a bunch of unknowns and we're grappling with that and as Roger said, we're very committed to doing things. The right way, we don't want to make promises that we don't know how to deliver and then make a big public statement and then run home and look at each other and say well how are we actually going to do that.
We'd rather do it in the other order, which is to know how we're going to do something and then make the public promise.
I think that may not be every bond this approach, but that's been our so.
Maybe just a tiny bit slower than others to make some of these promises but.
But we're very much on the path and working hard and going as quickly as we can.
Helpful. Thanks.
Our last question today will come from Alex Blaustein with Goldman Sachs. Please go ahead.
Hi, everyone. Good morning. This is actually on the deal just filling in for Alex I'll. Just a quick question on feeding you all feeding it remains very resilient, especially relative to that that the industry can you speak to how much of that stability is coming from the mix shift of the underlying assets and also how you think.
About pricing on new mandates won.
Before I take the first part and I'll leave you to think on the second topic.
It's a blend of both I think I guess, you could you could back into it from from.
Our description of flows we said that that flows.
Yes. This is X X the quant equity business flows of $3 3 billion out you have to get you to date of around $10 million of positive revenue.
We are adding.
Higher fee business clients about what we do they are asking they're asking us to do interesting business.
And then and there.
And they're paying.
Right price for the for that for that product. So we are adding to the Phoenix, but youre right on top of that there is there is beta.
And that has come through over the last couple of years as equity markets have risen.
But I think it is.
I am pleased it's being picked up.
What we've always said is that asset felt the only measure they're off the very simplistic measure of comparing businesses in our industry.
But nonetheless, it somebody to equal and we're very pleased to be adding quality assets, let's say not fee right.
Kris over three basis points over the last two years.
So it was a combination of the two.
They can tend to favor extra costs.
So we don't have I don't have anything magical to say about how we set fee rates with clients, we try and have a philosophy, where you charge a fair price for the alpha or the expected alpha that you deliver.
We also charge all of our fees against a marketplace, which is highly competitive and so the two inputs tend to be whats a fair ratio of the expected alpha and what's the market.
Price.
And we sit down with those two.
Ideas in our head and try and price things fairly.
And.
I don't think we have any special insight our magic to it but where we're looking to grow where were focusing our energies, where we have some opportunities. We've clearly directed internal resources towards opportunities that we view as not only better alpha for the clients, but better economically for us as well.
And some of those things are working I mean, we launched a new hedge.
Hedge fund last year and life Sciences that is still pretty small, but a few hundred million dollars and with the opportunity to grow significantly and obviously those assets are depending on what you imagine performance fees might be 10, 15, 20 times as valuable as the average asset in the firm and so.
We're trying to focus on opportunities that represent.
The core of what we do for a living we use research and very careful hard work to uncover the opportunity to deliver alpha where alpha matters.
And we.
We want to be active where the clients really care about a differentiated inactive approach and I think we're doing a good job of focusing our resources there and some of the outflows have been in places which are much lower priced.
And as a consequence of the shift the shift has been good in addition to the mix shift resulting from the beta.
With that.
I'm sorry.
I think there might be some more questions, but maybe we apparently have some more questions. So we can keep growing operator, we can take some more questions.
Our next question will come from John Dunn with Evercore. Please go ahead.
Hi.
Guys talk about increasing allocations to all.
I think you mentioned private debt, but maybe you could just talk a little more about areas you might win a push into in that space and then maybe just more generally what you want your old segment kind of look like a few years from now.
Yes, I think in an ideal world you would have all that on an economic basis.
<unk>.
A third or fourth pillar.
In the firm that it was.
<unk> that when equity beta went against you uncorrelated returns could really.
Diversify and carry the weight that would be a very significant change from where we are today.
That would be a whole lot of alts, but that would be the ideal.
And as you look across the spectrum of the kinds of Volte, you've got to ask yourself, what would we be good at what relates to work that we already do what relates to reputation and relationships that we already have with our clients how can we benefit from taking.
The franchise that we have and developing it.
Into some of these opportunities and not all of the ops.
The possibilities are a good fit for us so we've looked across the spectrum and we have.
Some ideas that some are better fit than others, we've mentioned.
We've mentioned private debt as something that might have a good fit.
It's related I think very closely in terms of what we do do the credit work that's already in the house I think it relates to the reputation that we already have with the clients I think our distribution would know how to assist in building relationships for that kind of an approach, but then again the pricing for that these days in the current world is extremely robust.
So whether or not you can find an opportunity in that space what else, we'll see but.
But clearly there are some kinds of alts that are better fits for us than others, and we're trying to be very sensitive to those.
I was curious.
I guess in the meantime, we will continue to grow continue to grow and we got it has ever been.
And a very successful absolute return range.
Europe.
<expletive> mentioned.
The hedge fund that we added on to the very successful life Sciences.
We got I've talked in prior quarters around multi strategy.
Something which again you don't really notice it.
But if.
If there is an old talked feed product.
So we're growing we're growing the business organically as well.
You should look forward to a sustained continued results from that.
Okay.
Great and then just a quick quick one on digital you mentioned institutional.
<unk> solutions in digital and in how a bunch of people who are bulking up in that region like that area.
What's some of the stuff that can help you be one of the winners in digital.
Well, firstly very exciting our newest board member Alison Davis, who really knows a lot about this space and if you go look at her.
Record she's written a couple of books and she is well versed in what.
<unk> technology is doing for ownership of assets and the creation of some new markets. I think there is over two five trillion dollars of bitcoin and the world. These days.
Not just been acquainted electronic currencies combined so this is a major development in financial markets and it isn't going to stop there'll be fraud, there'll be volatility there'll be all sorts of mass, but underneath that there is a trend here, which is important and will be sustained and changing how assets are.
Owned and what.
Legal vehicles clients can use to access certain investments and younger people tend to like some of these newer tools more than some of the older legal vehicles, and so I think it behooves us to pay a lot of attention to that and to try and get educated were at the beginning phases of that.
That industry. We're also at the beginning phases of our <unk>.
Involvement they're learning about it here at this firm so I wouldn't expect us to do anything.
Two wild and dramatic, but I think it's a place where we ought to have an oar in the water I think it's.
We ought to be developing our knowledge and our participation.
With an awareness that a bunch of this stuff is going to turn out to be fraud, or wrongheaded, you've got to be cautious and it's sort of a wild west market like like digital assets are today, but it would be foolish to ignore it and we're looking for opportunities to participate in an appropriate size and.
Way and the good news is we have some some people internally you know a good bit about it. We also have a board member who knows an awful lot about it and obviously the world has some other experts who are willing to help.
Educate us so we're looking and learning and looking forward to finding ways to participate.
More cautiously than some.
Makes sense, thanks, very much guys.
Our next question comes from Nigel put away with Citi. Please go ahead.
Okay.
Oh, Hi, guys. Thanks for taking the question just wanted to return if I could to the lower compensation expense and the explanation there that it was due to lower revenue, particularly performance fees.
Or at least to give us the idea of how the performance fees actually impacts comp because my understanding was it was not as direct an impact as it as it used to be.
Okay.
Variable comp.
Last there is naturally as our variable comp is variable revenues were $58 million lower this quarter.
And you're right that was it.
More than all of that $77 million of that with performance fee decline.
So that drives that drives lower variable comp.
That's the that's the vast majority of the reduction this quarter.
Yeah.
Okay. I mean, obviously if it was all due to revenue you wouldn't have this sort of big expansion in the operating margin side. Just just seems a lot of that might be something else, we're able to pick up you've also got <unk>.
Big Big it's a much lower number this year.
That's LTI as mark to market, so the markets have risen for.
Four quarters in a row and therefore, our LTI has been high for four quarters.
Q3 markets were flat to slightly down.
And we also did have a.
One mark to market fair value adjustment on one particular LTI would say <unk>.
<unk> is also a part of that driving that a little bit lower.
Okay. Thank you.
In the past from low now.
Okay.
Our last question today comes from Marcus Barnard with Bell Potter. Please go ahead.
Yes, good morning Gents.
Question sort of follows on from the activist investor trends.
I was just wondering if.
Having that.
And on the shareholder list changes the way you think about running the business.
Yeah.
So no major changes I'm, just thinking about the margin do you think about just what made you think about hurdle rates different are you thinking more about.
Returning cash to shareholders rather than investing in the business. So just interested in your thoughts on that thanks.
Yes.
No.
Yes.
So I think we've already been thinking about all those things it's hard.
Well as we could.
But.
I think knowing that theres another pair of eyes, and then active largest shareholder who's.
Focused on all the numbers and all the details and cares a lot about it and we'll be communicating actively.
Probably add energy into the system and.
And sharpness.
To the to the conversation do we get up a few minutes earlier and look a little harder I don't know that I can prove that scientifically but.
Okay, well, we'll talk to you next quarter.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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