Janus Henderson Group plc (JHG) Q3 2019 Earnings Report, Transcript and Summary

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 Third Quarter 2019 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 third-quarter 2019 earnings call for Janus Henderson Group. Roger Thompson and I will be taking you through the results for the quarter today, after which, we'll be happy to take your questions. As I think you already know, we try and keep a long-term focus on our business, which is slightly different than the view implied by quarterly reporting. To that extent, on the first and third quarter calls, Roger provides you with updates on the business and we use the second- and fourth-quarter calls to address the same items, but also include a more robust discussion of the business and the strategy. We believe that set up better aligns our calls with the way we manage our business. So I hope that works for you. With that said, let me turn it over to our CFO, Roger Thompson, to walk you through the third-quarter results.

Thank you, Dick, and thanks, everyone, for joining us. The third quarter's results can be characterized by three points. First, investment performance remains very strong, with at least 70% of assets reaching their respective benchmarks over the 1-, 3- and 5-year time periods. Second, total company net outflows improved to $3.5 billion, resulting in assets under management decline of 1% compared to the prior quarter. And third, the financial results were better than the prior quarter, with EPS of $0.64 compared to $0.61 a quarter ago. Turning to Slide 3 to take a look at investment performance results, overall, investment performance relative to benchmarks remained strong. We saw continued strength in the performance of our equity, fixed income and multi-asset capabilities across the 1-, 3- and 5-year time periods and short-term improvements in our alternative and INTECH capabilities. Year-to-date performance of INTECH has been encouraging, but the weakness in longer-term performance means we still have business at risk. The other notable movement in the quarter was alternatives. The U.K. absolute return strategy, which has switched to underperforming at the end of June, returned to outperformance as of the end of September, however, the strategy remains modestly behind its high watermark. On the right-hand side of the slide, you can see that our relative performance compared to peers is very strong, with more than 70% of AUM represented in the top two Morningstar quartiles on a 1-, 3- and 5-year basis. Now turning to total company flows. For the quarter, net outflows were $3.5 billion compared to outflows of $9.8 billion last quarter. The improvement was driven by lower growth redemptions, primarily in the four known areas of concern that we previously highlighted. While we're pleased with this improvement and it's a step in the right direction, we are far from satisfied with the results and much work remains in front of us. Similar to last quarter, we wanted to spend a few minutes breaking down the flow results between known area of concerns and the remaining area of the business. Last quarter, we introduced Slide 5 in an effort to help you better understand where we're seeing major headwinds in the business. We did this because the current concentration of outflows is masking some really great work across the major cross sections of our business. Given the improving trends in the areas of concern, next quarter will likely be the final time we break out the flow results in this manner. First, let's take a look at INTECH. INTECH had net outflows of $2.4 billion in the quarter, which is an improvement from the prior quarter, however, given the weakness in the longer-term investment performance and the low sales pipeline, the business remains a key area of concern. Given these concerns and the lumpy nature of INTECH's predominantly institutional business, we wanted to provide an update on the fourth quarter flow to date. Thus far in the fourth quarter, INTECH has experienced $1.4 billion of outflows, which is a disappointing result. Global emerging markets, outflows totaled $200 million in the quarter compared to $2.5 billion in the second quarter. Last quarter, I told you, we remained fully committed to the emerging markets asset class and we're very pleased to announce during the third quarter that we've hired what we believe will be an exceptional gem team, filling a key gap for us. This will now allow us to compete for assets in this category going forward, and we're very pleased with the new team. The remaining assets in this strategy is still at risk as clients continue to evaluate depositions. We're obviously, keen to retain as much as possible. That said, thus far, in the fourth quarter, we've seen $400 million of redemptions in the strategy, which leaves $1.9 billion of assets at risk. Outflows in core plus fixed income, which includes flexible bond fund with $300 million in the quarter compared to $1 billion in the second quarter. The result continues the trend of improved outflows as the years progressed. Performance has also improved in 2019 relative to benchmark and peers, which is also encouraging. And finally, European equity outflows were $500 million in the quarter compared to $800 million in the second quarter. Whilst negative, this represents continued improvement for this area of the business. While demand across the industry for European equity remains weak, investment performance across our strategies continues to improve and relative to peers, all are in the top two quartiles over the one- and three-year time periods. The remaining parts of the business continued its upward trend in the third quarter. I'd remind you that the reason why this is so important is because this area of the business accounts for 80% of the firm's totally AUM. As you can see in the second bar chart on the right of this slide, this area of our business had $100 million of net outflows in the third quarter compared to $1.4 billion of net outflows in the second quarter, a much better results, but still one that's below where we aspire and expect to be. The improvements over the prior quarter really reflects the continuation of the trends we spoke about last quarter. We're seeing inflows into fixed income across a diverse set of strategies, most significantly during the quarter into European investment-grade credit, strategic income and multi-sector income. We've seen market share gains in our intermediary business, with positive net flows during the quarter in the U.S. and Europe and in Latin America. We're seeing ongoing improvements across a number of U.S. equity funds and continued organic growth globally in the balanced fund. While net flows have improved during the quarter, and we're winning new business and gaining market share across a number of regions and capabilities, we do continue to see risk across the four areas I highlighted earlier, so we remain cautious about the flow outlook in the near term. Slide 6 is our standard presentation of the U.S. GAAP statement of income. Moving to Slide 7 for a look at our summary financial results, adjusted third-quarter results compare favorably versus last quarter, primarily as a result of lower expenses. Average AUM in the third quarter was flat compared to the prior quarter as market gains were offset by outflows and a negative FX impact. Total adjusted revenues in the quarter remain unchanged compared to the second quarter. Adjusted operating income in the third quarter of $160 million was up 5% over the prior quarter, driven by lower expenses. Third-quarter adjusted operating margin was 37.0% compared to 35.0% in the prior quarter and 38.5% a year ago, when we had a higher average AUM. Finishing up the financial results, adjusted diluted EPS was $0.64 in the third quarter compared to $0.61 for the prior quarter and $0.69 a year ago. On Slide 8, we've outlined the revenue drivers for the quarter. Management fees decreased slightly from the prior quarter as higher AUM and one additional calendar day was offset by lower net management fee margin. The margin for the quarter was 41.6 basis points, which was down compared to the second quarter, driven by mixed shift in the business, primarily from outflows in higher fee equity products. Performance fees remained positive at $1 million compared to $4 million in the second quarter. Regarding U.S. Mutual Fund's performance fees, the third quarter improved to a negative of $1 million from negative 4 million in the second quarter and negative $11 million a year ago. If we're successful in continuing to outperform benchmarks in the fourth quarter of 2019, we will further improve these performance fees and under this scenario, we'd see positive performance fees in this area in the fourth quarter. Turning to operating expenses on Slide 9, adjusted operating expenses in the third quarter were $273 million, which was down 3% from the prior quarter. Adjusted LTI was down 14% from the second part, largely due to social security taxes on vestings in the U.K. that occurred in the previous quarter. In the Appendix, we've provided the usual further detail on the expected future amortization of existing grants, which hasn't changed significantly compared to the prior quarter. The third-quarter adjusted comp to revenue ratio was 42.7%, which is in line with the guidance which we communicated previously. Adjusted non-comp operating expenses decreased 2% quarter-over-quarter, primarily from the lower seasonal marketing expenses. With nine months results in the books, the guidance on 2019 non-comp expenses, which is flat to 2018, excluding the 12 million legal outcome in 2018 is still applicable. Finally, the firm's recurring effective tax rate for the third quarter was 23.8%. For the full year, the firm's effective tax rate is still expected to be 23% to 25%. Lastly, Slide 10 is a look at our capital management. As you can see on this slide, our strong balance sheet and our commitment to returning excess cash to shareholders has enabled us to fund $513 million of dividends and buybacks over the last 12 months, which represents approximately 100% of the cash flow from operations that was generated in the period. During the third quarter, we paid $68 million in dividends to shareholders and declared $0.36 per share dividend to be paid on the 25 November to shareholders of record as at the 11 November. Additionally, we purchased 4.2 million shares in the quarter for $81 million. This takes our year-to-date accretive share repurchase program total to $187 million or 8.9 million shares. We anticipate the remaining $13 million of the 200 million authorization to be completed in the fourth quarter. After the completion of this program, we would have reduced the total shares outstanding by nearly 7% since we began buying shares in August 2018. Looking forward, any consideration of a new buyback authorization will occur during our annual capital planning process with the board in early 2020. We'll provide an update during the full-year earnings call in February. And with that, I would like to turn back to the operator for Q&A.

Thank you. [Operator instructions] And we'll take our first question from Simon Fitzgerald with Evans & Partners.

Thank you. Good morning. Thank you very much for taking my call. I'll just refer you to Slide 19 where we can see that there's two strategies that are in inflow at the moment being fixed income and equities. Roger, you talked a little bit about some of the strategies in terms of fixed income that have been more popular than others or at least seeing some of those inflows. Could you elaborate in terms of which sort of jurisdictions you're saying that sort of come through in terms of client demand?

Yeah, Simon, I think, it's one of the strengths of the franchise, and it's also one of the strengths of the cross-selling we're starting to see. So there is a number of areas I'd like to what's called Strategic Bond in the U.K. developed bond – developed world bond is called in the U.S. That's the same London team, which is selling very well in the U.S., our absolute return income funds. That's the team – the Kapstream team in Australia, which is something we've talked about over the last six to 12 months, I guess, in terms of globalizing that and selling that product globally, getting the right products in the right place, we're starting to see that come through and some institutional wins in fixed income as well. So it's pretty broad. On the multi-asset side, it's the continued strength of the balanced fund. We've talked about the performance of that fund. It is well in the top decile over all-time periods, and it continues, again, to be a great strength of the combined firm. It's selling in the U.S. It's selling in Europe. It sells a little bit in Asia and so that's what's driving multi-asset. There are other things, which we're confident about for the future but the flows you're seeing in multi-asset, certainly driven by the balanced fund at the moment.

Excellent. Thank you. Second question relates to market share. There were some comments in the media statement and also mentioned on the call just now that you're seeing some increases in market share. Just wanting to know a little bit, is that sort of something anecdotally that you sort of think about in terms of your flows versus others. Or are you seeing some statistics and data that you could share with us in terms of how that market share is unfolding?

Yes. Certainly, I mean, we look at the – I think best data for that is the Simfund data, which comes out monthly. And you'll see, again, you've got to look at that in terms of what we do. So when we look at – and I guess, the one that we've talked about, again, consistently is sales of U.S. equity. We're excited by our U.S. equity franchise. It's a great franchise with some fantastic numbers. And if you look at it, those numbers continue to be exceptionally strong. And we should be taking market share. The good news is we are. And what we've said is we can, despite that market in active equity not growing. It is a shrinking market. We know that. We understand that. But we can take market share. We are taking market share, and we're actually seeing – we are seeing actual growth in U.S. equity. But it's the Simfund data you're looking at. I think the other thing that's notable over the last couple of months is that we're back in inflow in intermediary in Europe and Latin America. Obviously, that's been a strong growth area for the firm in a few years ago. It's been – it's had a tough couple of years but we're starting to see positive flows consistently. And I think that, again, is an important fact. It's not one month. We're starting to see consistent flows in – on the continent and in LatAm.

And we'll move on to our next question from Andrei Stadnik with Morgan Stanley.

Good morning. Can you hear me okay?

Yes. Hi, Andrei, [indiscernible] I wanted to ask two questions. One question is around what kind of flows you've seen from Japan and from Dai-ichi? And other question kind of high-level. It seems that the organization, the combined organization is clicking together better than ever in terms of some of the cross sales and also fewer PM departures or turnover from what we can see publicly. So are you getting the sense that you're starting to really move ahead with what you envisioned from the combined entity?

Hi, Andrei, it's Dick Weil. I think generally the answer is yes, but its progress and we're nowhere close to what we believe we can and will accomplish. So there's still as Roger said earlier in his comments, there's still a lot of work in front of us. And frankly, we still face in the four areas we've called out, some continuing real challenges, which is why Roger expressed some shorter-term caution. So in the broad sweep of time, yes, we're making a lot of progress. The firm is coming together. We're building the right culture; the talent is applying itself well and we're starting to produce improved results. That's the positive side. The cautious side is, hey, INTECH is still facing some challenges. In EM equity, we still have a bunch of assets that are challenged by the changes there. European equities is improving, but let's face it, it's still not a healthy external environment, and it's not a – we haven’t finished strengthening the internal record. And in Core Plus Fixed Income, we continue to face some challenges. So we're on the right track and we're getting through it, but there's still substantially more to go in front of us before we feel like we've approached our potential.

Right, specifically in terms of Japan, flows were flattish, I think, yes, basically flat in the quarter. We continue to look at new business with Dai-Ichi and Asset Management One. We talked over the last couple of quarters about the new fund that we launched – the asset allocation product that we launched in Japan, and that's seeing – that's continuing to see some small inflows. So again, that's doing exactly what it's supposed to do. And the relationship with Dai-Ichi remains incredibly strong. The other part of the question was around fewer departures, and we're in good place, obviously.

Yes, I feel like we have – every day is a challenge, of course, you don't want to take it for granted, but we have really wonderful people, and We feel quite good about the stability of our team.

Thank you.

We will take our next question from Ed Henning with CLSA.

Hi. Thanks for taking my questions. Just firstly on INTECH, there's been a bit of talk about that on the call today. And last quarter, you kind of touched on some potential structural headwinds the core funds are kind of facing. Are you still seeing those industry headwinds continuing to play out for INTECH as a headwind for them beyond performance?

Yeah. Hi, this is Dick. INTECH continues to face difficult market conditions. It's in a lot of different market spaces and so generalizations are tough. But large-cap equities in institutional U.S. continues to face tremendous competition and the trend to barbelling of portfolios and INTECH's portfolios tend to be well controlled on the risk front. And so people who believe that what the right investment strategy is to either take a lot of risk or to index that can be a challenging trend for INTECH to be held out in the middle. They've done an awful lot of product innovation, process improvement and other things. And we believe, over the long term, they'll come through that and start growing, again, even in the U.S. But it's a long road from where they are to there. And right now, as Roger mentioned, their sales pipeline doesn't look terrific and they continue to face some challenges. So the recent volatility over the last three years has put them a little bit on the back foot, and that continues.

Okay. Thank you. And just the second one, you've touched on last period, you talked about strategic pillars and one of those things some new growth initiatives. Today, you talked a little bit about some good growth in Fixed Income and multi-asset. Can you just touch a little bit more on some of the growth initiatives you've got going on with some new products?

Sure. So the growth initiatives that we identified internally that we wanted to strengthen our efforts in Asia ex Japan. We wanted to further invest and build out in our ETF franchise. And we're making progress on both of those, but both of those are sort of longer-term initiatives. So in Asia ex Japan, we have retooled the team and brought in a lot of new talent. But most of that is distribution sales talent, and it takes a while for folks to acclimate to a new firm and then drive sales. So we're confident that the investments we've made in some people and talent will move us forward in that region. And frankly, that's one of the really important sources of growth for asset management in the industry and that's available to the industry. And so we've just got to be more successful in that space. We think we're on the right track but it's too early to talk about big results. The third area was multi-asset, and we had mentioned previously that we had hired Michael Ho to lead the effort, and that we were trying to push forward there. We've seen some encouraging signs with some new wins and substantial client interest. There's a lot more to do there. A lot of what we're doing there tends to be using alternatives tools to enhance some basic indices and we need to get also moving forward, with some higher discretion, higher fee part of the product lineup as well if we're going to achieve our aspiration. So there's plenty to do there but we are seeing progress. And particularly the team in London is seeing some real substantial institutional interest that we hope will bear fruit.

And we'll take our next question from Ken Worthington with JP Morgan.

Hi. Good morning. Maybe first, U.S. performance fees are about a breakeven. I think that's the best result since 2011. Given that fulcrum fees are back to that almost breakeven level, is there an appetite to restructure the performance fees? And this is something you think might be feasible to either correct the flaws in the structure or maybe outright work with the fund boards to eliminate them?

Hi, Ken, it's Dick. Thanks for the question. I have said previously that I am not the largest fan of this particular fee structure. And the real reason is because it's a three-year lagging analysis, it looks over the last three years and then sets the fee based on performance, the trouble is folks in a retail mutual fund who may have a three-year time horizon in terms of the length of their duration of their investment are generally always paying for somebody else's investment returns. And that lack of alignment I find really inappropriate and troubling. And, coupled with that, a lot of the distributors find the variability of the fee a bit hard to deal with because they have trouble of explaining what the fee is going to be on an ongoing basis. And so our key partners in distribution in this business, the big networks don't particularly love that fee structure. So if you could press a button and amend the fee structure to something more stable, we would probably do that. But the fact remains there's an awful lot of hurdles set out to change that fee structure. They're very expensive and complicated investor votes. There's a big complicated SEC approval process. And so we're not on the cusp of sort of pushing down that road. The cost and challenge and disruption of the transition of the fee structure is in our view substantial. So in a frictionless world, the answer to your question would be no and in a practical world in which we live given the hurdles, the answer is we're going to stick with this for a while longer but we continue to talk to the trustees who are really in charge of this. They are aware of our thoughts about the fee structure. And if it becomes appropriate to amend it, we would be a willing partner in that discussion. But that's not imminent.

Right. Thank you. And then on EM, with – I think you said the new PM, does the track record need to be built from scratch here? Or is it – does it take a year or multiple years to sort of rebuild the track record so that you're in a better position for sales? And then, I think last quarter, you received notifications on $800 million of redemptions that you thought would hit in 3Q. It looks like $200 million max hit. Do those notifications get canceled or maybe just postponed to this coming quarter?

They're postponed to taking your second question first, they are postponed, and we still expect them to come in the third quarter, and obviously, there could, as we mentioned in Rogers comments, we're cautious about it because we think there's a high risk that you could get substantially more notifications. There's one big concentrated client in the remaining mix that is Roger, what's?

$1.3 billion.

$1.3 billion, and that could – that certainly at high-risk also. So we don't see – and we're trying to be clear in our communications. We see that remaining emerging market asset base as substantially challenged in the short term as we've gone through the transition. Turning back to your question about the new team, it's a hard question to answer. It's a good question. We ask ourselves that question. They're, obviously, a well-known team with a strong track record from their prior employee. How much credit the client base gives to that and how quickly they are willing to sort of take a – on an institutional basis, take a consistent view of their track record over time is something that we don't know for sure yet. We're optimistic that because a substantial part of that team came over, including analysts that that continuity makes the case very strong. And therefore, shrinks the sort of the waiting period. We don't yet have enough evidence to know how well that's going to play going forward. The thing we really know is they're a very good team. They're already contributing to research and understanding on a broader basis. They're integrating well in the firm, which is kind of an amazing thing to say when they are based in Boston and they've only been here in such a short period of time. But they've made it their business and gone far out of their way to start the process of connecting and integrating. They're great people, great professionals. We're thrilled to have them. And I can't give you a precise read on how the clients – how fast they will adopt it, but we're confident that in the medium term, there'll be a lot of adoption of what they do.

And we'll take our next question from Mike Carrier with Bank of America Merrill Lynch.

Great, thanks for taking the question. First, you're seeing good improvement in the performance even on the redemption side, that's heading lower. But it seems like on the sales side still a bit muted and realize some of the stuff is industry challenges. But with the improved performance, can you give us some color on how you're working with the distribution teams to try to drive sales going forward?

Yeah. Sure. This is Dick, again. First and foremost, on the distribution team, the biggest news is that we recently hired Suzanne Cain to be the Global Head of Distribution. And she is a terrific new talent and addition to our team. She's doing a good job of trying to review the existing distribution and marketing resources and making sure that we're facing off against the opportunities in the right way. And we're excited for the leadership that she is providing. And we're optimistic that we'll get more bang for our assets in distribution and marketing going forward. The second point I would make is that flows generally lag investment performance. So when you have improvement and good investment performance, I think the first thing that you see is the redemption slowdown. And probably the second thing you see is that continues for a long period of time, you then pick up on the sales. And obviously, we have a lot of different products we're talking about. So we're being sort of inaccurately general. But that sort of the path we see. So we see that we are gaining momentum in our strong product areas and we think we can continue to do so and drive more sales. That said there are parts of the industry that are really challenged. The U.K. is, obviously, still going through Brexit chaos. And it's really tough to make a huge amount of progress in that market environment. And you put that together with some of our performance challenges in the European equities. That's made that one tough. But again, we are gaining market share in the intermediary business with positive flows in the U.S., Europe and Latin America. That's a good lead indicator for us that we're on the right track.

All right. That's helpful. And then, maybe as a follow-up, Roger, just with the performance improving, can you provide, I guess, just a general update on the performance fees, meaning, like what is the average or like max potential that you can actually see any year versus maybe the more muted recent trends? Just you have an idea of what the potential is over time?

Yeah. Well, as you say, it's – there's three pieces. We've talked about the U.S. Mutual Funds. And we're, obviously, in a much better place there than we were. And we'd like to see that becoming a positive number. We have about $64 billion – $62 billion ex the U.S. Mutual Funds with performance fee capabilities. So that's stayed about the same. We've grown some things. We've – some other things have shrunk, but about $62 billion has performance fees, and it's very broad. So Dick mentioned, it's a bit – there's a bit of a risk generalizing on things, but we've got a portfolio of assets with performance fees. They are spread through the year. Q4 and Q2 are the two biggest years – two biggest quarters for those as we've talked about before. So we didn't expect and you shouldn't have expected much in Q3. You should expect a bit more in Q4. Most of those are three-year institutional accounts with three-year performance fees on them. So we've got 33 months in the bank. But you don't count anything until it's done. So there'll be some performance fees in Q4. It's – we're not talking about the levels that the combined firms had in 2014, '15. The capability is still there. We need to get – we need to continue to build that performance in the areas which have got the performance fees on them. But there'll be some performance fees in Q4.

And you mentioned U.K. absolute return?

Yeah. U.K. absolute return, I guess, is the other swing factor that funds sizable fund, which you can track, which pays quarterly performance fees quarterly. It's been a very strong long-term performance for the clients in it and has generated significant performance fees in the past. It's had a tougher last 18 months. And as I talked about, the last 12 months, it's got back above its benchmark. It's still slightly behind its high watermark, so just a little bit more work to go before that starts to generate fees again, but hopefully it will.

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

Thank you, just wanted to start on the macro actually on Brexit given your large European operations. But what is your view of investor cash on the sidelines in Europe and pent-up demand for risky assets with the resolution? And also how does a hard versus soft Brexit scenario change your view?

Hi. This is a Dick. I'll start and then hand it over to Roger. Roger has led our Brexit preparations across the firm. So he's exactly the right guy to address this. Let me just say regarding the un-invested assets. I think Europe, with negative rates, is driving assets out of the banking system. Ideally, a lot of those would come to us. We don't see that really happening yet. There are – the banks themselves are getting products sort of in the middle. Insurance companies are getting products in the middle. And some of the fear that the Brexit process is generating probably stands in the way of a big wall of un-invested cash coming forward into the active asset management industry. So we're not yet really reaping the major benefits from that possibility. But we still see it hanging out there in the future. And frankly, not just in Europe, there's tons of un-invested cash in a lot of other markets as well. And that's one of the reasons that we're sort of strategically optimistic about our opportunities in this business. But particularly in Europe with negative rates, over time, that will drive a whole lot of the money out of the traditional bank deposits and it's going to have to find somewhere to go. And if we do a great job, we're optimistic that once sort of the Brexit noise calms down, which hopefully it will do post U.K. election, et cetera, that will represent a real opportunity for us.

And Craig, technically, hard versus soft, technically, we are built for a hard Brexit. We've enhanced our structure. We've got 17 people in Luxembourg now. We used to have five. We've done the work to move our branches to be branches of the Luxembourg company, rather than the U.K. company. We've launched some products in – or some funds that weren't in our SICAV range where some Europeans were buying the OEICs and potentially might not be able to. So we've technically Brexit proved our business. Yes. So the issue isn't the technical side, as you say, it's much more the macro side. The flows in the U.K. have slightly improved. That's outflows are slightly less, but nothing to write home about an improved. So we've got time to wait yet. The U.K. is a tough market to be doing business in. Teams are doing a great job, but it's a pretty ugly market out there.

Thanks, Roger. And just a follow-up here on expenses, what would it take for Janus to take a more proactive stance on reducing expenses? And really do you have this lever available after the significant cost you took out of the business post the merger?

Well, you've always got that lever available. But I think the most important thing is what are we trying to do? And again, I hope we've been pretty consistent with this. But we put together this combination to grow this business. And we've invested in it to grow this business. And we continue to do that. We will try and do that as efficiently as possible. There are natural levers in the business. Our variable comp is – at the total company level is just about fully formulaic, so that will flex up and down with earnings. And we continue to look for efficiencies in the business. There's things we're going to take costs out. There are also things we're going to invest in the business. So are we running – I think – yes, we're running the business to grow. And that's because we believe we can grow this business and we expect to grow this business. Should that not be the case, you'd run a different expense base.

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

Good morning. This is actually Ryan Bailey, on for Alex. I was wondering if we could spend a moment on the fee rate, specifically the management fee rate. It looks like it declined another 0.6 basis points this quarter. So as you kind of think through the puts and takes of the key areas of risk that you highlighted, can you give us some sort of near-term guidance of what that sort of pressure would ultimately result in for the fee rate?

Yeah, sure. Hi, Ryan, I don't think anything has changed from what we've said consistently. There is fee pressure in the business. We see fee pressure the same as others, but we do have high-quality product, and that probably protects us a little bit more in some areas. So the biggest impact is flow mix. So the – and you've got an average move in rate. So that's sort of – you got to look at what happened in both Q2 and Q3 in terms of the assets we lost. So we've lost some higher fee product in equity in emerging market equity, some of the alts capabilities, but we've also lost some lower fee product in INTECH. Going forward, it will depend on the mix of product, I guess, is the answer. We've told you that we continue to see risk with INTECH, that's at the lower end. We got risk in emerging markets, that's at the higher end. Should we see continued growth in intermediary, that's, obviously, good news for the fee rate. So it will be driven by the mix of business. But there is no fundamental change in that fee pressure that the industry sees and we see and that comes back to Craig's prior question around expenses, we need to continue to be efficient in how we run our business because we're running a business with the expectation that fee rates will do what they've done for the last decade, which is drift down, but it's not a fundamental change that we're seeing or expect to see.

Got it and maybe just one more on INTECH, you gave us some really helpful color on the EM concentration. Do you mind giving us an update or a reminder on concentration at INTECH in terms of key clients?

Yeah. I mean, that's a pretty concentrated business. We've got a number of multibillion dollar accounts at INTECH, and that's why we say that it is the most difficult to predict. There are opportunities. There is a little bit of pipeline. It could be something that comes in, but where we are at the moment is with the challenging performance. Running through 2018, 2019, pleasingly, has been much better, but we sit with three years of too much volatility. And therefore, there is risk in that business. And if – and our clients, we talked before, we have very good relationships with those clients. That team is excellent at explaining its performance and working with the clients, and they've been very patient. But you will notice it, if – on the asset side, you will notice it if we lose some of those assets. There are some large concentrations.

Yes. This is Dick. That's right. It's – I think the five largest strategies at INTECH make up for 57% of its AUM. So it's a smart question. There's a high degree of concentration and therefore, substantial risk that you could see big pieces move. The corresponding truth is those tend not to be the highest revenue pieces. But it's a good question you've asked.

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