Janus Henderson Group PLC (JHG) 2018 Q4 法說會逐字稿

Good morning. My name is Nicole, and I will be your conference facilitator today. Thank you for standing by, and welcome to the Janus Henderson Group Fourth Quarter and Full Year 2018 Earnings Conference Call. (Operator Instructions).

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 SEC.

Janus Henderson assumes no obligation to update any forward-looking statements made during the call.

Thank you. And now it is my pleasure to introduce Dick Weil, Chief Executive Officer of Janus Henderson. Mr. Weil, you may begin your conference.

Welcome, everyone, to the Fourth Quarter and Full Year 2018 Earnings Call for Janus Henderson Group. I'm Dick Weil, and I'm joined by our CFO, Roger Thompson.

In today's presentation, I'll first touch on what was accomplished during 2018, and then I'll provide an update on our focus for 2019 as we move out of merger integration and into business execution mode. After which, I'll turn it over to Roger to review the results in some more detail and following our prepared remarks, Roger and I will be happy to take your questions.

Turning to Slide 2. Take a look at some of the key accomplishments from 2018. Despite a challenging market backdrop and disappointing net flows, there were many encouraging achievements in the year.

First, looking at investment performance. Despite mixed results across capabilities, the majority of AUM outperformed benchmarks over 1-, 3- and 5-year periods. More specifically, 8 of the 10 largest U.S. -managed equity and multi-asset portfolios beat their benchmarks over 1 year net of fees. So some really strong results were had in those large strategies and most importantly, this performance is gaining market attention from our clients.

Over 60% of our mutual fund AUM is in the top 2 Morningstar quartiles over 1, 3, and 5 years, as at 31 December, 2018.

And finally, 55% of our U.S. mutual funds have a 4- or 5-star overall Morningstar rating. Second, as we continue to seek to expand our distribution efforts to better serve our clients, I want to call out some highlights around client relationships.

First, we're gaining market share in U.S. equity category in the U.S. retail market, which is a great result. This is the largest market, in which we do business today, and our result in 2018 is very encouraging.

Second, in institutional space, we're winning new business across all 3 global regions and this success is coming across a diversified list of strategies including equities, fixed income, multi-asset and our quantitative strategy from INTECH, reinforcing the strength and breadth of our investment capabilities.

Third, in our multi-asset capability, we're seeing outpaced organic growth with 6% organic growth during the year, driven by strong net inflows in our balanced fund.

Lastly, we're seeing early wins in new product areas including adaptive allocation, multisector bond fund and absolute return income, which are all very encouraging.

Finally, a few comments on integration capital management and culture.

I'm very pleased that during 2018, we were able to substantially complete our integration efforts. This delivery was nearly 18 months ahead of the original time line we set out to achieve and was made possible by the very hard work and commitment of our many employees.

During the year, we generated more than $550 million of cash. We returned $375 million to shareholders by dividends and share buybacks. And in addition, we repaid $95 million of convertible notes to further strengthen our balance sheet.

Finally, I'm pleased that we have been able to attract some very strong new leaders over the last year to further strengthen our existing team. These hires position the firm well for the future and enhance our progress around building a common culture.

While the path ahead will not be linear, we know that our long-term success will be determined by our ability to deliver exceptional service to our clients, to profitably grow assets under management, to increase our market share across our existing businesses and as well as to develop our growth drivers into the future. We're committed to these ambitions. This list of achievements underlines the progress we are making in our efforts to continuously improve our firm.

Let's turn to Slide 3, which is a look at our priorities for 2019. With our integration nearly complete, I want to lay out our priorities so that you can understand how we will manage the business and prioritize our resource and investments going forward.

First, our #1 priority is producing excellent and dependable investment outcomes for our clients. We do this through a combination of attracting and retaining the best talent, consistently delivering on our client promises and investing in technology that enhances our ability to deliver alpha, while also facilitating strong risk management.

Second, we must drive consistent and continuous improvement in client experience. This helps build stronger, long-term relationships with our clients and leads to deeper engagement with our clients across a broader cross-section of the strategies we offer.

Third, we need to seek to enhance our processes to become increasingly efficient in all that we do. There is a grinding pressure on our industry from changing fee rates, regulatory pressure and other factors, competitive pressures as well, and this requires us to respond by, over the short, medium and long term, taking steps to become more efficient in all that we do.

Fourth, we must demand reliability, scalability and simplicity across our global infrastructure. Therefore, we must seek to continuously refine to improve and to further develop our proactive risk and control environment.

Finally, we need to develop our new growth initiatives to build the businesses of tomorrow. For us, this comes in many different areas and is in addition to the execution around our existing core business.

Over the near term, we'll be particularly focused on further building out of our multi-asset and alternative capabilities, our Asian business ex Japan, and we also have some new developments in ETFs. We believe that by delivering excellence across these 5 areas, we will be winning for our clients, and we will be gaining market share in our business. As we progress through the year, we will seek to provide you with updates on how we are executing across these initiatives.

Now please let's turn to Slide 4. In addition to our priorities, I also want to review our vision for our business, which guides us in our efforts.

Naturally, there's quite a bit of overlap between these 2 things. At Janus Henderson, we are aspiring to be a firm that clients want to loyally invest with for many years and that shareholders seek to invest in for long term. Our vision to fulfill this aspiration is built on 3 key pillars: first, delivering excellent, dependable investment results that outperform both the active and passive competition; second, ensuring industry-leading client experience; and third, enhancing an infrastructure built on a foundation of market-leading technology and operational efficiency. This combination of vision and our priorities for 2019 will guide us as we manage our business ahead.

Before turning it over to Roger, let me last provide you with some comments on the outlook for Janus Henderson, as I see it.

In our industry there are always many factors that we can't control: markets, client behavior, industry trends, but one important thing is that we continue to make progress on the areas that we do control. As we look forward, we do not expect the competitive pressures to ease, rather we expect them to become stronger. We also do not see a slowdown in regulatory change in our industry, and we see no reversal in the increased volatility that the markets have demonstrated.

In this environment, our most important challenge as a company will be managing our business effectively with a strong and stable team, process, philosophy, while maintaining a sound focus on financial discipline. If we do this, we will be successful in delivering on the aspirations of what we hope to be as a firm, and we will deliver market-leading returns to our shareholders.

Overall, I'm optimistic about the outlook for our business. I believe in our potential and the progress we're making and, most of all, in our people. We are taking the right steps as a firm to deliver on our promises to our clients, to our shareholders and to our employees.

I'm confident that if we continue to successfully execute on our initiatives, we'll become a stronger and more globally diverse firm that delivers for you, our shareholders.

With that, let me turn it over to Roger, to walk you through the results in more detail.

Thanks, Dick, and thank you, everyone for joining us. 2018 was a year that reflected continued transformation for the firm and ongoing challenges across the competitive landscape and market environment, and our full year results reflect these factors.

From a market perspective, 2018 saw a reduction of nearly $12 trillion of world market capitalization, 90% of which or $11 trillion occurred in the fourth quarter. Against this backdrop, full year total adjusted revenues held up well, and we're 1% higher than the pro forma prior year and stronger management fees offset lower performance fees. Adjusted operating margin for the year continued to be very healthy at 39%, virtually flat year-over-year.

AUM did end the year 11% down from the prior year, driven by the negative impact of markets in the fourth quarter and full year outflows of $18 billion. That said, given that we've seen a meaningful improvement in the market since the end of December, we thought it would be helpful to provide a sense of where AUM sits today.

This isn't an update we'll provide on a regular basis, however, following the drawdown of assets in December and the rise in January, we thought it would be helpful.

As we sit here today, AUM is up roughly 5% from the end of the year, which reflects a combination of market appreciation and some notable improvements in net flows, particularly in the U.S. retail business.

Finally, on the capital management front. During the year, we increased the dividends paid to shareholders by 17%. We completed a $100 million of share buybacks, and I am pleased that today, we're announcing that the board has authorized a $200 million share buyback, which we expect to complete over 12 months.

I'll go into capital management a bit later in the presentation. But these results reflects the execution of the plans we've been communicating with you since the merger's close.

Moving on to the summary of the quarterly results, which you can find on Slide 7. Investment performance over the 3-year time period remains solid and consistent with the third quarter level with 61% of firm-wide assets reaching their respective benchmarks as of the 31st of December.

Net outflows increased to $8.4 billion in the quarter, as a result of an increase in redemptions among retail clients and a slowdown in gross sales, which the entire industry experienced in the quarter.

Whilst we're disappointed with the net flow results, we don't want that to take away from of the accomplishments in 2018 that Dick mentioned.

Assets under management declined to $329 billion at quarter-end. Adjusted EPS of $0.59, reflects lower revenue due to the market declines as well as a higher tax rate, which is largely driven by a true-up in the quarter for the mix shift in regional profitability.

Finally, we returned approximately $119 million of cash to shareholders during the quarter by dividends and share repurchases. Before getting into more detail around the fourth quarter results, I wanted to take a minute to recognize the great work that's being done by our employees on the firm's integration efforts.

As Dick mentioned earlier, we're very pleased to go in 2018, we were able to substantially complete our integration and realized the $125 million of cost synergies as of the end of December. This level of savings is greater than we originally forecast and it came nearly 18 months ahead of the time line we set out to achieve it.

This achievement was made possible by the hard work and commitment of our employees. So thank you to all of you who worked on these efforts.

As I said previously, while there's still efficiencies to unlock in our business, some of which is still to come from the merger, we will not continue to separately report on synergies, as we want to focus on running our business for the future rather than measuring on a backward-looking metric. You'll see future efficiency saves continue to come through in our results and our margin.

Moving to Slide 8, on our investment performance. Overall investment performance for the quarter was mixed across our capabilities. While we saw continued strength in the performance in our equity and multi-asset capabilities across the 1-, 3- and 5-year time periods, we did see weakness in the 1-year results with several of our largest fixed income alternative strategies along with ongoing weakness at INTECH. In our fixed income capability, we had some modest underperformance in the core plus bond strategy and in the alternative capability, the UK return fund finished behind its benchmark for the year.

With respect to INTECH, during the quarter, we saw recent underperformance impacting the 5-year results and as you will see on the page, the results across time periods are quite disappointing.

As we discussed previously with INTECH, its 2018 results were negatively impacted by the narrow leadership in equity markets, mega cap growth stocks in particular, as INTECH's process seeks efficient diversification and requires broad equity market exposure.

Now turning to total company flows. For the quarter, net outflows were $8.4 billion compared to $4.3 billion last quarter. These results reflects the very challenging market environment that we saw during the quarter. The outflows in the fourth quarter were driven by lower growth sales, a trend we've seen across the industry during the quarter, as investors did not put money to work in risky asset classes due to the significant market volatility.

Additionally, we also saw an increase in redemptions from our intermediary clients in North America and EMEA. These redemptions were most significant in our international equity, Global Equity and U.K. absolute return strategies.

Despite the challenges, we did see an improvement in institutional flows during the quarter, driven by inflows from EMEA clients and, as Dick has already mentioned, we continue to see market share gains in U.S. equities among U.S. retail clients, which we're very encouraged by.

Moving to Slide 10, which shows the breakdown of flows in the quarter by capability. Equity net outflows in the fourth quarter declined to $4.1 billion. This decline was primarily in our intermediary business and was partially caused by the increase redemptions in the U.S. This elevated level of outflow looks similar to what the industry as a whole has experienced during the quarter. Flows into fixed income improved slightly and were negative $1.3 billion for the quarter. The improvement in the quarter was led by positive flows in the absolute return income product. We're excited about the opportunities around the globe with this strategy and in 2019, we'll be launching additional vehicles across regions to meet the needs of clients.

This strategy is another emerging example of what we expect to be able to deliver as a combined firm in the future.

Outflows of INTECH were $1.1 billion due to lower gross sales during the quarter. For the fourth consecutive quarter, multi-asset flows remain positive at $300 million this quarter. This result continued to be driven by the balanced fund, reflected in the strategy's exceptional investment performance and the global strength of our distribution team.

Finally, alternative net flows declined to a negative $2.2 billion, the decrease was attributable to outflows from our U.K. Absolute Return and Property strategies.

Slide 11 is our standard presentation of the U.S. GAAP statement of income.

Turning to Slide 12 for a look at the summary of financial results. First, looking at the full year's result. Average AUM was up 6% over the prior year, which drove higher management fees and led to a 1% increase in adjusted total revenue for the year.

Full year adjusted operating margin continues to be very healthy at 39%. And adjusted diluted EPS for the year was $2.73, compared to $2.48 in 2017. The 10% increase in adjusted EPS was driven primarily by a reduction in the full year tax rate as a result of the tax reform that took place in the U.S.

Now looking at the quarter-to-quarter comparison. Our fourth quarter adjusted financial results primarily reflect the weak market conditions during the quarter. Average AUM decreased 8% over the third quarter driven by negative markets, outflows and negative currency movements. Lower average assets drove lower management fee revenue, which was partially offset by the expected seasonality in performance fees, resulting in a 6% decline in total adjusted revenues from the prior quarter.

Adjusted operating income of $165 million was down compared to the third quarter, primarily, as a result of lower average assets. Fourth quarter adjusted operating margin was 37.3%, compared to 38.5% in the prior quarter. And adjusted diluted EPS was $0.59 for the quarter, compared to $0.69 for the third quarter.

On Slide 13, we've outlined the revenue drivers for the quarter and also the full year. First, looking at the quarterly change in adjusted total revenue. Lower average assets were the biggest driver of the quarterly change resulting in a 9% decrease in management fees. That management fee margin for the fourth quarter was 43.4 basis points, down compared to the prior quarter and the same period a year ago.

The decrease was primarily due to mix shift resulting from the negative markets during the fourth quarter. This decrease is consistent with our continued expectations, and we will see roughly a 1 basis point decompression a year. However, for the full year, despite the negative markets in the fourth quarter and a meaningful decline in performance fees, total year-over-year adjusted revenue increased 1%.

On Slide 14, given the significant change in performance fees year-over-year, we wanted to walk through 2018's results and highlight opportunities for 2019.

Performance fees in 2018 were $7.1 million, down from the pro forma $84.7 million in 2017. The biggest factors in the decline were the performance fees earned from the U.K. absolute return and the European equity strategies. Additionally, as a result of underperformance at INTECH, we did see lower performance fees from these strategies in 2018, which you'll see reflected in the year-over-year change in segregated mandate category on this page.

Whilst we can't predict what performance fees will look like in 2019, there are a few items of note as we begin the year: first, while the 2018 underperformance for the U.K. absolute return strategy will impact 2019 performance fees, as the fund first needs to recapture this underperformance before a performance fee can be earned. We're encouraged that during January, this strategy had made up well over 1% of underperformance thus far. So it's off to a good start.

Secondly, on our U.S. Mutual Fund fulcrum fees, the investment performance in the first quarter of 2016 was particularly weak and this period will roll out of the calculation in this quarter. Based on the formula for calculating these performance fees, there is a potential for improvement without dependence on what performance is for the first quarter of '19.

As of the end of January, relative performance looked good for most of these large funds.

Finally, I wanted to point out that despite the decline in performance fees year-on-year, the number of performance fee accounts and hence, the opportunity for the firm to earn performance fees in the future has not significantly changed.

Moving to adjusted operating expenses and the nonoperating line items on Slide 15. Adjusted operating expenses in the fourth quarter were $277 million. Adjusted employee compensation, which includes fixed and variable costs was flat compared to the prior quarter. While there was no change in the prior quarter, there were a few moving pieces that offset.

During the quarter, both fixed and variable compensation was down, the latter as a result of lower profits due to the weak financial markets in the quarter. The impact of these 2 items was offset by year-end adjustments to our cash and noncash payout mix. Adjusted LTI was down 36% from the third quarter, primarily due to the impact of the mark-to-market adjustments and the impact of departures during the prior quarter. In the appendix, we provided further detail on the expected future amortization of existing grants along with an estimated range for 2019 grants for you to use in your models.

The fourth quarter adjusted comp to revenue ratio was 41.5%. For the full year, total comp to revenue ratio was 41.4%, in line with the guidance we provided throughout the year of the low 40s.

Turning to adjusted non-comp operating expenses. Collectively, there was an increase of 9% quarter-over-quarter. The main drivers of the increase were marketing, which saw a seasonable pick-up in spend and slightly higher G&A costs.

Finally, our recurring effective tax rate for the fourth quarter was 28.9%. It is higher than our prior guidance. The higher tax rate during the quarter was primarily driven by a year-to-date true-up in the quarter for the mix shift in regional profitability as a larger portion of the firm's profits were being generated inside the U.S.

For the full year, the firm's effective tax rate was 24.5%, slightly higher than our guidance. Again, due to a larger portion of the firm's profits being generated in the U.S.

The fourth quarter adjusted EPS of $0.59 is down over the third quarter and the same period a year ago.

Looking forward to 2019, I want to take a few minutes to provide some insight into what we anticipate in our expense base. With AUM starting the year down 11%, we know we'll see additional pressure on margins all other things being equal. As a management team, we're focused on balancing the appropriate amount of investment that's required to grow our business and maximize profits over the medium term with sound financial discipline and an awareness of margin pressure.

But it's important to note that we run the business with an emphasis on the long term rather than quarter-to-quarter margin results.

With that said, let's walk through a few points for your models: first, looking at compensation, as we realize the cost synergies of the merger, we have seen fixed comp come down, and we will continue to see the variable comp pool flex with business results. That means, we'll expect an adjusted comp to revenue ratio to continue to be in the low 40s. Second, as we previously disclosed, non-comp expenses in 2018 show an exceptional amount of increase year-over-year and looking forward, we do not expect that to continue. In 2019, even excluding the $12 million legal outcome we had in 2018, we'd expect to see non-comp expenses flat year-over-year.

Finally, the firm's statutory tax rate is expected to be 23% to 25%, slightly higher than our prior guidance due to the relative strength of our U.S. business. The effective rate will be impacted by various differences, which arise quarter-to-quarter.

Lastly, Slide 16, is a look at our capital management since the merger. We remain committed to returning excess cash to our shareholders. And on this slide, you can see those results over the last 7 quarters, as we've been able to gradually increase the payouts, while retiring outstanding debt.

During the fourth quarter, we purchased approximately 2.2 million shares for $50 million, which completed the inaugural share buyback program, in which we repurchased 4 million shares, reducing the total shares outstanding by 2%.

It's important to reiterate that when it comes to granting employees shares of company stock as part of compensation, we purchase shares on market and, therefore, do not annually dilute shareholders. What this means for Janus Henderson, different from most of our competitors, is that each share the firm repurchases under a buyback authorization, is accretive to shareholders.

In addition to share buybacks and dividends, in 2018 we also retired $95 million of convertible notes. Inclusive of this repayment, we returned $470 million of capital to shareholders, which represented nearly 90% of adjusted net income for the year.

Looking forward for generating excess cash, which allows us to continue to follow the capital return philosophy, which we previously laid out for you. We will evaluate and balance the ongoing investments that business requires with external opportunities we see, and when excess cash remains, we seek to return that capital to shareholders.

At today's share price, we did not see many opportunities that provides as compelling an option that our own shares do. With this in mind, we're very pleased to announce today that the board has authorized an additional on-market share buyback of up to $200 million over the next 12 months. In addition to buybacks, we're paying a fairly healthy dividend, which offers a very attractive yield to shareholders at the current price.

With that, I'd now like to turn it back over to Dick, for one final comment.

Thank you, Roger. I just now want to turn for a moment to one last thing, the retirement of Bill Gross. As was recently announced, Bill approached us and let us know that he's come to the point where he would like to focus on the work of his very substantial family charitable foundation, focus more on perhaps giving away money than earning it in the last chapters for him. Bill is the bond king, I don't think anybody has ever made more money for their clients in the Fixed Income industry. He is the best there has been and it has been an honor for us to work with him and have him on our team here at Janus Henderson. And as he goes off to the next chapter in his life, we wish him well and mostly, we say thank you for the time he has shared with us.

So with that, let me turn it over to the operator and take your questions.

(Operator Instructions) And we'll take our first question from Brian Bedell with Deutsche Bank.

Maybe just to start off with the fixed income strategy. And just overall, I know the performances weakened a little bit here in the 1-year period. But any overall change to that strategy? And just as you also think about the development of the new growth initiatives. Is there any -- are there -- you mentioned, I think, Dick, multi-asset and alternatives and mid-caps, but anything in the Fixed Income area that you'd focus on as well?

Yes, thanks, Brian. First, I guess, I would say that we have a diversity of performance across our Fixed Income landscape. We have a number of our strategies, which are fairly conservative, credit-based management and through the really hot period of returns in strong credit markets, they struggled to keep up but have a little bit less than exciting track record right now. And complementing that, we have a few areas that are strong bright spots, ones are multi-sector income strategy and another one is our absolute return income strategy. And those are strategies that we think have opportunity to grow in various markets around the world. In particular, I mentioned earlier, the absolute return income strategy where we are opening some new vehicles in Europe and elsewhere to make sure that we have the right legal structure to make those properly available to clients, who are interested. So there's some really nice bright spots in our Fixed Income business but also some challenge in some of the more conservative credit-based strategies that have shown modest underperformance for a while now.

Okay. And then just a follow-up, I'd say, maybe just -- and thanks for the commentary on January with the AUM up. Maybe if you can elaborate a little bit more on what you're seeing in flows, both on the retail side and then the institutional client behavior, of course, there is a lot of delayed fundings industry-wide in the fourth quarter given the environment. Are you seeing that reverse during the -- in the first quarter so far and in which areas?

Brian, it's Roger. Thanks for the question. I guess, first I'd say is that we would normally -- I would normally answer that question, we don't talk about short-term flows, but there has been a very dramatic change in markets going, as we went through the fourth quarter and going into Q1. So that's why we updated a little bit in the script, and I'm happy to answer the question now. And the turndown in the fourth quarter, particularly December, in the U.S., was pretty dramatic and the comeback in January has been pretty dramatic. So, again, you'll see these flows publicly shortly, but we're in positive flows in the U.S. in January. In Europe, outflows have slowed, but that we're still in small outflows. Institutionally, as you say, it's a lumpy environment and too soon to tell. We've got a pipeline of interesting prospects, I guess, what I can tell you is we're not sitting on any big losses as we sit here today.

We'll move onto Ken Worthington from JP Morgan.

You've executed on the promised cost synergies. Can you share the plans for driving revenue synergies from the combination of Janus Henderson in 2019? What I'm really after is what are you hoping to accomplish from the combination this year from the merger?

Yes, I think -- well, first, I think, we're starting to put away the use of the term synergies because it's backwards looking around 2 legacy companies that no longer exist, and what we're -- as we're through sort of the bulk of the integration process at this point, we're really just focused on managing our company ahead. And so you'll probably find us not referencing synergies very much anymore, either cost or revenue. But I do think that the promises we made in the merger around the power of having strong global distribution coupled with well-performing products remains true and there's probably no better example of that than our balanced strategy, which is gaining significant assets in markets around the world through different sales force. We already mentioned ARI is another example of something that, I think, through different sales teams that are legacy, one or the other, there is significant interest there. Previously, we've seen significant interest in emerging markets sold by legacy teams from both heritage, and I could go on. So we've said this before, EURO is going to be able to point to bright spots and dark spots in our very diversified book of business and that remains true, but I think we see in the data, lots of evidence that where we have well-preforming funds, we can deliver more of them to -- across more markets effectively, and that gives us a reason to be optimistic, and it's why we believe we will prove out the value of the merger with stronger flows in the future.

Okay. Maybe second, we're seeing a step-up of mangers expensing the cost of research in the U.S. What are your thoughts about expanding how you treat the payment of research in Europe under MiFID to the U.S.? So I believe, you're unbundled in the U.S., but I don't believe you expensed the cost of research. So what are your thoughts there? And are there any lessons learned in Europe about bringing the cost of research on to your P&L here?

Well, I think, there are -- to take your last part first, there are certainly lessons we're learning in Europe. We're all -- the sellers, the providers of research and the consumers of research are trying to define sort of new market patterns and get together effectively and that, as you probably know personally, from JP Morgan's experience, this is a complicated restructuring of the markets for research. And I would say that still in flux. We did a good job of estimating with that with cost on our P&L in Europe in this past year, well done, Roger, and team. And I think we've managed it pretty effectively. But the pricing structures and all that are in flux, and I think it's too early to talk about big lessons, but there will be lessons that apply in the U.S. if that market changes structure to match Europe. And, I guess, following on that comment, we don't see that happening yet. It may happen in the future, but we don't have any plans currently to change how we're treating the research in the U.S., but we're aware that some other competitors have changed their treatment. And we know how this happened in Europe over a reasonably compressed period of time, and we see that, that could happen in the U.S. But so far, we're not seeing a lot of strong demand out of the client side yet. So for us, it's watchful waiting.

We'll take our next question from Nigel Pittaway with Citi.

Just a couple of questions. First of all, on the employee comp and benefits. I think, Roger, as you're going through it, you said there were some year-end adjustments relating to cash and noncash payment. Can you -- presumably, that means more cash. So, I mean, was that sort of a one-off adjustment or is that something that we need to factor through moving forward? Because I think, as far as I was aware, there was also some one-offs in the third quarter relating to that catch-up of treatment of interest on pension plans. So it was perhaps a bit surprising to find it flat on third quarter.

Yes, it is exactly as you said, Nigel. It's a mix between cash and noncash, means that we're paying a higher -- slightly higher proportion of cash in 2018 and lower as deferred in 2019. I guess, the good news being that means that there's less, less is going to be amortized in future years. That is a true-up to the -- in the fourth quarter. So it's the full year mix is what you should really look at as you're planning for the future with comp coming down slightly, then the mix slightly changes towards cash over stock.

All right. So that actually impacts the long-term incentive plan line rather than the employee comp line? Does that -- is that right? Or does that mean employee comp line?

It will reduce the future amount -- it will reduce the future amount going through LTI. And you see...

Starting from the back, yes. So the reason why the employee comp line is flat then given that there was that, sort of, one-off of catch-up of interest on pension plans going through that line in third quarter. You should've had synergies coming through, obviously revenue was down, yet flat employee comp, any sort of reasons for that?

It's exactly as I said on the call. So comp is down -- variable comp is down with profits and that is offset by that cash stock mix.

Right. Okay. All right. And then, obviously, you gave guidance for that comp ratio, et cetera, but there was no, sort of, mention of the op margin. Is that, sort of, still high 30%, it's what we can expect or?

It depends on -- it obviously depends a lot on where markets are, but we're on a -- and we've given you guidance of a comp ratio in the low 40s, basically flat, non-staff costs. And so, I guess, if you model out, you're in the high 30s.

We'll take our next question from Patrick Davitt with Autonomous Research.

I just want to go back to the AUM guidance, again, versus kind of the vague flow guidance you gave. If markets are up kind of 6%, 7%, 8% globally, depending on where you look and AUM is only up 5%, how do you get to flows, kind of, being flattish to positive per your comments earlier? Is there something I'm missing there?

I guess, the non-equity parts of our portfolio. So about half our book is equity, the rest is pure equity. We've got the quant equity book as well, but then we got Fixed Income, multi-asset and also, it's going to be -- we go up slightly less -- we've slightly less betas than the pure equity market, because of that metric.

Okay. Fair enough. And then you mentioned INTECH briefly, just curious how the conversations are evolving there, as we think about how flows track the last time performance came down this much, and I believe, this is one of the lowest 5-year numbers that's ever had. So I'm just curious, how those conversations are going and if you have any kind of outlook on AUM risk as that plays out?

Yes, obviously, we've tried to be transparent that this underperformance is significant, and we're concerned about its effect. But we've also been transparent that nobody really knows and in AUM spaces, a few decision-makers in INTECH's book of big institutional business can move a lot of money. And so it's -- we've called it a lumpy business for that reason and it remains so. So we're not sitting on any big news at the moment, as Roger said earlier. But we're obviously concerned that the underperformance will have destabilized clients, and hopefully, they will stick it through. Often in the past, INTECH's best performances come on the heels of some difficult periods and INTECH's actually put up some more reasonable numbers more recently. And so we'll hope that the clients stick through some challenging performance, but we don't have a good way to predict it. All I can tell you is that we're on sort of high alert and making every extra effort to touch the clients and service the clients and answer their questions and concerns as best we can so that they have the full information as they make their decisions. But so far, we haven't seen big new trends out of their assets, but again, it's a lumpy business, and it can change quickly.

And we'll take our next question from Andrei Stadnik with Morgan Stanley.

I just want to ask my first question around investing in further growth. Can you comment maybe on the number of strategies and maybe the [farm of] strategies that are under incubation now versus 1.5 to 2 years ago when the merger occurred?

We don't track a number, sort of, strategies under incubation. We don't actually use the term incubation here. So I don't quite know how to answer your question. We -- as part of our effort to be focused, we're going to periodically prune the number of strategies, we have been, and we'll continue to do. And that to us is just as important as adding new ones. We have an awful lot of well-performing strategies, our success is more determined by how we bring those to market and how we carry those forward than it is bright new ideas. And so that's our first priority. But we have a discipline around sort of trying to constantly prune our lineup, and we follow that. And I don't think that the overall number of strategies is probably changing in a radical way, but it's probably decreasing modestly, as we prune. As we said, we're also adding from time to time new ideas. Our ARI strategy has launched a new sort of more concentrated version of that absolute return income on the Fixed Income side, and we have some new ideas coming forward in ETF space and elsewhere. So it's a balance of new and old, and our commitment is we want to do the things we're really good at and that are going to matter to our clients. So as we discover that maybe some of the things we've tried haven't worked so well, we'll be focused on pruning as well as adding.

Thank you. And my second question. Can you comment on flows in the December quarter, flows outlook momentum in Asia-Pac and in Japan, particularly around Asia as well?

Well, speaking of Japan, we didn't have our biggest year last year in Japan. They'd had an awful lot of years of good growth and last year wasn't one of them. That said, we have a lot on the boil right now in Japan, and we're hoping that as this current year progresses, that we're able to do a lot more. Our very good partners and owners Dai-ichi Life have committed to bring to market in Japan as part of insurance products, our adaptive asset allocation, run by Myron Scholes and Ashwin Alankar, which is a new product we've been building here in recent years and Roger, I think, mentioned that they're starting to see some early wins. And it's exciting that Dai-ichi Life has decided to make that a part -- a core part of some of its insurance products and bring that to market in Japan, as they have publicly announced themselves. And so that's an opportunity and there are more. We had a big success with the Dai-ichi Life affiliate TAL, down in Australia last year, and we're hopeful that we'll find ways to be a good partner for them and serve their needs and continue to grow that relationship. So we have opportunities to work on. And lastly, we mentioned that one of our significant growth initiatives has been to retool and focus on Asia ex Japan, and we hired a gentleman, named Scott Steele, out of PIMCO, to help lead that effort reasonably recently, I guess, it was the last year or maybe the end of the prior year?

Yes, June, last year.

June, last year. And so he's been putting together a bit of a revised team and making some hires, and we're hopeful that in 1, 2, 3 years ahead, they can start developing a positive momentum there to match the positive momentum we've seen in Japan and Australia.

I think the other bit to add would be around our intermediary sales in Australia as well as the TAL mandate, which is obviously a substantial piece of lumpy institutional business. We continue to see strong retail flows from the 2 strong Fixed Income businesses that we have in Australia, 2 fantastic businesses. So -- and that's in -- more in the model portfolio-type of retail account. So small amount of money coming in every day into tactical income, absolute return income and that will -- and both the collector -- absolute return income plus, which is that more leverage version that Dick talked about. So it's a really strong intermediary flows into Fixed Income in Australia, which is really important for us.

And we'll take our next question from Craig Siegenthaler with Crédit Suisse.

First just on the multi-asset business. The 5-star rated balance fund is really performing out there and was actually up in 2018, but it looks like the big trade would underweight international equities and a little overweight Fixed Income. So I'm just wondering are there other factors you can attribute the strong performance to. And also, as my follow-up, which segments -- which investor segments are generating highest level of inflows to this fund?

Well, the balance strategy -- the investor segments that are most interested in that historically have been more of the retail sector. It's come more in the funds space than in institutional separate accounts. If that's what you're asking.

But that's now coming from around the world. We're seeing sales -- strong sales of that in Europe, some sales in Latin America, in Asia as well as traditionally strong selling of that in the U.S. So that really is -- and I've talked about green shoots before and some of those turning to significant trades. I guess, that's what we're starting to see turn that way. So I think gross -- so net flows have balanced last year across the world were around $3 billion. And that's the sort of thing we're looking for in the future is to more products like that, that we can sell around the world through the distribution we have now got with Janus Henderson.

And, of course, while we're talking about multi-asset, our adaptive asset allocation with Myron and Ash that we talked about, perhaps more of an institutional client, I don't know, client base going forward for them. So I think, we have opportunities in retail and in institutional to take advantage of that strong global network.

Also, yes -- thank you, Roger. Roger pointed out that we'd forgotten to mention one other key factor, which is we'd hired a new leader for our multi-asset and alts business that we're very excited about. We welcomed recently Michael Ho to the team, and Michael is a great talent that I hope some of you get to meet here in the not-too-distant future, and he really strengthens our leadership lineup in multi-asset and alternatives, and we're looking forward to his contributions.

And we'll take our next question from Simon Fitzgerald from Evans & Partners.

Just the first question relates to your comments in regards to U.S. equities in terms of revival there. In terms of interest, just wanting to know a little bit more, if you could elaborate that. Is that interest in the system general or these mandates that you've been working on in the background are now starting to come together?

I think what we're talking about here, Simon, is our relative strength in the -- in certain parts -- particular parts of the U.S. market where we're taking quite significant market share. So if you look at in the small and SMID-cap spaces in a number of other areas like tech growth and income, small-cap value as well, we're taking between 400 and 900 basis points of market share in those -- where we're seeing flat to positive growth. So Triton, which is our small-cap growth fund growing at 8%, that's -- and the market is up 2%. So we're taking significant market share in some of these areas.

Okay. That sounds very encouraging. And also just wanted to get a little bit of guidance just in terms of distribution expenses. Obviously, they came back a fair bit in the fourth quarter '18 from $112 million to $102 million. But I just wanted to get a bit more of a sense about the market sensitivity in the AUM sensitivity in regards to those distribution expenses going forward.

You should think about them in line with AUM, Simon. But you're right, they came off in the fourth quarter as management fees came off.

They're in line with gross sales.

Yes.

Not AUM, gross sales.

Sorry, gross sales.

And we'll take our next question from Alex Blostein with Goldman Sachs.

First question around is capital use. Can you guys give us a sense on the pace of the buybacks, as we saw a nice pickup in authorization here? But how should we think about the pace of that being implemented? And I guess, a bigger picture question sounded like you don't really see any inorganic opportunities right now, but curious to hear your thoughts on additional M&A down the road, whether smaller, kind of, bolt-on or more transformational deals?

Okay. Alex, I'll take the first part and then I'll let Dick pick up on M&A. Yes, I mean, we've just executed our, I mean, on over $100 million, you saw how we did that across both markets, pretty much in line with the mix of the markets or where our asset -- where our investor base is. We went -- we obviously went by too much on a particular day, so we are limited on what we'll buy because of market volume. So you should probably use that as a guide. We've put a programmatic trade in place and execute it in that way. So I mean, -- I hope that answers that part of the question.

And I'll talk about M&A, Alex. Right now, I think, what we're very focused on is delivering on the promises we've already made on the merger that we've already, obviously, recently completed. And that's the highest priority. Never say never about it but I think another transaction of really significant size right now would be a real stretch and would be very unlikely. It's not impossible, again. So never rule anything entirely out, but it would have to be viewed as pretty far out there, tail kind of case. We have a lot that we're focused on to do with what we already have. In the fullness of time, look, we learn, we listen, we watch market developments, and we're focused on making sure that we're going to be able to compete and build the right kinds of relationships with our clients going forward, and if we were to determine that we needed to somehow go through a big transformational merger to position ourselves to win, we wouldn't be afraid to do that down the road, but I would say in the near to medium term, it feels pretty darn unlikely.

And we'll move on to our next question from Mike Carrier with Bank of America.

Just a question on the European front. You mentioned some improvement, but still outflows for the year-to-date, can you provide some context on what you view as maybe industry trends versus some performance or product mix issues. And maybe, potential, like green shoots, to potentially ship that trend.

Europe had a pretty challenging year last year. I think the total industry had almost EUR 130 billion of outflows, which is the first year in 7 that it's seen outflows. But there's -- yes, but there are bright spots in that. Mixed asset funds were positive, Europe actually was slightly positive by the end of the year, Global was negative. So we've got offerings in each of those spaces, we've got a great brand in Europe, we've got a great sales force in Europe, we've got some great product. And so we will compete in those areas as well as defending the franchise and the products we got in place now.

And we'll move onto our next question from Dan Fannon with Jefferies.

So Roger, just want to follow up on the non-comp guidance. I think, you excluded a legal charge, I just want to get the starting point for the flat, what's the -- as we think about 2019.

Yes. So we will be -- headline number, it will be down $12 million. If we're flat, that will look like we're down $12 million because we had a one-off $12 million hit -- charge in 2018. So I'm saying that we will be roughly flat excluding that.

Got it. And then just a follow-up on INTECH. I'm just wondering if there's anything different about the agreements you have with your clients there or -- to think about the stickiness of those assets. Obviously, the performance is documented and you guys have highlighted as being challenged. And so, wondering, if there's just a process for redemptions is different than we might see elsewhere because of the contracts that they -- the clients have or if there's any different -- anything different with how they, kind of, deal with their clients?

No, I mean, it's primarily an institutional client base and so, I think, the liquidity, the way the clients transact, is a little different than they do in mutual funds. But it's the standard institutional fare in liquid investments, and so we don't have private equity kind of advanced notice and gates and that sort of thing. So no, there's nothing special we would call your attention to.

We'll take our next question from Chris Harris with Wells Fargo.

A bigger-picture question on your alternatives business. I know you sighted it as a growth area going forward and so flows aren't clearly where you guys want to see them. What is it going to take to turn that business around? Is it a function of just improved investment performance or is there some other things that could happen that could accelerate growth?

Yes. So, as I mentioned, we hired Michael Ho to help us work through the answers to that. I think some of it is making sure that we've got the right combination of skills applied for our clients. So some of that is product positioning or effectively capability positioning and how you explain yourself to clients. Some of it is how you use your various capabilities in combination to solve problems. So drawing the skills from various different teams, our liquid alts teams or some of the historic Henderson alternative teams here in London and putting those things together in the right way to serve client needs. So I think there are a number of things to do from always ensuring that you have the highest quality effort going into generating the alpha and the risk control to positioning and explaining your products properly and connecting them well to the client basin. Frankly, I think we're decent at those things, but we can get better. And I think, Michael Ho is an important part of getting better, but certainly there is more to do.

And we'll take our next question from Robert Lee with KBW.

Maybe my first question, just as you've talked about and we all know the pressures in the industry, fee pressures and whatnot. When you do your own budgeting and forecasting internally, I mean, how do you think of fee pressures, fee compression? I mean, do you kind of have a base assumption that -- I think, you may have talked about this before in the past, Roger, but maybe, it's 1 or 2 basis points a year, how do you, yourselves, kind of factor in that industry trend?

Yes. Robert, I mean, it's obviously different in different areas. But overall, yes, we do assume that there has been -- there has always been fee pressure in our industry. And we expect that to continue. So yes, we model in a mild fee compression. I have been pretty consistent and talked about around 1 basis point of fee compression a year. I've also said that you haven't really seen that in the past because of the equity market's strength over the last decade, I guess. But yes, we did build in an expectation of mild fee pressure in our budgeting process as we go through the year.

Great. Maybe as a follow-up. If possible, I'd like to maybe drill down a little bit more into the U.S. retail flows. In addition to kind of the styles that are winning, is it possible to get a little bit more color on which distribution channels you see and are -- is part of the improvement in sales there due to being added to, maybe, some key distributors' model portfolios? Just trying to get a sense of how much of, kind of, the uplift is being driven by distributors and maybe being added to different portfolios of different distributors?

Yes, there is nothing individually that we'd call to your attention in that zone. We're always being -- it's a very competitive situation, as you know, and we're constantly facing the opportunities to be added and subtracted from various different platforms or different parts of platforms. But there is nothing, in particular, as we sit here that we would know about and call your attention to that's special this quarter.

And we will take our final question from Alex Blostein from Goldman Sachs.

Just a quick follow-up. I think you talked about the U.K. absolute performance fund made up about a 1 percentage point back from there on the performance. Can you tell us what the high mark is, so kind of how much more do they need to make up in order to get back into positive performance fee-generating mode?

Yes, happy to do that, Alex. At the end of the year, I think, it was about 4% behind this benchmark. And it's, again, that's dated for January, either is or will become fully public, but it's over 1% in January.

And ladies and gentlemen, that does conclude today's conference. We appreciate your participation today. You may now disconnect.