Janus Henderson Group PLC

NYSE:JHG

Earnings Call Transcript 2019-Q2

[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 Second 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.

[Richard Weil, executive]

Welcome, everyone, to the second quarter 2019 earnings call for Janus Henderson Group. I'm joined by Roger Thompson, our CFO.

As we've said on previous calls and in line with taking a longer-term view of our business, we are using the second quarter call to run through a more robust discussion on the business and our strategy as well as the usual updates on quarterly flow performance and financial results.

In today's presentation, Roger will review the quarterly results and the current challenges and opportunities facing our business. I will try to give you a deeper look at our 5 strategic priorities that we have laid out. Following our prepared remarks, we'll be happy to take your questions as always.

Before turning it over to Roger, I wanted to provide my thoughts on the quarter as there are a few important insights, I think, to highlight. The story for our quarter, in my mind, has 3 parts. First, investment performance remains strong. 72% and 80% of the assets are beating their respective benchmarks over 3- and 5-year time periods, which is an improvement from the prior quarter and a very strong result. Second, net outflows of $9.8 billion are disappointing. However, with strong markets, our AUM ended up increasing 1%. Third, the financial results and aggregate are better than prior quarter with EPS of $0.61 compared to $0.56 a quarter ago.

Looking a bit deeper at the net flow result, there are a few important trends I'd like to highlight. The first one is that the quarterly result reflects $8.4 billion of outflows from the 4 areas that we have previously called to your attention as challenged areas at risk for us, which are INTECH, Core Plus Fixed Income, European equity strategies, along with our global emerging marketing strategy following the announcement of that team's departure. So we expected to see challenging results in these 4 areas. We tried to call your attention to it, and indeed these results are disappointing and challenging.

The second trend is one that I think you have to look closer to see. Outside of those 4 areas that I just highlighted, we had $1.4 billion of net outflows in the quarter, which is a significant improvement from the result in the first and fourth quarters. This is a very important point because this area of our business outside of these 4 challenge areas accounts for 80% of the firm's totally AUM. In other words, 80% of the business is strengthening. And we're absolutely accountable for the full 100% result, and by breaking it out in this way I don't mean to distract you from that accountability. But I do think it's important to look at the composition of the flow. The current concentration of outflows is masking some really, really great work that's being done and 80% of our business is improving, and we look forward to seeing that continue.

There are no quick solutions to the flow challenges that we face. We're committed to improving each of our challenged areas, but it's important to be aware that the business has many other elements that we're very optimistic about.

With that said, I'll turn it over to Roger here to walk through the quarter's results.

[Roger Thompson, executive]

Thanks, Dick. Thank you, everyone, for joining us. Dick's given you the summary of the results. My comments on the details start from Slide 3 with investment performance.

Overall investment performance relative to benchmarks of the quarter was strong, with all time periods presented showing improvement compared to the prior quarter. We still continue to strengthen performance of our equity and multi-asset capabilities across the 1-, 3-, and 5-year time periods and short-term improvements in our Fixed Income and INTECH capabilities.

Year-to-date performance of INTECH has been encouraging, but the weakness in the longer-term performance means we still have business at risk.

The other notable movement was in Alternatives. The U.K. Absolute Return strategy had some very strong outperformance from 2018 rollout of the 1-year measurement period resulting in a switch to underperformance on a 1-year basis during the quarter. However, year-to-date performance remains good.

On the right-hand side of the slide, you can see that relative performance compared to peers is very strong, with more than 2/3 of AUM represented in the top 2 Morningstar quartiles on a 1-, 3- and 5-year basis. 85% of equity AUM, our largest capability, is in the top 2 quartiles on a 1-year basis, 55% of which is in the first quartile, which is just an outstanding result.

Now turning to total company flows. For the quarter, net outflows, as Dick said, were $9.8 billion compared to $7.4 billion last quarter. The increase in net outflows was driven by higher growth redemptions primary from INTECH and our emerging market strategies, which were partially offset by improved redemptions in Fixed Income.

Normally, our next slide looks at flows by capability. However, this quarter, we've moved that slide to the appendix and wanted to spend a few minutes breaking down the flow results between the known areas of concern, as Dick has just spoken about, and the remaining areas of the business.

On the first quarter call, we spoke about 3 specific areas of investment performance weakness that we were concerned about, which included the INTECH, Core Plus Fixed Income and European equity strategies. In addition to those areas, we also said that we expected all of the AUM in our global emerging marketing strategy to be at high risk following the announcement of the team's departure.

This quarter's flow results is a reflection of those concerns. First, in looking at the 4 areas previously highlighted is concerned, INTECH. INTECH had net outflows $4.1 billion driven by longer-term performance weakness as well as client decisions to change portfolio positioning and allocations away from the strategies that INTECH offers. Improving longer-term performance is the top priority and to that end, performance for the first half of 2019 has been strong. However, we recognized that 6 months is too shorter time period and the strong performance needs to be sustained for a longer time period before we can gain clients' attention. We remain confident in INTECH's investment process and their proactive communication with clients. However, this area of the business does remain the key area of concern as we head into the second half of the year.

Global emerging market outflows totaled $2.5 billion for the second quarter and as of 30th of June, assets under management for the strategies were $2.7 billion, all of which remains at high risk for redemption most likely during the third quarter. So far we've received notification of $800 million third quarter redemptions in the strategy. We remain fully committed to the emerging markets asset class and are actively pursuing options to build out our global emerging markets business.

Outflows for Core Plus Fixed Income, which includes the flexible bond funds, were $1 billion in the quarter compared to $1.6 billion in the first quarter. Despite the poor start in 2019 for flows, the outflow trend has improved as the year has progressed and performance year-to-date has improved modestly.

Finally, European equity outflows reduced to $800 million in the second quarter compared to $1.2 billion in the first quarter and $1.6 billion in the fourth quarter of 2018. While still negative, this represents significant improvements in this area of the business. 1-year investment performance across these strategies has improved, and whilst most are still modestly behind benchmark, relative to peers, the strategies are generally in the second quartile over this time period. We remain very confident of this team and their ability to continue to improve their best performance.

Outside of the 4 areas I've just highlighted, we're seeing an improving trend across the rest of the business. As Dick said, this is important to highlight that this area of the business accounts for 80% of the firm's total AUM.

As you can see in the second bar chart we've included on this slide, in the second quarter, this area of the business had $1.4 billion of outflows, which represents $4 billion improvement from what we saw in the fourth quarter. While this level of outflow is still below where we aspired to be, we're pleased with this improvement.

The improvement over the last 3 quarters has come across a number of areas, which include good flows into fixed income strategies in EMEA and Australia, along with strong flows into a multi-sector and developed world bond funds in the U.S.

From a continued improvement among intermediary clients in Continental Europe and Latin America, with June marking the first month of positive flows in these regions in more than 18 months. Improvements in a number of U.S. equity funds where we've seen redemptions decline meaningfully, for example, international lot.

And finally, in the U.S. retail market, we're continuing to gain market share. Over the last year, we've seen a significant increase in the number of financial advisers doing more business with us and importantly, they're growing the number of products they're investing across.

And in the RIA segment, we're seeing outpaced growth in the business relative to our competitors. As Dick said, there's no quick solutions in the areas we're experiencing challenges, but the business has many elements to be optimistic about, which can get washed out in the short run by some of the more concentrated outflows that we're experiencing.

Slide 6 is our standard presentation of the U.S. GAAP statement of income.

Moving to Slide 7. We'll look at the summary financial results. Adjusted second quarter results compare favorably versus last quarter primarily from higher revenue. Average AUM in the second quarter increased 2% over the first quarter as market gains more than offset outflows and a slightly negative FX impact. Total adjusted revenues in the quarter increased 4% compared to the prior quarter due to the higher average AUM, better performance fees and additional calendar day.

Adjusted operating income in the second quarter of $152 million was up 6% over the prior quarter driven by higher revenue. Second quarter adjusted operating margin was 35.0% compared to 34.4% in the prior quarter and 40.1% a year ago, when we had higher AUM and stronger performance fees.

Finishing up the financial results. Adjusted diluted EPS was $0.61 for the second quarter compared to $0.56 for the prior quarter and $0.74 a year ago.

On Slide 8, we've outlined the revenue drivers for the quarter. Management fees increased 1% from the prior quarter. Net management fee margin for the quarter was 42.2 basis points, which was down compared to the first quarter driven by mixed shift in the business primarily from outflows in higher-fee equity products.

Performance fees were the biggest driver of the quarterly change in adjusted total revenue. Second quarter fees were $4 million compared to a negative $6 million in the first quarter. The second quarter has got the largest pool of AUM eligible to earn a performance fee. However, performance in our large performance fee paying strategies, whilst improving, was below benchmark at the crystallization date, resulting in a very limited performance fee payout during the quarter.

Whilst there's an increase in performance fees over the first quarter, $4 million of performance fees realized in the second quarter of 2019 was lower than the $14 million recognized during the same period of '18 and was significantly below the $52 million recognized in '17.

Regarding mutual fund performance fees, the second quarter improved to a negative $4 million from a negative $9 million in the prior quarter, and strong performance in the second quarter replaced weak performance in the second quarter of 2016.

If we're successful in continuing to outperform benchmarks in the second half of 2019, we will see further improvements in these performance fees. And under reasonable outperformance scenarios, we can exit the year with positive performance fees in this area.

Turning to operating expenses on Slide 9. Adjusted operating expenses in the second quarter were $282 million, which is up 3% from the prior quarter. Adjusted employee compensation, which includes fixed and variable staff cost, was up 2% compared to the first quarter, driven by higher variable cost on a higher pretax profit.

Adjusted LTI was also up 2% in the prior quarter largely due to social security taxes on vestings in the U.K.

In the appendix, we've provided further detail on the expected future amortization of existing grants, which hasn't changed significantly compared to the prior quarter.

The second quarter adjusted comp-to-revenue ratio was 44.4%. For the full year, we still anticipate a total comp ratio to be in the low 40s, but given the lower performance fees I just talked about in the second quarter, we'd expect it to be in the higher end of that range.

Adjusted noncomp operating expenses increased 6% quarter-over-quarter. The main driver of the increase was G&A cost, some of which was one-off. We're maintaining the guidance on 2019 noncomp expenses, which is that excluding the $12 million legal outcome in 2018, we'd expect to see noncomp expenses flat year-over-year. The first half 2019 results are on track towards that expectation.

Finally, the firm's recurring effective tax rate for the second quarter was 23.7%. For the full year, the firm's effective tax rate is still expected to be between 23% and 25%.

Lastly, Slide 10 is a look at our capital management. As we said previously, we remain committed to returning excess cash to our shareholders. During the second quarter, we paid approximately $69 million in dividends to shareholders and declared a $0.36 per share dividend to be paid on the 28th of August to shareholders of record on the 12th of August.

And we purchased 3.5 million shares of our stock for $75 million in the second quarter. That takes our year-to-date accretive share repurchase total to $106 million or 4.8 million shares. We anticipate the remaining $94 million of the $200 million authorized to be completed in the second half of 2019.

With that, I'll turn it back over to Dick.

[Richard Weil, executive]

Thank you, Roger. In February, I presented our 5 strategic priorities, and today, I would like to provide you with some additional color around each of those. 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 clear, defined client promises as well as investing in technology and infrastructure that enhances our ability both to deliver alpha and to construct portfolios with strong risk management around the clear promises that we have made.

Second, we must drive consistent and continuous improvement in our client experience. This will help us deliver industry-leading client experiences that drive stronger long-term relationships and lead to deeper engagement with our clients. Ultimately, this will lead to longer duration of assets and continued improvement of market share.

Third, we need to focus our efforts across all that we do. This means looking closely at our products set, standardizing our global operating model and streamlining and reducing our complexities.

Fourth, we have to embed continuous learning and feedback loops in our risk and control environment.

Finally, we need to develop new growth initiatives building the businesses of tomorrow. For us, this comes in several different areas and is in addition to the execution I've been talking about -- around our core business.

By delivering dependable excellence in these 5 areas, we will be winning for our clients, we will be gaining market share in our business, and we'll be generating very good returns for our shareholders.

Now let's look at each of those pillars individually. Turning to Slide 13 and taking a deeper look at what dependable investment outcomes entails for us.

Today, we have a legacy of exceptional asset management, diversified across asset classes, across investment styles and geographies. Our goal is to build on this strength to ensure dependable delivery of risk-adjusted returns. We believe high-quality and dependable risk-adjusted returns are built on 5 basic principles: an investment team that is highly intelligent, dedicated and stable; clearly articulated investment objectives achieved by establishing transparent investment policy statements for all of our portfolio; building a modern infrastructure with strong risk management tools that allows us to constantly monitor risk and take risk intelligently; good portfolio analytics; and a culture of partnership and collaboration.

I'm pleased to say that we're seeing early signs of very encouraging results where these principles are being applied within our organization.

Turning to Slide 14. Let's look at how we're developing our client experience. We're in the early stages of a multiyear journey of weaving client experience into the very fabric of our organization, focusing on embedding a client-centric culture into every aspect of the firm. And again, it's a multiyear journey because this really is about cultural change. We're working hard to enhance and redesign our most important client journeys and to improve the feedback loops and measurements that will drive market-leading experience.

We are developing robust client feedback tools and a measurement approach to be sure we're tracking our progress. This will take time and a considerable effort involving our entire firm. We're committed to developing our industry-leading client experience. Done well, we're confident this approach will produce more sustainable relationships, will increase our market share and will lengthen the duration of our client assets.

Turning to Slide 15. We will cover our third and fourth strategic priorities. As you can see by the title, these 2 pillars are all about focus. Across our product portfolio and our global operating model, we have to become more focused in all that we're doing. What do we mean by that? First, with our product portfolio, we've got to ask whether we're allocating our efforts and resources on the right areas. We've got to continue to standardize our global operating model and system. We're working on consolidating to a strategic data architecture. We need to, every day, continue to streamline and reduce our operational complexities. We're working very hard to refine and improve and further develop a proactive risk and control environment. By this, we mean building strong relationships with our global regulators and working on our firm-wide culture of risk management, transparency and urgency. These 2 areas may not be exciting for everyone, but they're absolutely imperative to our future success.

Slide 16 gives you some insight into the new growth initiatives we're developing. The growth areas we've laid out previously are multi-asset, ETF, and Asia-Pacific. In Multi-asset and Alternatives, Dr. Michael Ho, who joined the firm in January, is spearheading our activities to develop our existing capabilities and develop new capabilities as well. Today, this area of our business represents only 13% of our AUM, and it must be much more.

We're supporting our growing ETF business, where we have seen positive momentum already in such areas as active fixed income. We've seen more than $1 billion of flows from VNLA, V-N-L-A, as well as our JMBS, ETF, with JMBS recently crossing the $100 million mark less than a year after launch.

Finally, we're committed to expanding our presence in Asia Pacific region, building out our teams to the best service our clients and deliver on the opportunities that are growing in that region.

It's very early days across each of these initiatives, but we're busy building the foundations for future growth.

Finally, turning to Slide 17. As I mentioned at the beginning of the call, there are many years of our business that are doing well. So let me run you through those things that I'm most excited about. First, obviously, it's investment performance. Our total company investment performance is strong with 66%, 72% and 80% of our AUM outperforming benchmarks over 1, 3 and 5 years, respectively. This remains the best leading indicator for our future success, and we're very proud of this result. Thank you to all of our excellent teams for their great work.

Second, we're winning new businesses. Despite incredibly tough and competitive environment, we're gaining market share in our biggest business, U.S. equities in the retail channel. Our multi-asset capability is growing at an annualized rate of 7%, led by our balanced fund, which has seen strong and consistent investment performance ranking in the top decile on a 1-, 3- and 5-year basis.

We're also seeing positive flows in a number of fixed income strategies in EMEA and Australia, along with strong flows into our multi-sector and developed-world bond funds in the U.S.

Third, it's about people. We're excited about the outstanding talent we have working at this company, and we've been successful in adding to it. We recently hired Suzanne Cain to head up our global distribution teams. Suzanne comes with a strong background in institutional sales. I already mentioned Dr. Michael Ho who is leading our Multi-asset and Alternatives business. Both Suzanne and Michael joined a strong and stable executive committee and firm-wide leadership team, and we're thrilled to have them.

Finally, we continue to generate very strong cash flow. This is supporting ongoing investments in the business, and we continued to return excess cash to shareholders via both dividends and substantial share buyback.

So in conclusion, we remain focused on healing the areas where we are experiencing the most significant outflows. But the concentration of outflows is masking much of the progress that we're making elsewhere in our business.

Our leadership team remains committed to the strategic agenda we've laid out, producing excellent and dependable investment outcomes while delivering industry-leading client service. I'm confident that by continuing to successfully execute on these initiatives, we'll deliver a stronger and more diverse firm, winning business for our core markets as well as delivering strong long-term results for our shareholders.

With that said, I'd like to take your questions and turn it back over to the operator.

[Operator]

[Operator Instructions] And we'll take our first question from Dan Fannon with Jefferies.

[James Steele, analyst]

This is actually James Steele filling in for Dan. I just wanted to know if you guys could maybe provide some idea as to what the fee rate is on the at-risk revenue. Understand that the quant stuff is cheaper than the EM. Sounds like a big mandate. So just kind of any guidance there?

[Roger Thompson, executive]

Yes. James, it's Roger. Like I said, it's a mix of higher and lower. Actually, on average, the total comes out pretty much exactly the same as our average fee rate.

[Operator]

And we'll move onto our next question from Ken Worthington with JPMorgan.

[Kenneth Worthington, analyst]

I'll wrap all my question, my follow-up into one on INTECH. So gorse sales essentially nonexistent this quarter, gross redemptions were elevated. I guess maybe first, how concentrated were the INTECH outflows this quarter? Was it sort of 1 customer, 2 customers? Or was it most broad-based? Maybe part 2, can you give us asset levels for the biggest INTECH strategies to kind of help us level set where things are? And then the ultimate question, decision to keep that wheels are finally falling off INTECH. Are the limited sales and big redemptions indications that there's really more bad news to come? And maybe how would you gauge the risk of elevated gross outflows as we look to the second half of the year?

[Richard Weil, executive]

Thanks. It's quite a set of questions. I'll do my best. In terms of the composition of the outflows, just over half the flows came from the U.S. Enhanced Plus strategy, with the remaining outflows spread across a number of different strategies. I don't have it on a client-by-client basis, I have it on a strategy basis for you.

In terms of INTECH's concentration of business, which I think was underlying a bunch -- some of your other question. The 5 largest strategies at INTECH make up about 60% of its business. And it does have really large individual clients whose single decisions can move a whole lot of AUM. Those tend to be lower-revenue products, but they certainly can make a huge splash on the AUM change line.

In terms of whether this is some indication that in some fundamental way the wheels are off the cart at INTECH, I think it's less grand than that. We've been transparent with you all on a quarterly basis about the performance challenges and the volatility they've experienced, and we've been trying to call your attention to the fact that we think that, that volatility has generated risk across this client base. And because of the nature of their clients, where small numbers of decision-makers can move large amounts of AUM, we've tried to call your attention to the fact that quarters like this, they are possible.

On the other hand, INTECH has put up year-to-date better investment performance. They continue to do what they do. They're learning from their experience and improving over time. They have a multi-decade track record that shows that what they do is really good and valuable. They're smart, very professional people doing a good job on the portfolio management side and on the client communication side. So I don't see any reason to believe that somehow this is a fundamental issue of wheels coming off the cart, but I do think their business is challenged by the performance record they've put up in the last few years. It's challenged by a client base in institutional space that has been heavily moving towards passive as opposed to active. And they're going through a tough period. And looking ahead, I don't think they're out of the tough period. Their positive performance is not yet long-standing enough to heal the risk that we've called your attention to, as Roger said earlier, but now I don't agree with the characterization that the wheels are off the cart. These guys have been doing this very successful for a long period of time, and they'll come back around, but it's a tough period. And it's really hard to project exactly on a quarter-by-quarter basis what the flows are going to look like. But I think you can say that they need continued good performance to heal from here.

[Operator]

And we'll take our next question from Nigel Pittaway from Citi.

[Nigel Pittaway, analyst]

Couple of questions. First of all, just trying to understand the equities flows. When we went through first quarter, there were a few one-offs that were annunciated there like the initial emerging markets and the closure of the Australian business. You're talking about U.S. equity market share improving, European equity flows -- outflows falling, and yet, there still seems to be a deteriorating trend in those equities flows quarter-on-quarter. Where is the missing bit of the jigsaw there in terms of what's going worse. I mean, obviously, there's a $2.5 billion emerging market, but that doesn't explain it completely.

[Roger Thompson, executive]

It's Roger. So yes, as you said, the biggest part of -- as we had about $6 billion of outflows in equities in the quarter, of which we've said about $2.5 billion is GEM, so it's about $3.5 billion elsewhere. $800 million is in Europe, which we said is improving. The rest is sort of a bit of a mix, a bit of resources in Australia, as you know, 1 larger client in the U.S., but it's a blend across the rest of the business.

[Nigel Pittaway, analyst]

All right. Okay. So there's a large client outflow in the U.S., which is a big component. All right. And then moving on -- just on your comments on the compensation ratio, I think you said, you're still targeting the low 40s, but it'll be at the higher end of the range. What range is that you're actually talking about? In other words, what number would constitute the high end of that range -- the highest end of that range?

[Roger Thompson, executive]

The comp ratio is a little high this quarter at 44.4%, and we were 45.4% in the first quarter. So I did want to address that. So why is this? So I think there's a couple of reasons in there. The first is LTI. In the first quarter and the second quarter, you've got seasonal cost of vestings, and you've also got mark-to-market on the awards as markets have gone up, which, as we said, is largely offset in the investment gains line, which doesn't drop into the comp ratio. So LTI in the first quarter was $48 million and second quarter is $49 million. But on Slide 41, we've given you the full year estimate of that, that's $186 million, so which means in the second half, we're expecting it to be $88 million or $44 million a quarter. Yes, $44 million a quarter puts the comp ratio, all other things being equal, at about 43%.

The second part is sort of a denominator. We've got lower P fees in the second quarter, as we've talked about, and that would affect the full year, obviously, the second quarter being a quarter where we have a large opportunity to earn P fees. So without the increase in performance fees, you'd expect, say, that the comp ratio to be at the higher end of the low 40s. And I guess that I'm calling that out to be, say, 42% to 44%. And as I said, once you strip out the LTI piece, we were at 43% in the second quarter. I think that's not -- I want to be very clear, we have not taken out our costs in any way at all. We've got a business we're managing on an ongoing basis. That means investing in it, it also means continuing to drive efficiency in it. But that's the answer on the comp ratio and I guess, the narrow answer to you question is 42% to 44%.

[Operator]

We'll take our next question from Mike Carrier with Bank of America.

[Unknown Analyst]

This is actually [ Sean Kellman ] on for Mike. So we understand the INTECH and EM challenges, but in the other core areas, you're still seeing some outflows. So we're just wondering how you're planning on turning these around going forward.

[Richard Weil, executive]

Yes. Thanks. So you understand GEM, you understand INTECH we've talked about. The next piece is we've had some underperformance we've talked about in some of our largest fixed income strategies, the core plus fixed income strategy. It hasn't been terrible performance by any means, but it's been sort of modestly challenged compared to peers and sometimes compared to index for a bit of an extended period. And it’s weighed on its client confidence, and we've seen significant outflows in that area. So we're working with that team to make sure that we're doing everything we can do to support the return of their investment results to stronger numbers. There isn't an easy quick fix to something like that. But as we also called out in our comments, a lot of the really smaller products in Fixed Income are starting to gather momentum. So what's the plan to help there is get some better performance out of their core plus team and stabilize that product and then capture growth in a lot of those smaller pieces. And working with those managers in that leadership, Jim Cielinski, our CIO of Fixed Income, is working towards that result. But there's no magic switch or solution for that. It's working with that portfolio management team to make sure we're doing everything we can to support their work. I don't know what else I can say that would be responsive to your question. Roger, anything you want to add?

[Roger Thompson, executive]

I guess the other things that I just wanted to make sure you picked up, we've got a number of areas, which we're pretty excited about and whether that's things that look like they're starting to turn and that's, obviously, always a dangerous thing to say, but flows in our Continental European business, as we said, have markedly improved, and June was the first positive month for 18 months. If you go down individual product lines, the overall performance -- just look there's a slide in there of our top 20 funds, 17 are in the top 2 quartiles. I think 12 of those 17 are in the top quartile. That makes some things pretty exciting, the Forty Fund. That can be very big, and we're getting back on the front foot. There are areas like we continue to call out around health care, technology, the balanced funds selling all the way around the world. So there are areas which we're pretty pleased with. And we're wanting to see it run further and run faster.

[Operator]

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

[Andrei Stadnik, analyst]

Can you hear me okay?

[Richard Weil, executive]

Yes.

[Andrei Stadnik, analyst]

Fantastic. First question, I just wanted to asked about the ETF strategy. Can you explain a little bit more about how you're planning to compete here because in passive, it seems scale is very important. So how much confidence do you have in your passive ETF strategy versus your active ETF strategy?

[Richard Weil, executive]

Yes. We're really not shooting for a passive ETF strategy at all. We're really focused on active. We've tried somethings in smart beta, which reasonable people can argue about how active or passive that is. But fundamentally, we're an active manager, and we're focusing on active management in our ETFs. We have launched this year our JMBS ETF. It's crossed over $100 million. We see what competitors are doing in that space, and we actually think our product is significantly better. And we need to make more progress and grow that. VNLA continues to grow. We have plan to launch some ETFs in Australia. So we're not going to be a colossal ETF, very broad, very complete platform anytime soon. But we see the opportunity to offer good products that make a material difference for our clients and grow meaningful amounts of assets and revenues, but not probably double-digit billions. I mean small numbers of billions is certainly possible. It's -- we do not -- let me just be extra clear, we do not have an intent to enter the passive space.

[Andrei Stadnik, analyst]

And my second question. I wanted to follow up on cost, in particular. What kind of further cost opportunities, or maybe I'm taking a step back, do you see opportunity for the cost efficiencies given what you have just outlined, simplification being one of the 5 priorities. And also in the light where just looking very simplistically 2 quarter '19 versus 2 quarter '18, revenue was down around 10%, but costs are largely unchanged and that's despite the synergies of the merger coming through in a more meaningful way. So from that point of view, are you remaining confident that you can deliver more efficiency and simplification?

[Roger Thompson, executive]

Yes. I'll take on a couple of pieces, Andrei. Year-on-year, as I said, we're flat noncomp once we strip out that $12 million legal fee in the first half -- in Q2 last year, which we had called out at the time. So we're flat year-on-year despite continuing to invest in the business. And our fixed -- our staff cost fixed and variable is low single-digit growth. And again, we're investing in the business, and we're finding efficiency safe. So we are tight on the costs. I continue to be an unpopular CFO internally.

The other piece is -- are the more efficiencies defined? And the answer is yes. And again, there's nothing changed here, whether that be in how we work with our service providers and continuing to make that as efficient as possible, you say around -- focus around products. You've seen us -- you've seen the actions that we've taken there and continue to take, the most obvious ones being around closing noneconomic areas, but also opening things. So we continue to seek the efficiency in the business and growing the important areas. That focus, as Dick's talked about, is something that -- it's not just around product areas, it's around everything what we do. But yes, there are things that we will continue to do in the long run. Again, we don't react to things on a very short-term basis, we're running a long-term business. And we don't -- a bit like our capital philosophy, we will do things. We won't make that bigger noise about it, but if we say we're going to reduce costs, we'll reduce them, and they won't pop up somewhere else. So I reiterate the guidance, flat noncomp year-on-year and a comp guidance I've given you, which, [ if you went back into it ], is exactly what we said, which is very low single-digit growth.

[Operator]

[Operator Instructions] We will take our next question from Alex Blostein with Goldman Sachs.

[Alexander Blostein, analyst]

So just building on that last point, and maybe we can expand this conversation kind of a little bit beyond 2019. Dick, you've outlined a number of kind of growth initiatives, and things you guys are doing to invigorate growth in the core franchise, presumably that will take some investments. So maybe help us think about what the kind of underlying core expense base could grow over the next couple of years for you to achieve these investment goals. And obviously, the constructive equity market backdrop has been helpful, but if equity markets get a little softer, what are some of the areas where you could pull back on?

[Richard Weil, executive]

The growth areas that we've laid out don't require huge investments out of line with sort of normal reinvestment in the business. The stuff that really takes significant longer-term investment is sometimes systems, infrastructure, but a lot of that expense is amortized and so it's spread out over a long period of time. So at the moment, as we think through the plans, we don't see a big bubble in expenses coming. And as Roger pointed out, we're working very hard to avoid such a thing and trying to keep it under tight control as possible. But we're not in a position to give guidance beyond the period that Roger has already given. So I guess the most helpful thing I can say is we're not planning for some large bubble, and we've given you our best guidance for the period we can.

[Operator]

And we'll take our last question from Ed Henning from CLSA.

[Ed Henning, analyst]

Just a quick question for me and a follow-up back on INTECH. You talked about before allocation away from the strategy. Can you just expand on that a little bit? Is this a major concern to you guys as a headwind going forward or just something eating away the strategy with the soft performance?

[Richard Weil, executive]

Good question. The characterization of a major concern is a little hard to turn into math or numbers. This quarter is a disappointing quarter for INTECH. It's not what we were hoping for. Could it happen again? I suppose it could. But what we really need for -- we're not very good at predicting their flows because of the lumpy nature of their client base. What I think we all recognize is they are putting on some significantly improved investment performance results. And for them to get back to where we need them to be, that has to continue. And if that doesn't continue, they will continue to be a story of risk and concern. That's kind of how we think about it. And their asset base is 49 -- $48 billion, I got it wrong, apologies, $48 billion. That's a really -- that's a very important piece of our business, and so we care a lot about that. And certainly this quarterly flow out of over $4 billion was disappointing as we've said. We're not shirking that message either. So it depends what they do from here. They've put on better returns. We need that to continue. Otherwise, we'll continue to see some material outflows from them that we don't want to see. That's the reality. At a higher level, they do stuff very well. And they have done it for decades. They communicate it very well. There are super-high-quality group of folks. And we expect that they will win in time. But obviously, we're sitting on the edge of our seat saying let's not win in time, let's win now and nobody wants it more than they do. Nobody is more dedicated to that outcome than they are. So it's a tough spot they're in. They're digging their way out, and that's probably all we can say.

[Ed Henning, analyst]

Just might be expanding on that a little bit. If you look at competitors around with similar strategies, are you seeing outflows from them comparing to yourselves?

[Richard Weil, executive]

Well, it's always a little tough to compare quantitative strategies. I don't want to pretend I know more about the guts of some of these other quantitative processes than I do. But certainly, it's noticeable that AQR had difficult returns and difficult flows, and they've previously been super-high-quality competitor, and there are others out there who had similar results. So yes, I think the class of investing they do has been challenged. They are certainly not the only ones. But frankly, I care a lot less about those other people than I do about INTECH. So I tend to focus more narrowly on INTECH, and they have the capability of delivering excellent returns. They just need to keep going, and I think they will.

[Operator]

And we have no further questions in the queue. At this time, I would like to turn the conference back over to Dick Weil for any closing remarks.

[Richard Weil, executive]

Well, thank you everybody for your time. I hope our messages have been clear. We tried very hard to break down the net flow number for your benefit, not because we are trying to distract you from the overall number, but because I think underneath the covers, there is a lot good going on that we look at internally and that drives how we feel about the results. But clearly, the headline is a disappointing number, and we look forward to improving that for our clients for our owners as well. So thanks for your time and attention. We'll talk to you next quarter.

[Operator]

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