Janus Henderson Group PLC

NYSE:JHG

Earnings Call Transcript 2020-Q1

[Operator]

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 First Quarter 2020 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 section of the company's Form 10-K for the year ended December 31, 2019, Form 10-Q for the quarter ended March 31, 2020, and in other filings made by the company with the SEC from time to time. Janus Henderson assumes no obligation to update any forward-looking statements made during the call. Thank you.

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

[Richard Weil, executive]

Thank you, operator. Welcome everyone to the first quarter 2020 earnings call for the Janus Henderson Group. I'm joined by Roger Thompson, our CFO today. First and foremost, I hope that everybody listening on this call, along with your loved ones, are all safe and healthy. I want to acknowledge the heroic work of many in our society, supporting all of us in the continuation of our businesses and our lives. It's their resilience and sense of duty, which keeps our society going during this COVID-19 crisis. I also want to recognize the very hard work of our own employees who've put in tremendous hours and creativity to adapt to these extraordinary circumstances. And as thanks to them that today, we can report that we're working safely from our homes and that our company is operating successfully. On today's call, I'll provide an introduction and a little update, and then Roger will give his update on quarterly flows, investment performance and financial results. After those remarks, we'll take your questions as usual.

For me, the story of the first quarter is really 2 stories. Roger will give you more specific information in a minute. But we were having a very good start to our year in January and February. Investment performance was strong, and we seem to be gathering positive momentum across our business. Then, of course, the COVID-19 crisis hit in March, and that changed things. Let me step down a level and focus on what we've actually done in the first quarter. Immediately after the WHO declared a global health emergency, we moved aggressively to implement our emergency scenarios in offices around the globe. We were guided by our simple principles, taking excellent care of our clients while simultaneously protecting our employees and their families. The very good news is that these efforts have worked, powered by the hard work of our amazing employees. Currently, we have greater than 95% of our employees working remotely with every single one of our 28 offices operating under an emergency business continuity plan. Our infrastructure and planning have held up extremely well. We're able to do our daily business, maintain our strong control environment and continue to take good care of our clients and remain in good contact with them. I'm extremely proud of how our employees have successfully adapted to these challenges and this new way of doing things, while remaining focused on keeping our clients at the heart of everything we do. A little more on the clients. At Janus Henderson, we understand in times of crisis like today we need to be closer than ever to our clients. We need to communicate with them about what we're seeing in the financial markets and hearing from the companies we cover, and we need to listen to them to understand their fears and concerns and answer their questions. I'm proud to say our communication effort has never been stronger. From the start of the pandemic, we put out a vast amount of focused content that's been created to answer key client questions. I'm hearing great feedback from clients that we are listening well and responding effectively. While no one can accurately predict the future, I think our experts are doing a very good job helping clients make timely and better-informed decisions.

From an investment perspective, COVID-19 has obviously created unprecedented challenges. We have been very focused on maintaining our client promises. During the crisis, our portfolio managers and analysts have been working harder than ever doing their deep research. They're talking to company management teams, revisiting their financial models and stress testing company balance sheets in an aggressive way. In fact, the companies that we've been talking to have been very responsive and in some ways, corporate access has never been better. Current valuations reflect a huge amount of liquidity management and perhaps also some panic selling. Large gaps are opening up between market value and our own well-researched opinions. In the coming months, we will see great opportunities to invest for our clients in a way that should drive returns in the years ahead. The global health crisis is a significant challenge, but our investment teams are rising to it. And they're actively seeking out opportunities created by the volatile markets. I'm proud to report our investment team has adapted well and is working well despite the remoteness of not being in the office, our teams are collaborating effectively and intensely, and I remain very confident in their success.

Before I turn it over to Roger, let me also touch on financial conditions. Considering the strength of the market declines around the world, I want to make sure I talk about our financial strength. Despite the lower levels of AUM, we continue to deliver significant profits with a strong margin. We're generating a substantial positive cash flow. We continue to have a strong balance sheet. Against this backdrop, our Board remains committed to paying our regular dividend. Our strategy of simple excellence remains our path forward. We continue to deliver for our clients, for our owners and for our employees. Our financial strength is allowing us to continue to invest in becoming both more simple and more excellent.

Finally, let me turn to ESG. The COVID-19 crisis rightly deserves all of our focus and attention. But we have not reduced our commitment to developing our ESG approach, governance and policies. Janus Henderson has a long history of active management and initiatives that cover a diverse range of products -- sorry, of topics, such as corporate governance, sustainable investing and climate change. We are committed to acting responsibly, not only in the way that we invest, but in the way that we engage our clients and support our employees and manage our impact on the environment and the societies and communities around us, particularly during this pandemic, I'm proud of our initiatives that we've undertaken to support the local communities and charity partners. Our culture and values are even more important at times like these, and I'm proud of what we're doing.

In conclusion, we're living in unprecedented times. Our top priority remains to deliver excellence for our clients while safeguarding the safety of our employees and their families. Our long-term track records remain solid. That's investment track records, obviously, sorry. Our client relationships are strong, and we're on a very solid financial foundation. We continue to move our business forward. I can't thank our employees enough. You've shown great resilience and professionalism during this trying time while also dealing with the obvious personal challenges created by this pandemic. Please stay safe and healthy.

With that, let me turn it over to Roger.

[Roger Thompson, executive]

Thanks, Dick, and thank you, everyone, for joining us. I sincerely hope that everyone and your friends and family and colleagues are safe and healthy. Looking at the first quarter's results. Market volatility in the last 5 weeks of the quarter, coupled with the previously communicated redemptions, resulted in $12 billion of net outflows. Period end AUM was down 21% compared to the fourth quarter. That said, the average AUM for the quarter was down only 3% from the prior quarter. And as we sit here today, AUM is up around 10% from the end of March.

In terms of our GAAP results, there is one significant item in the quarter. The decline in AUM as at the 31st of March and the economic uncertainty of COVID-19 is affecting the value of our intangible assets and goodwill, which resulted in an impairment of $487 million. I'll remind you that this is a noncash adjustment. The adjusted financial results were actually stronger than the same period a year ago, but down a little compared to the prior quarter with adjusted EPS of $0.60 compared to $0.65 a quarter ago. Finally, we returned $97 million of cash to shareholders during the quarter via dividends and share repurchases.

Moving to investment performance on Slide 5. Long-term investment performance remains strong, with 65% and 66% of firm-wide assets, meeting their respective benchmarks on a 3- and 5-year basis as at the 31st of March. Relative performance compared to peers is even stronger, with 69%, 84% and 79% of AUM represented in the top 2 Morningstar quartiles on a 1-, 3- and 5-year basis, respectively. We take a long-term view of investment performance, understanding that very short-term results will fluctuate period to period. The last 5 weeks of the quarter were unprecedented in volatility and liquidity terms. Our investment team is focused on identifying opportunities that are being created by recent market events to position portfolios for the long term.

Turning to total company flows on Slide 6. For the quarter, net outflows were $12.2 billion compared to $6.7 billion last quarter. This reflects an increase in gross redemptions due to the $6 billion of mandate losses that we previously told you about on our full year earnings call, along with elevated redemptions created by the extreme volatility in the latter part of the quarter. The gross redemptions were partially offset by higher gross sales. Gross sales were 37% higher than the same period a year ago, and the $21.4 billion of gross sales is the best result since the merger, continuing the momentum we saw in the second half of 2019.

Slide 7 provides a little more color on the quarterly flow results. Normally, we don't focus on such short-term flows. But with the circumstances of this quarter, we felt that as a one-off, it was important to provide this level of detail to help explain the results. The $12.2 billion of outflows is almost entirely made up of the $6 billion of previously notified and disclosed redemptions in the global emerging markets and Core Plus Fixed Income, and outflows in the month of March, caused by the market volatility. Outside of these items, January and February outflows were less than $1 billion and included a continuation of the strong momentum in our intermediary business. I'm pleased to say that as we begin the second quarter, the pace of retail outflows has slowed significantly. And as you'll see in the public data soon to be published, in April, intermediary outflows -- sorry, intermediary flows are currently around flat.

Moving to Slide 8, which shows the breakdown of flows in the quarter by capability. Equity net outflows for the first quarter were $6.9 billion compared to $1.3 billion in the prior quarter. The quarterly results was due to the previously notified $1.1 billion redemption in EM and outflows over the last 5 weeks of the quarter. Flows into Fixed Income were negative in the quarter at $3.4 billion. Excluding the previously notified $5 billion low fee redemption in Core Plus, the remaining Fixed Income business was positive for the quarter, due to institutional mandate wins primarily received in Australia. INTECH outflows were $2 billion. Multi-asset flows continue to be driven by strong flows into the balanced strategy. Total inflows for this capability in the first quarter were $900 million. And pleasingly, the strategy continues to be in the first Morningstar quartile over all-time periods. Alternative net outflows of $900 million were primarily from the U.K. Property Fund and U.K. Absolute Return Fund, which is actually performing very well.

Slide 9 is our standard presentation of U.S. GAAP statement of income.

Now turning to Slide 10 for a look at the summary financial results. Despite the difficult market environment, our adjusted financial results are better across the board than they were a year ago. This improvement resulted from better performance fees, slightly higher average assets and good cost discipline. First quarter adjusted operating margin was 37.2% compared to 36.9% in the prior quarter and 34.4% a year ago, reflecting that strong cost discipline. Finally, adjusted diluted EPS was $0.60 for the quarter compared to $0.65 for the fourth quarter and up from $0.56 a year ago.

On Slide 11, we've outlined the revenue drivers compared to the prior quarter. Lower average assets, performance fees and one fewer calendar day were the biggest drivers of the quarterly change in adjusted total revenue. Net management fee margin for the first quarter was 45.1 basis points, which was up slightly from the fourth quarter. The quarterly increase is due to mix shift. The margin has been resilient during the market downturn with the exit rates down only slightly compared to the first quarter average. Performance fees were lower, primarily from segregated mandates, which are seasonally higher in the fourth quarter. Regarding U.S. Mutual Fund performance fees, the first quarter remained relatively flat to the fourth quarter at negative $1.9 million, but had improved significantly from the negative $8.9 million a year ago.

Moving to operating expenses on Slide 12. Adjusted operating expenses in the first quarter were $278 million, which was a 5% decline compared to the fourth quarter. Adjusted employee compensation, which includes fixed and variable staff costs, was down 2% compared to the prior quarter. Fixed costs were actually up 4% due to annual pay rises, seasonality of payroll taxes resetting and 401(k) matches. Given the latter 2 are Q1 only items, fixed staff costs will be lower in Q2. Variable compensation was lower by 8% due to lower profits. Adjusted LTI was down 25% from the fourth quarter from the impact of mark-to-market adjustments. In the appendix, we've provided updated detail on the expected future amortization of existing grants.

The first quarter adjusted comp-to-revenue ratio was 42.4%. This ratio is in line with guidance. In a moment, I'll talk about what we anticipate for the remainder of 2020, given lower asset levels. Adjusted noncomp operating expenses were virtually flat to the prior quarter, which, as a reminder, included a onetime $5.5 million credit. The absence of these credits was offset by lower expenses, particularly in marketing and travel. Finally, our recurring effective tax rate for the quarter was 27.4%. The higher effective tax rate compared to the statutory rate guidance of 23% to 25% is primarily a result of book to tax differences on stock-based compensation.

Considering the lower asset levels entering the second quarter, I wanted to spend a few minutes revisiting our expense guidance for 2020. As a reminder, we have a keen focus on sound financial discipline with an awareness of margin pressure, but with an emphasis on the long-term as opposed to short-term results. That said, in this environment of so many unknowns, particularly around the depth and duration of the crisis, we are being prudent in managing expenses. This includes the hiring freeze, canceling or deferring the hiring to fill vacancies, reviewing contractor use and a review of all noncompensation-related expenses. And looking at compensation, lower assets will drive lower revenues, putting pressure on the adjusted comp ratio, which we now estimate to be in the mid-40s. Our guidance for noncompensation expenses was low to mid-single-digit growth compared to 2019. We now anticipate noncomp to be flat to slightly down on 2019.

And finally, the firm's statutory tax rate is expected to remain at 23% to 25%. But as we saw in the first quarter, the effective rate will be impacted by various differences, which arise quarter-to-quarter. The updated guidance assumes roughly flat AUM for the remainder of 2020 and continued low activity from travel -- low activity and travel from COVID-19 through the summer. We'll update guidance accordingly on future earnings calls should these assumptions materially change.

Turning to Slide 13 and a look at our balance sheet. A balance sheet that can withstand volatile markets, such as the current environment, has always been a priority of Board and management. We are in a net cash position, have no debt maturing until 2025, and the minimal debt we do have equates to less than 1x EBITDA.

On Slide 14, we provided additional detail on the first quarter cash activity. First, cash flow from operations is positive, despite including annual compensation payments in the first quarter. For the remainder of the year, we don't anticipate any large operational cash needs, so forecast generating significant cash flow that can be used for further investment to the business or to return to shareholders. Second, we returned $98 million to shareholders via dividend and buybacks. The dividend remains well supported by the business results. And today, we've declared a static $0.36 per share quarterly dividend. During the first quarter, we purchased 2.1 million shares of our stock for $31 million at an average price of $15.11. Our thoughts around a buyback in terms of returning true excess cash to shareholders have not changed, and we believe it is a good use of cash at the current stock prices. So whilst we'll constantly review, you should expect to see us in the market in Q2. During the quarter, we finalized the sale of Geneva Capital Management, which resulted in net cash proceeds of $38.6 million in addition to an earn-out over the next 5 years.

Finally, we had $98 million in net seed redemptions in the quarter. In the prior quarter, we've made $100 million short-term investments in our seed book, which we redeemed in Q1. The net result of this activity is a slight quarterly increase in cash and cash equivalent balance to just over $800 million. This cash balance, coupled with the expected cash flow generation for the remainder of the year, provides a solid foundation to weather this storm and to come out winners. I'd now like to turn it back over to the operator for Q&A.

[Operator]

[Operator Instructions] We'll take our first question from Ken Worthington with JPMorgan.

[Kenneth Worthington, analyst]

I think, first, can you talk about the differences you saw between the reaction of your European investors, your U.S. investors and your Asian investors to the COVID-19 crisis and the downturn in the various markets? And as the world recovers, would you expect to see -- or how would you expect to see customers reengage by region, given your mix of business and your relative performance?

[Roger Thompson, executive]

Ken, let me start on that, and perhaps, Dick will comment as well. Looking at flows, it was interesting. We saw outflows in March in the U.S. and in Europe. Actually, interestingly, in Asia, outside the one big fixed income outflow that we've talked about on the prior call, flows in Asia were actually positive. We had our best quarter in Asia for quite some time, and that has continued. So it has been different, but March was a pretty consistent outflow in both Europe and the U.S. Dick, anything to add to that?

[Richard Weil, executive]

No, that covers entirely.

[Kenneth Worthington, analyst]

And then on the reengagement side, any things that you would expect here as the market recovers?

[Roger Thompson, executive]

I guess, the biggest thing in there is we are very active in the marketplace. We're seeing considerable client interactions. Our pipeline in institutional is actually stronger than it has been since the merger. Our pull-through of information is very high. So yes, it's obviously difficult to say given where markets are and where they may end up. But activity is pretty high everywhere.

[Operator]

Our next question comes from Dan Fannon from Jefferies.

[Daniel Fannon, analyst]

I guess just following up on that last comment there, Roger, with regards to the release pipeline since the close of the deal. Can you talk about the breadth and the products that entails?

[Richard Weil, executive]

Yes. This is Dick. It's a broad list of products. It's not just in one thing. It includes some absolute return in fixed income and equity, and it's geographically diverse as well.

And so look, Roger is the CFO and he never believes in pipeline, what he believes is cash in the front door. And so we'll see how well we can convert opportunity into flows and long-term relationships.

But I think all of us would have had a question going into this crisis, how well can you reach out and connect with clients and even prospects through this remote working environment, it turns out better than I think any of us would have anticipated.

I think we are seeing some clients turn to Zoom or remote finals presentations in a way that seems to be working for them and working for us. So our business continues to move forward, and we're optimistic about what we can accomplish asterisks none of us have a crystal ball as to whether the market is going to continue in a relatively stable way or whether there'll be more very significant upsets on the horizon.

So we will live in the broader environment as that moves. But assuming a relatively stable platform from which to work, we're pretty optimistic about what we can accomplish.

[Daniel Fannon, analyst]

Great. And then just a follow-up. The noncomp guidance of flat to slightly down. Just you mentioned a couple of different things in terms of what you're evaluating. I assume you had just gone through a lot of those evaluations through the merger.

So curious how much is actually business decisions that are being made versus the no travel and kind of work from home, kind of natural reduction in some of the expenses. So can you give a little more color around what that -- what you're actually doing versus kind of what's the output of the current environment?

[Roger Thompson, executive]

Yes, you're right. You're quite right there, Dan. There are some things that sort of naturally look after themselves. We normally spend about $2 million a month in T&E and obviously are not. Our marketing and conferences and things like that and client events is obviously very significantly diminished, and we're expecting that to continue for a period of time.

There are -- we've tightened our belts on a couple of things. But the other thing I think is very important to note is we're continuing to invest in the business. We've got a number of projects that we plan to do this year.

The vast majority of those, we're still doing them this year. And again, Dick talked about how the organization is working to be able to deliver those things in this market, I think, is -- or sorry, in this environment where 95% of people are working at home, I think is pretty remarkable, and we're pretty confident of progressing with those.

Some of them will take a little bit longer. So again, we've -- some of that is that -- some of those things that we hope to finish in 2020 will probably drag out to 2021.

So there's a little bit of cost that will drag into next year, but we are continuing to invest in the business. And that's baked into that guidance of flat to slightly down.

[Operator]

We will take our next question from Simon Fitzgerald from Evans & Partners.

[Simon Fitzgerald, analyst]

I only have one question this morning. Just in regards to the impairment, if you could just sort of highlight in terms of the -- what the test was there or the measurement that resulted to the impairment?

And was it certain contracts as opposed to others? Like I just wanted a bit more detail around that impairment charge, understanding that's noncash.

[Roger Thompson, executive]

Yes, Thanks, Simon. Yes, you've got -- I think all firms will be looking at this, and you've got a triggering event. There's no doubt you got a triggering event with the AUM decline and the uncertainty in the market.

You then just need to look at where your period end assets are and then look at that. We sit with a pretty significant impairment and goodwill balance. We're an intangible business. And when you look at that and you come up with some reasonably prudent assumptions of where you are and where you might be on the upside and downside from the end of March.

You model something and that you've got some contracts and some goodwill, that looks a little bit toppy at those prices. So we've written that off. But as you say, it's a noncash item.

[Operator]

And our next question comes from Mike Carrier from Bank of America.

[Michael Carrier, analyst]

I guess, another question on flows. I mean I think if I look at the sales in the quarter, you are pretty strong given the environment. Redemptions, obviously, as expected. When you look at the trend line there, any granularity on where you're seeing kind of that relative strength?

And then, Roger, just on the comment on April, I think you said relatively flat. And I just want to make sure -- I don't know if it was just intermediary or overall, but just any clarity there?

[Roger Thompson, executive]

Let me take the second bit of that first, Mike. Yes, intermediary is flat, institutional is lumpy, but we've talked about the pipeline -- we talked about the pipeline there. So -- and there's nothing big to tell you about, I think, is that's how we normally describe institutionally, is we'll tell you if there is something, as we did at the end of last year, there's nothing big out there that you need to be aware of an institutional and intermediary is flat.

Sorry, could you just remind me of the first half of the question again, Mike?

[Michael Carrier, analyst]

Yes. The first part was just when I look at the strength in sales that you guys saw during the quarter, just anything that kind of stood out because on the redemptions, like we obviously know what happened in the quarter and where we saw like the industry outflows. But on the sales side, just any more granularity on that.

[Roger Thompson, executive]

So it's a pretty broad brush. You can see in the deck that we saw increased gross flows in a number of capabilities. Some of our long-standing strong products like balances continue to be positive. Absolute Return income, very strongly positive.

Some other Fixed Income areas, small cap, global value. So it is fairly broad. But as always, it's different by geography in our business, but fairly broad.

[Operator]

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

[Andrei Stadnik, analyst]

I just wanted to ask a couple of questions. Firstly, just following up on the flows and intermediary flows going in April. Can you describe a little bit what's changed the -- are some geographies doing better than others? And is it better gross sales? Is it lower gross redemptions? What's changed in April?

[Roger Thompson, executive]

Primarily redemption story, Andrei, I think there was obviously a reaction in March, but that seems to have -- there's a pause at least now in terms of redemptions. We're still seeing good activity in gross. So the decrease to get to flattish for intermediary is really around less redemption, but it's the same everywhere.

U.S., Lux, Dublin, the U.K. and Asia are all around flat. So it's not that one region has changed completely and others haven't. It's pretty -- again, for us -- I don't think that's the same everywhere, but for us, we're seeing flattish flows in intermediary. The result of gross ins and gross outs being about flat in all markets, which is a dramatic change from April. But again...

[Richard Weil, executive]

Sorry, dramatic change from March.

[Roger Thompson, executive]

Sorry, dramatic change for March. But as Dick said, we caveat that with just happens to be where we are now. I think the important message is, yes, April looks different than March, but obviously, we can't tell you what May is going to look like.

[Andrei Stadnik, analyst]

Good. And my second question, just thinking through where the operating margin could end up, should we be thinking about mid-30s for FY '21?

[Roger Thompson, executive]

I think we previously said mid-to-high 30s. That remains our long-term aspiration, but with lower asset levels, yes, you're probably looking in the lower 30s.

[Operator]

We'll take our next question from Ed Henning with CLSA.

[Ed Henning, analyst]

Can we just start off on INTECH, look the outflows have been getting better there, but performance seems to be getting a little bit worse. Can you just touch on conversation with clients? And how -- and what the outlook is there for INTECH?

[Richard Weil, executive]

Yes. I'd say in the first quarter, the performance was a little bit better overall, but they have so many different products moving in different directions that any such comment is -- has to be taken as a pretty blurry outline.

Underneath the covers, they have a lot of different products moving in different directions. But generally speaking, the INTECH products in the first quarter performed sort of as described on the 10.

So that's not strong enough outperformance to really drive them back to a very healthy front foot, they need to put up good performance over a long period of time to get to the level of success that we aspire to for them.

So they're not back to sort of green lights in full health, but they're continuing to do their job and work hard. They do an excellent job of explaining things and communicating with clients.

As they continue to evolve their business, they have a significant number of strategies that have been excellent in this environment and have delivered outperformance. And obviously, those will probably be the things that a lot of clients will be more interested in. But they continue to have opportunities to sell business and move ahead.

And they're focused on healing some of -- continuing to heal some of the damage of some of the past. We've talked about, they've added some risk control practices into how they manage money as lessons learned from the past. So they're an improved business. And they're continuing to sort of try and build forward. No special guidance that we have around their future at this point.

[Ed Henning, analyst]

Okay. And just one other question. If you look at the world now, and you've obviously got a very strong balance sheet, which you've highlighted given all the market moves, does that change your appetite at all to look at any inorganic opportunities?

[Richard Weil, executive]

We've sort of always answered that question the same way, which is never say never, but we really are focused on first things first. We want to deliver the simple excellence that we can deliver in the current configuration of our company.

We see lots of opportunity to improve how we're doing what we're already doing. And our priorities are more focused on that than they are on big M&A or changing things in an inorganic and significant way. But never say never. We continue to look at things. We continue to educate ourselves. We continue to listen to folks who would like to chat.

And mostly, that's a learning exercise, but you can't ever foresee the future perfectly. Something could potentially happen, but it's not the highest thing on our priority list.

[Operator]

Our next question comes from Nigel Pittaway from Citi.

[Nigel Pittaway, analyst]

First of all, just it seems like on Slide 35, there's reasonable evidence of that sort of LTIP flex here you were talking about. I mean just checking, I mean, is the assumption behind that pretty much of a same as what you were saying on the other costs, basically flat AUM from here? Or is there anything else you can tell us about what's been the scenes behind that flex down that we're observing there?

[Roger Thompson, executive]

That's based on flat markets from the end of March, Nigel.

[Nigel Pittaway, analyst]

Yes. Okay. Okay. And then just a second question, just on performance fees. I mean obviously, I think it surprised most people that how good the performance fees were in the first quarter. Can you give us sort of any kind of guidance as to how we should think about those for the remainder of the year? I mean presumably, we've got to look at sort of relative benchmarks now? And is there any color you can provide on that as to what the potential is moving forward?

[Roger Thompson, executive]

If we take it in the regular pieces, if you like, the U.S. fulcrum fees Q2 2017 that rolls off was actually quite a good quarter. So we'll have to add a bit in order to stay at the sort of $2 million negative level where we were. But then we run into the sort of bad year of performance dropping off. So again, you can model that. If you model flat performance for the year then you get to sort of $5 million of negative fees for the year compared to $15 million last year. So I can't tell you what future performance will be, but assuming no alpha, it's minus $5 million for the year.

In our Mutual Funds, obviously, we have the -- European funds have the calendar period is June 30. There are some funds in those that are -- and again, you can track this stuff public. There are some funds in there that are currently above high watermarks. So that as we stand here today, there's a little bit uncrystallized, but again, that can change. The U.K. Absolute Return Fund is slightly ahead now. So again, more around the opportunity for the future rather than something that's in the bag today.

But if the team there can continue to add small positives, then there's some performance fees that could occur there. And then the last piece is segregated accounts. See, in the first quarter, we had a couple of segregated accounts that were quite large.

One of those is one-off, I assume the account we don't have anymore. But there are some SEG accounts that we would expect to have performance fees on for the remainder of the year, including in Q2.

[Operator]

And we'll move on to Ryan Bailey from Goldman Sachs.

[Ryan Bailey, analyst]

My first question was on the U.K. property funds that are gated. I was just wondering if you can give us an update about the timing that you think that, that might change. And any broader implications that you think could have curbed that one?

[Roger Thompson, executive]

Yes. I mean that's gated as the entire industry is in that sector because the valuers put what they call the material uncertainty clause on valuations. So if you can't value a fund, there's no real choice other than to suspend it.

So we suspended, and I think everyone else suspended a day after us just about. The fund is positioned very well. It has a strong cash balance. Its mix has less retail in the most people. It's actually got some things like logistics warehouses in that I would have thought we're doing rather well at the moment.

So we can't -- I can't tell you when it will reopen. It will be when the surveyors decide they can take off that material uncertainty clause. And I doubt that will really happen until there's some transactions in the marketplace. But again, we're communicating well with clients. And I think we've been viewed quite strongly in terms of how we have communicated. So you never like to go to product, but yes, it's a little bit easier when an entire sector is positioned the same way.

[Ryan Bailey, analyst]

Understood. And just maybe another question on buyback activity? And thank you for the incremental color on the balance sheet strength and cash flows.

I'm just wondering how we should be thinking about maybe as a target payout of EPS or cash flow? Do you think in the current environment expected to be prudent and maybe not pushed to wall given the stock price, do you think you have the opportunity to be a bit more aggressive?

[Richard Weil, executive]

This is Dick. Thanks for that question. Yes. I guess, our commitment to the dividend is the first way that we return capital and the strongest commitment. The buyback is then an incremental piece when we don't have to invest that money in the core of the business, and it's how our investors have told us they like to get that incremental return of capital.

So at these levels, we're generating good free cash flow, as Roger said, and we're going to continue to be in the market, as Roger said earlier, buying back. If the levels of the market change significantly, we'll have a conversation with the Board and reflect on whether that remains true.

But that's the piece that is, I would say, more -- it's on top of the dividend, and that would be the first thing where we'd look to adjust if the market levels changed significantly.

[Operator]

And we'll take our question from John Dunn with Evercore ISI.

[John Dunn, analyst]

You talked about being wanted to be a winner coming out of this location, and you talked about what kind of gross sales side is working. But are there any areas that maybe haven't been doing great that maybe teed up or close to maybe flipping to being contributors.

[Richard Weil, executive]

We have a list of focused products that we think have good client demand and good performance. We have a tracking process where we take a look at things that are in the wings that we think are maybe because of length of time that we've been running the strategy or maybe it's just AUM in the strategy or it could be performance bubbles moving through that we think will be more appealing on a go-forward basis, and we track all those things. But there's nothing that we'd want to publicly call your attention to along those lines. That's sort of an internal process.

And frankly, most of those pieces are smaller. Our results tend to be the aggregation of a lot of individual pieces, and we hesitate to call any one individual piece out too often because the nature of our company is diverse geographically and diverse product wise, diverse across asset classes.

And so the things that really drive our results tend to be aggregations rather than individual specific things.

[John Dunn, analyst]

Got you. And then on the investment, were there -- in the quarter, were there any investment strategies that stood out as causing kind of the deterioration in investment performance and any ones that -- I know it's super early days, but maybe that a position to inflect back -- get you back to where you were in that kind of top quartile overall performance?

[Richard Weil, executive]

Yes. I mean I don't think I want to participate in a naming and shaming exercise on this call. But yes, we had a few products that dramatically suffered in the 3 weeks -- the bad 3 weeks in March.

We had some very good products that lost years of outperformance that they carried into March and gave significant parts of that back. And we had some other pieces, Absolute Return and other things that delivered well through the period of volatility.

But honestly, we're less concerned about what's just happened in the last 3 months and more concerned about what happens from here. I don't think success or failure is driven by how you rode through these last 3 weeks. I think success or failure is driven by how well we find value in this disrupted market from here going forward.

And so we're not going to overreact to short-term performance changes in the last month or 2. What we're going to do is try and keep everybody very focused on the idea that there's a huge range of mispriced opportunity out there. And this is where we do our jobs well and succeed over the next 3 and 5 years.

With that, maybe let me just thank everybody for your time and attention today. I hope we've done a good job answering your questions. Feel free to follow-up with us afterwards if there's more we can do. But we appreciate your time and attention today, and we look forward to speaking with you next quarter.

[Operator]

And once again, ladies and gentlemen, that does conclude today's conference. We appreciate your participation today.