Janus Henderson Group PLC

NYSE:JHG

Earnings Call Transcript 2020-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 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 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]

Thank you, operator. Welcome, everyone, to the second quarter 2020 earnings call for the Janus Henderson Group. As usual, I'm joined by Roger Thompson, our CFO.

Let me start by saying that I hope all of you and your families and your loved ones are all safe during this unprecedented global health crisis. As we've said on previous calls, on the second and the fourth quarter, we try and give a longer-term perspective on our business. And so in line with that promise today, Roger will run through the quarterly results and I'll try and give you a bit more discussion on business and strategy. And then, like usual, we'll take your questions.

Turning to Slide 1. This quarter represents our 3-year anniversary since the closing of the Janus Henderson merger. Before I turn it over to Roger to go over the quarterly results, I just want to touch a little bit on the strategic journey that we've been on over these 3 years. The industrial logic of the merger between Janus and Henderson was all about bringing 2 independently successful firms together because they had complementary strengths. And by joining them together, we felt we could gain the benefits of those complementary strengths and also increase scale and diversification.

As we went through the merger, we identified 3 immediate priorities. First, we needed to learn how to deliver growth from our enhanced global platform. Second, we needed to consolidate the business footprint and the infrastructure to leverage the benefits of scale. Third, we needed to deliver cost savings.

Turning first to growth. The promise of growth has clearly taken longer to materialize than we planned, targeted or we would have liked. In this most recent quarter, our institutional flows have been particularly frustrating, given the progress that we are making across our business. That said, we're seeing encouraging signs. And we're confident that with the work we're doing to move our company to simple excellence, we're going to deliver better results. Later in the call, I will update you on the more specific steps that we're taking to deliver our simple excellence strategy, which should lead us to delivering positive organic net flows and profitability growth.

Second, we've been successful in creating a unified company with a common culture. Now that's the work of years, and I think we've made really good progress in recent years and are delivering a strong global culture. We now have a very strong global product lineup. We've enhanced that with a truly global distribution team, and we are now supported by integrated platforms and operating systems underpinning all of it. We've made challenging but essential long-term decisions to simplify our model. And going forward, we're going to drive modernization across products, capabilities and global client servicing, while still exiting as we have marginal businesses and reducing complexity.

Turning third to costs. Through the merger, we successfully delivered $125 million of savings, both ahead of schedule and a bit higher than we targeted. Since that initial phase, we've maintained good cost discipline through our business. But discipline is not really a destination, it's a journey. And so taking a look at the fact that we're 3 years on living in our shoes as Janus and Henderson, taking a look at the lessons that we're currently learning around the possibilities presented from working at home and more electronic servicing of clients, that's been the bright edge of this terrible dark cloud of the global health crisis. We think it's an appropriate time to take a hard look at our business structure and our expenses, all the while, balancing that against the appropriate investments necessary to deliver simple excellence. And I'll update you in next quarter and quarters ahead as we progress down the road of reexamining our cost structure as well as the investments necessary to support simple excellence.

In summary, we're confident that our merger has positioned us for success as an active manager, although we own and acknowledge that it hasn't happened faster. And I'll get more into our strategy and the steps we're taking a little bit later in the presentation.

But before I turn it to Roger, let me say a word on the very important topic of diversity and inclusion. Recent events have quite rightly outraged the society, triggered really important conversations about prejudice and racial injustice in our communities and institutions, and our firm is no exception.

At our firm, we recognize that we are stronger together and that our outlook is shaped by people's varied skill sets, backgrounds and cultures. This diversity helps us explore unique avenues and uncover opportunities that are unseen by others and underappreciated by others in our industry and in investing. We're committed to creating an inclusive environment that promotes cultural awareness and respect.

As an example, we committed to reach our women in finance target of 25% by 2022, and we've already met that target. We are encouraged by this progress and wish to continue to build on these first steps. In addition to examining our employee demographic data to understand and measure our progress, this quarter, we've launched a Stronger Together Campaign. It is an internal and external initiative that addresses systematic racism, social injustice, allyship privilege, micro aggressions and more.

Look, we realize that we have a long way to go. We realize that we need to continue to get better but we're working hard at it. We're trying to make Janus Henderson a firm that deep in our culture we value diversity and inclusion, and we treat all of our people with respect.

I will now turn it over to Roger to walk through this quarter's results.

[Roger Thompson, executive]

Thanks, Dick, and thank you, everyone, for joining us. I sincerely hope everyone and your friends, family and colleagues are safe and healthy.

Looking at the second quarter's results. The market bounced back during the quarter, provided a significantly better backdrop for AUM and financials compared to when we spoke last on the April earnings call.

Net outflows of $8.2 billion are disappointing. However, with the strong markets, AUM increased 14%. The overall flow figure marked a strong and important rebound in the intermediary business.

Investment performance remains solid with 60% or more of assets beating their respective benchmarks over the 1, 3 and 5-year time period. Adjusted EPS of $0.67 was better compared to the $0.60 and $0.61 for the prior quarter and the same period a year ago.

And finally, we returned $88 million of cash to shareholders during the quarter by dividends and share repurchases.

Moving to Slide 4 on investment performance. Investment performance remains solid, with 60%, 62% and 68% of firm-wide assets beating their benchmarks on a 1, 3, and 5-year basis as of June 30. Short-term improvements came primarily from our equity and fixed income capabilities.

We're encouraged by INTECH's year-to-date performance, however, the longer-term performance remains a concern. Relative performance compared to peers is strong, with at least 2/3 of AUM represented in the top 2 Morningstar quartiles on a 1, 3, and 5-year basis, the majority of which is in the first quartile.

Now turning to total company flows. For the quarter, net outflows were $8.2 billion compared to $12.2 billion last quarter. While flows improved quarter-over-quarter, the result is not where we expect it to be. The quarterly flow number reflects the continuing trend of positive flows into our intermediary business whilst institutional saw significant outflows.

Intermediary flows were positive for the quarter across the U.S., EMEA and Asia Pacific. Our U.K. business within EMEA posted its first positive result since the fourth quarter of 2017 and its best quarter since the merger. While U.S. intermediary flows remain positive and relatively diversified, year-to-date investment underperformance in our U.S. mid and mid-cap growth strategies could impact flows in the second half of the year.

We remain encouraged with the institutional pipeline and its diversity across strategies and regions. The focus now is to realize some of those opportunities. Dick will speak more about our strategy on distribution later in the presentation.

Moving to Slide 6, which shows the breakdown of flows in the quarter by capability. Equity net outflows for the second quarter were $4.2 billion compared to $6.9 billion in the prior quarter. The improvement was primarily due to better market conditions.

The equity result reflects a $1.6 billion redemption from an EMEA client who has experienced strong performance and with whom we continue to maintain a strong multiproduct relationship. This redemption was simply a derisking of their portfolio.

Flows into fixed income were negative $700 million in the quarter, primarily due to a few smaller mandate redemptions. However, in retail, we continue to see positive flows with several strategies producing inflows including strategic fixed income, absolute return income, European investment grade, high-yield and our ETFs JMBS and VNLA.

Those fixed income ETFs were $600 million positive for the quarter and are just under $1 billion of net inflows for the first half of the year. INTECH outflows were $3.9 billion. Multi-asset flows of $700 million positive were driven by strong flows into the balanced strategy.

Alternative net outflows improved to $100 million. Pleasingly, our U.K. absolute return strategy turned positive during the quarter, reflecting its good performance.

Slide 7 is our standard presentation of the U.S. GAAP statement of income. There is one item to mention impacting the GAAP results this quarter, which is nonrecurring and hence not included in the adjusted results. The recent announcement by an unrelated issuer to delist their VelocityShares ETN's impacted the value of intangible assets, which resulted in the impairment of $26.4 million. I'll remind you that this is a noncash adjustment.

Moving to Slide 8 for a look at the summary financial results. Adjusted second quarter operating results were down compared to the first quarter, primarily from lower average AUM. While AUM recovered during the second quarter, average AUM still decreased 8%, given the low starting AUM entering the quarter.

We entered the third quarter with 4% higher AUM compared to the second quarter's average. Total adjusted revenues in the quarter decreased 7% compared to the prior quarter on the lower average AUM, partially offset by better performance fees and higher net management fee margin as a result of strong markets, outflows from lower fee assets and inflows into higher fee strategies.

Adjusted operating income in the second quarter of $138 million was down 16% over the prior quarter, driven principally by lower revenue. Second quarter adjusted operating margin was 33.5% compared to 37.2% in the prior quarter and 35% a year ago.

Finishing up the financial results. Adjusted diluted EPS was $0.67 for the quarter compared to $0.60 for the prior quarter and $0.61 a year ago. Despite the lower operating income, the quarterly EPS benefited from mark-to-market on seed capital, mutual fund share awards and other investments.

On Slide 9, we've outlined the revenue drivers for the quarter. Lower average assets was the biggest driver of the quarterly change in adjusted total revenue. Net management fee margin for the second quarter was 45.7 basis points, up from 45.1 basis points in the first quarter and 44.9 basis points a year ago. The margin remains resilient and has increased for 3 straight quarters. The quarterly increase is primarily due to mix shift and our focus on quality flows.

Performance fees was $17.2 million in the quarter versus $14.6 million in the prior quarter and up from $3.5 million in the second quarter of last year. The second quarter has a significant pool of AUM eligible to earn performance fees, including the SICAV Horizon range and our U.K. absolute return strategy. In the quarter, we were pleased that both of those ranges of funds earned performance fees, reflecting the much improved investment performance.

U.S. mutual fund performance fees in the second quarter were a negative $4 million.

Finishing off adjusted revenue. Other revenues declined $3.1 million, primarily on lower average assets as well as lower revenue from the ETN business. Going forward, we'd anticipate this line to be slightly lower on a run rate basis due to the uncertainty around the ETN's, which make up a small proportion of other revenue.

Turning to operating expenses on Slide 10. Adjusted operating expenses in the second quarter were $275 million, which is a 1% decline compared to the first quarter. Outside of the increase in LTI, which is market-driven and out of our control, the quarterly expenses reflect our profit-based variable comp structure, cost discipline and our focus on running an efficient business. We remain committed to managing our costs in the light of the elevated uncertainty being created by the global pandemic.

Adjusted employee compensation, which includes fixed and variable staff costs, was down 6% compared to the prior quarter. Fixed staff costs were down 3% and variable compensation was lower by 10% due to lower profits and lower sales.

Adjusted LTI was up 46% from the first quarter from the absolute impacts of the mark-to-market adjustments in both quarters. In the appendix, we provided updated detail on the expected amortization of existing grants.

The second quarter adjusted comp-to-revenue ratio was 47.1%. This higher ratio reflects the significant mark-to-market in our LTI expense in the second quarter. And when looking at the first half of the year, the comp ratio on average is 44.7%, which is in line with our mid-40s guidance.

Adjusted non-comp operating expenses were down 11% compared to the prior quarter. The decrease is primarily related to full quarter impact of COVID-19 and our strong cost control, particularly around G&A and marketing. For the year, we now anticipate our non-comp expenses to be down low single digits compared to 2019.

And finally, our recurring effective tax rate for the quarter was 22.9%, which is just below the statutory rate guidance of 23% to 25%.

Lastly, Slide 11 is a look at our capital management. Cash and cash equivalents weigh $880 million as of the 30th of June, of which Janus Henderson's portion was $837 million. You should think about the amount of cash we have on the balance sheet is what the Board and management are comfortable operating the business with due to the regulatory requirements, a conservative working capital buffer and a cash set aside to meet the 2025 debt maturity.

As we said previously, we remain committed to returning excess from future cash flow generation to our shareholders. During the second quarter, we paid approximately $66 million in dividends to shareholders and today declared a $0.36 per share dividend to be paid on the 26th of August to shareholders of record as of the tenth of August. And we purchased 1.1 million shares of our stock for $22 million in the second quarter.

Our Board and management is committed to maintaining a strong balance sheet, which is why given the low market levels at the start of the quarter the buyback was lower in the second quarter. Our thoughts around the buyback have not changed, and we believe it is a good use of our excess cash. And we will commence the next stage of the $200 million authorized buyback shortly.

Now I'd like to turn it over to Dick for an update on our strategy.

[Richard Weil, executive]

Thank you, Roger. I mentioned at the beginning of our call that our strategy is simple excellence. And underneath that strategy, we have 5 strategic priorities that I'd like to talk to you a little bit about right now.

Turning to Slide 13. Our strategy is centered on the belief that a combination of relentless focus and disciplined execution across the fundamental parts of our core business that, that will drive future success as a global active asset manager. Specifically, our strategy is designed to deliver organic growth and increasing profitability.

Let's look at each of the pillars individually. Turning to Slide 14. I'd like to highlight some of the work that we've undertaken towards our goal of producing dependable investment outcomes. We have world-class investment teams, and they have overwhelmingly demonstrated industry leading results, exceeding both benchmarks and peers since the merger. While the downturn was a shock in many strategies and admittedly set us back in some places, long-term investment performance remains strong, and our teams remain stable and focused. We're pleased that our 1-year performance numbers have improved since last quarter.

In the first half of the year, we have taken steps to further strengthen our investment team. We've recruited some excellent talent. Greg Wilensky joined us earlier this year as the Head of U.S. Fixed income; Matt Peron joined us in April as Director of Research. And in addition to those crucial positions, we've made several high-quality additions to our already strong group of analysts. So we're very pleased that we continue to be able to recruit the talent at the top of the market, the very best that we see in the marketplace.

Turning to Slide 15. We take a look at how we have developed our client experience and enhanced our global distribution platform. As you know, Suzanne Cain joined us as Head of Global Distribution just over a year ago. And she's brought real energy and focus and globalized what to a substantial degree had been pretty regional efforts. She's revitalized and consolidated her teams under a truly global distribution umbrella.

What this has enabled us to do is to take a more focused and strategic approach to global distribution. That includes both products and clients, and it stands on our ability to leverage our client tools more globally. As a small example of this, in the U.S., we have our portfolio construction services portal, our PCS, which is a dedicated award-winning service that we offer intermediary clients. And it's very, very popular and well received in the U.S. We've just recently launched that in the U.K. and made it available -- started making it available anyway to U.K. clients. It's been well received, and we're very optimistic that, that will enhance our ability to build the right kinds of relationships with U.K. clients.

Look, we recognize our flows are not where we aspire or need them to be, particularly, in institutional, which, as I mentioned earlier, has seen a frustrating second quarter. But our efforts are beginning to pay off in many important ways. Annualized organic net growth in our intermediary channel for the quarter was 3%. Our gross sales momentum is strong, and we've substantially recovered from the market dislocation in March.

We're capitalizing on a strong list of focused products with high-growth potential. We're launching select new vehicles to ensure our products have the appropriate global reach. For example, in the quarter, we extended our market-leading global sustainable equity offering to the U.S. with launches of a Forty Act and an SMA. We also launched our global multi-strat fund in a UCITS structure and with the Australian domiciled feeder for distribution in Europe and also Asia Pacific.

Despite elevated year-to-date outflows in institutional, despite the fact that the COVID crisis has created delays in searches and in funding of one business, we remain optimistic about the potential we see across the strong and diverse pipeline in our institutional business for the second half of the year.

In addition, we continue to make changes and globalize our institutional business to further enhance how we successfully work with clients who often share common objectives and face common challenges despite the fact they're in different places around the world. And we're learning and positioning to do better in our institutional business globally.

Our distribution efforts are complemented by our client experience program, where we've been enhancing and redesigning our most important client journeys. The improving feedback loops that we're building are driving improved client experiences that we intend to move to market-leading status. Done well, we're confident that this global client-centric approach will produce more sustainable relationships, allow us to increase market share and build longer duration client assets for everyone's benefit.

Turning to Slide 16. I'd like to highlight some of the work we've been doing around increasing focus and driving efficiency in our business. We operate a complicated global business. It's diversified across regions, across channels, across products. We believe it is critical for us to keep a focus on what's important to have strong prioritization to operate with excellence and invest in the best infrastructure to support our teams around the world.

Looking at focus, I'll give you a small selection of initiatives that we've completed. We wind down our Australian equities product. We divested Geneva. We outsourced some of our middle and back office functionality to BNP Paribas. On the efficiency front, we've moved largely to a single global operating model, maintaining global platforms underpinning our business. All the while, we've maintained a balanced approach between costs and investing selectively.

Finally, as I look to the future, we're undertaking a host of actions to strengthen and modernize our infrastructure, which, among other things, include, implementing a major upgrade to our OMS and portfolio risk systems. We're enhancing and modernizing our data architecture and our data stewardship. We're upgrading our CRM and our client analytics. These are important investments and will help drive towards the goals of simple excellence.

Let me remind you that we delivered $125 million in merger-related cost synergies ahead of schedule. And while we are maintaining cost discipline and efficiency isn't a destination, it's a journey and what we need to do is keep pressure on that. So we're not going to sacrifice making the appropriate and necessary investments in order to deliver simple excellence. But we are going to renew and we dedicate our focus, ask ourselves the hard questions around our cost structure. And as I said, I'll be getting back to you with the results of that balance in future quarters.

Slide 17 covers our 4 strategic priority of proactive, risk and control environment. Frankly, if you don't do this, you're not going to get a chance to do much else. Having a strong proactive risk and control environment, a strong compliance culture is necessary to maintain the trust of clients, to maintain the trust of regulators and to deliver for our owners and our employees. It's just essential. So I won't go through the specifics highlighted on this page. But know that it is a crucial thing for us, perhaps especially during this time when so many people are working from home, that we maintain a focus on proper compliance, proper risk, proper control environment.

Turning to Slide 18, where we give you some insight into new growth initiatives. Our expansion strategy is centered on leveraging current investment and distribution strengths. That means we're largely led by strength combined with where our clients are moving. We're focused also in that effort on delivering profitable growth.

On the product side, right now, we're supporting our growth in the ETF business, where we've already seen really good momentum. Our VNLA and our JMBS ETFs rank 5th and 15th in year-to-date flows out of over 100 actively managed fixed income ETF. And today, in Australia, we listed our second active fixed income ETF in that market. Regionally, we are committed to expanding our presence both in Asia Pacific and in LatAm, where we see increasing client demand and underlying growth characteristics that can help us achieve our aspirations.

Finally, we remain alert to other expansion opportunities, which complement our strategy and our operating model.

In conclusion, before handing over to the operator for questions, I'd like to wrap up my view of the second quarter for you. Despite extraordinary challenges driven through significant extent by the global COVID-19 pandemic, we've delivered strong financial performance in the second quarter, and our long-term investment performance remains solid. Our intermediary channel remains strong with $900 million of positive net flows and a 3% annualized organic growth rate for the quarter, and it's driven by a really nice diverse set of products and across a diverse set of regions.

Progress across our business in this quarter really was masked by recent institutional outflows, but we continue to have good opportunities in pipeline to improve those institutional flow results in the future. We are convinced that we are on the right path to organic growth and to increasing profitability with our focus on our strategy, simple excellence.

We will renew our strong focus on costs, balanced against appropriate investments to achieve simple excellence. We're confident we're on the right path to deliver for our clients, our owners and our employees as well as to continue to make really positive contributions to the communities in which we operate.

With that, let me turn it over to the operator to get your questions.

[Operator]

[Operator Instructions]

And we'll take our first question from Ken Worthington from JPMorgan.

[Kenneth Worthington, analyst]

I wanted to follow-up on your comments on the institutional business or institutional distribution. The assets there contracted this quarter, while other channels are growing. We know INTECH is a big part of that institutional channel. But at this point, it's less than half of the assets. So how are the non-INTECH parts of your institutional distribution performing? And maybe what is the path to growing institutional assets even if INTECH continues to suffer outflows?

[Richard Weil, executive]

Thanks, Ken. Nice to hear from you. Institutional flows were about -- well, just a little bit less than half INTECH and then it was a fairly diverse set of other things. We mentioned, I think, already in the comments that we had a substantial redemption from a strong multiproduct client with whom we continue to have a great relationship, but they were derisking their portfolio, that was part of it. We had a redemption in our global value strategy out of Perkins in Chicago. We had some in other places as well. It was sort of a smattering of, to me, somewhat surprising, hopefully, one-off events that nailed us in this quarter.

Our institutional business is not as strong as we needed to be. But we think with Suzanne Cain's leadership with Nick Adams, who runs that business out of London, we're taking the right steps to strengthen it. And clearly, looking at our contacts and communications with clients, we have opportunities ahead to do substantially better than this mark, but that has to be delivered, as Roger likes to point out that you don't count it until the cash comes in. But we're taking steps to strengthen the process, strengthen the technology, strengthen the team for the non-INTECH institutional business. And we're confident that's going to work. But the institutional business takes time, and it's subject to lumpy flows one way or the other. And in this case, in this quarter, the lumpy flows were against us. And so we're just going to rededicate ourselves to making sure that doesn't happen again.

[Kenneth Worthington, analyst]

Okay. And then on the direct channel, you reopened the direct channel. I think while it was closed that maybe Janus didn't invest in some of the basic tools that some of your direct channel peers were making. So why have the risk to the intermediary channel from opening the direct channel diminished? And are you considering investing in the direct channel? And if so, what are you planning?

[Richard Weil, executive]

Yes, we closed the direct channel in 2009 when investor preference has shifted and investors changed their choices from doing business with a single fund company to doing businesses with platforms that offered them a choice of many, many different asset managers of funds. And we were concerned, as you pointed out, I think, about the potential for competition between adviser-led distribution and our direct distribution. And so since 2009, that's been closed.

We've now reopened the D share class on July 6. And it's still too early to assess how effective that's going to be in improving flows in our direct channel business in the U.S. but it's not a huge investment in sort of competing with Fidelity. It's a way to better serve the needs of the existing shareholders and then folks close to them. It won't be a broad open retail push across the United States. But we think there's a good chance that we can improve the flows in our historic direct business with this moderate effort on reopening. And it's just too early to say if it's going to work, but we're optimistic.

[Operator]

We'll move on to our next question from Ed Henning at CLSA.

[Ed Henning, analyst]

Just a couple from me. Just further onto the flows. Obviously, you've touched again on the strong pipeline and what you're doing there. But can you just run through gross sales and the movement, especially maybe from month-to-month to get a feel of how that's tracking, especially in equities? Because if you look at equities, on the gross sales have trended down for the last 3 quarters on Slide 24.

[Richard Weil, executive]

Yes. I think gross sales -- gross sales have moved around certainly in the quarters. One of the biggest effects of that is what's happening in the relevant marketplaces, especially in retail, where you see gross sales, we're a pretty substantial participant in most of the large retail markets that are important to us around the world. And we're not going to escape huge trends that happen in those retail marketplaces.

I don't think there's a bigger message to the gross sales number than that. We're not drawing one from the small changes that you see. It has a lot to do with investor appetite. But as we've said, our investment performance remains strong, and we're going to be subject to things like COVID in the first quarter and some summertime seasonality in the second quarter, and you're going to see some of that across every player in the industry. But we're not drawing big messages from the changes in gross sales at this point.

[Ed Henning, analyst]

And just on that, with obviously COVID hitting early in the quarter, did it improve towards June -- towards the end of the quarter?

[Roger Thompson, executive]

Not relatively, it's -- yes, there's ups and downs in different markets. So I think the -- I guess right at the beginning, we were still coming out. So April was -- May and June were probably better than April. But again, I wouldn't draw any huge lines from it.

[Operator]

Our next question comes from Mike Carrier from Bank of America.

[Michael Carrier, analyst]

I just have one. Roger, I think you mentioned just on some of the U.S. growth strategies, I think on like the SMID side, some weaker performance. And I think you just indicated, like on the second half, it could impact flows. I just wanted to clarify, like, was that on the institutional side or would you say more on the intermediary side? I know you just like raising a flag just because the performance is a little weaker. So you could see something or if there was something like actually already known, I mean, that could impact the outlook?

[Roger Thompson, executive]

I mean we -- yes. Thanks, Mike. Yes. Thanks for clarifying or asking. I think we've got a range of strategies. There's some things that are fantastic. Our overall performance, as we've talked about, is pretty damn good. There's some things which we think are going to move faster. European equity, I'd say, is on the front foot for the first time in a while. So that's great to see. And you're starting to see that come through in our European flows. But our U.S. SMID and MID strategies, which have been fantastic for years have had a tough few months. So I think we're just recognizing that they're big strategies and short-term performance has been pretty challenged, but they've been fantastic strategies for a very long time for clients. But I guess, we're just putting that out.

[Richard Weil, executive]

And it's retail, it's not institutional.

[Roger Thompson, executive]

Yes, not in institutional. Yes.

[Operator]

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

[Simon Fitzgerald, analyst]

I've just got one. Dick, you mentioned before that you're going to be doing a review of how your cost structure could look and sort of a deep dive into how that cost structure might unfold. I'm wondering you to elaborate a little bit more whether this is part of a wider review about products and strategies and whether this may therefore lead to lower teams or a small amount of headcount or anything like that? Maybe you could just sort of give us a little bit more of a feel about what's behind that?

[Richard Weil, executive]

Sure. So this is a constant effort when you're managing a business, and it's been a constant effort for us. I gave some examples in my earlier comments about some areas where we've simplified the business and step back from some things that we were previously doing. And we'll continue to look at choices like that on an ongoing basis. And we also look at trying to find more efficient ways to continue to deliver the BAU responsibilities and improve the quality of client service. So basically, what we're saying is we think 3 years on from the merger, a, and b, in light of the lessons that we're learning from working remotely and the power that the technology can have for our business, we think it's a really appropriate time to sort of renew our commitment to that exercise. It's not a new exercise. It's a continuation of what we've been doing. But we'll raise it up on the priority list. We'll talk about it more and we'll drive to conclusions that we can come back and share with you all. And we haven't pre-judged anything in terms of whether there are choices to be made about further simplifying the business. Those are -- but those are important questions to ask, and we won't shirk from asking them.

[Operator]

And we'll take our next question from Dan Fannon from Jefferies.

[James Steele, analyst]

This is James Steele filling in for Dan. So just firstly, thanks for providing some additional color on where the institutional outflows are coming from. And I understand the 1 -- I think it was $1.6 million EMEA client derisking. I'm just curious if -- especially since those aren't performance related, if there's any opportunity to keep those assets in-house, maybe move to a different strategy, especially if the derisking activity is going to continue?

[Richard Weil, executive]

Yes. Good question. It's the same question I ask when I see a flow like that since we have a great relationship with the client. We didn't happen to succeed in keeping those assets in-house at this time, but it's what should be on all of our minds and what we're trying to do. And obviously, we have plenty of more conservative choices for a client who's reallocating their asset allocation. But in this case, the funds left, they didn't come back to us. But you're right to highlight. We have to do a better job of continuing to try and keep those flows in-house in our institutional business. And it's terrific that we've built this great, strong relationship with the client. And we look forward to being able to recapture maybe some of those future flows back in other ways in the future. But this -- in this instance, we weren't able to keep it in-house.

[James Steele, analyst]

Okay. And then just as my follow-up, I believe you mentioned in the prepared remarks, it sounded like there is a delayed funding in one of the institutional businesses related to COVID. I was hoping you could quantify that or provide any additional color on asset class or if that's supposed expected to still fund this year?

[Richard Weil, executive]

No. No, not really on a specific client-by-client basis. But what I was trying to indicate is, look, last quarter, we came to you when we said we felt that the institutional pipeline was looking better than it had looked in a while. And then we come this quarter, and we say the institutional flows were pretty substantially more negative than what we wanted or expected. And we're frustrated by that. And we're just trying to be transparent about those 2 truths and say some of the stuff that we were hoping to achieve it's still hopefully coming, but a lot of clients have gone slower through their process of moving from pipeline and finals to funding. And that's a fairly broad truth. Maybe it's related to changing the processes to working from home or your guess is as good as mine in many ways. But we have noticed across the institutional business that the process of moving from pipeline to final decision to funding at each stage has gone a bit slower than it has in some prior times. And so we're still hopeful that we have good opportunities to do better on a go-forward basis. But we have to deliver, and we have to prove it. We're just trying to be transparent with you through that process.

[Operator]

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

[Nigel Pittaway, analyst]

Just first of all, just focusing a little bit more again on the intermediary channel. I mean, obviously, you're talking about $900 million of flows and 3% growth. But I mean, it's still sort of a relatively small number compared to the level of fund that you have in that channel. I mean -- and you've obviously flagged the headwinds from SMID and mid-cap growth, but some growth in European equities. I mean, do you think there's sort of any possibility that this could start to grow more substantially in reasonable time frames? Or is it just sort of a slow burn and it's very difficult to see that moving forward any more than it currently is?

[Roger Thompson, executive]

Yes, Nigel, yes, absolutely is the answer. And I think we showed that going into -- or through the whole of the back end of last year, remember, intermediary flows turned positive at the half year. And by the fourth quarter, we did $1.7 billion of positive flows. And as we said on the first -- on the first quarter call, the first 6 weeks of the year was at that level or actually slightly ahead of that level. So we're progressing pretty well at that stage. We then fell into a hole as did everyone else in the second 6 weeks. To do $1 billion of intermediary flows compared to the first quarter, we're pretty happy with to be honest. But it certainly isn't where we intend to stay, no. And we've got a lot of things going the right way, whether they be in fixed income, whether they be in equity, whether they be in multi-asset with balanced with U.K. absolute return. So there is a good trend there. We've got a focused list of products, which are performing very well.

You're right, we have called out with U.S. SMID and MID that they may slow us down a little bit in the second half, but we've got an awful lot of things that are firing.

[Nigel Pittaway, analyst]

Okay. And then the second question is just on the LTIP. I mean as you went through, you said it was out of your control and driven by markets. But if we do look at what you've sort of shown us on Slide 40, it does suggest that 2Q has taken a fair sort of probably more than its fair share would maybe be a way to describe it in terms of LTIP and what's coming in the remaining 2 quarters. So firstly, is that true? And secondly, given that you're sort of -- the related cost-to-income -- sorry, compensation ratio was mid-40s probably struck at the low of the market, isn't there a scope for that to be a bit better now moving forward?

[Roger Thompson, executive]

For the second half of the question, the answer is yes. Our guidance going into the year is low to mid-40s. We said it was more like mid-40s with where the markets were at the end of the first quarter. With where they are now, you should expect it to be more low to mid-40s as we guided at the beginning of the year.

In terms of the LTI charge in the quarter, that purely is the mark-to-market on it. Some of that is hedged, and therefore, that's part of the investment gain you see below the line. So you've just got a -- you got to take the rough with the smooth, with that, in Q1, we had a very low figure, and that number came down in Q2, it goes up. So as far as saying, it's sort of out of our control. We hedge what we can, and the hedge part of that comes through below the line. So I think you should look at the first half on average. And as you say, in the appendix on 40, we've shown what the future charges would be given markets where they are at the moment.

[Operator]

And our next question comes from Alex Blostein from Goldman Sachs.

[Alexander Blostein, analyst]

So Dick, appreciate the strategy update. And I guess on this journey to simple excellence, what are the key financial and operating targets we should keep in mind? And I guess, targets that you all spread up for yourself and your management team as you progress through this process and over what time frame?

[Richard Weil, executive]

Yes. We have internal measurements for the different parts of the story. I've tried to give you a sense of some of the underpinnings in this call. But I don't have more specific stuff to give you. Look, the big score of the scoreboard is earnings and flows. And what we've told you is the big score is we need to get to positive organic growth and growing profitability. And those are the main metrics that are targeted in the strategy of simple excellence.

And I don't think I can do a better job of highlighting the underpinnings of that than I have done.

[Alexander Blostein, analyst]

Okay. I guess the...

[Roger Thompson, executive]

I guess the only other thing I'd add -- sorry, Alex, the only thing I'd add to that is around -- it's not -- we don't look at flow in isolation. We look at -- we look at quality flow. So it is about growing the profitability of our business. And I think the fee margin is something which shows that the assets we're adding are quality assets. And again, that's something we look to do over a period of time.

[Alexander Blostein, analyst]

Yes. No, of course, that makes sense. I guess as a follow-up to that. So when you talk about the second or I guess, one of the pillars from this is revisiting the cost structure, again, more holistically. And I guess one of the things you mentioned is OMS, portfolio risk systems, data, et cetera, can you just remind us, I guess, what are you guys spending across these buckets today? Is it all in-source or is it outsourced? And what is really the opportunity you see there to rationalize some of the kind of tech stack and some of these services?

[Roger Thompson, executive]

Yes. Let me pick that up. They are pretty chunky investments, as Dick said. They are in our guidance, so you shouldn't be concerned that there is a bunch of costs coming down the track. And some of those things should have some improvement around the tech stack, as you point out, in our data and allow us to further simplify the business, which, as Dick pointed out, is part of the strategy. But the main reason we're doing those things is for improved tools for our fund managers around CRM, for our sales forces. And so it's around giving access to the best information. We want to have the best technology, and we've got some work to do there. So they're the investments we're making, but that is baked into the current costs. And yes, we'd like to think there's some simplification of the back end of it. But it's more around improving the tools for our staff.

[Richard Weil, executive]

Yes. I'll just add, look, we need to be excellent or we should all go home. And in order to be excellent, you got to have the proper tools and they have to be implemented in a simple way, which can -- will make them cost-efficient and also more reliable. And we have scope to do much better across some of our infrastructure systems and data architecture and stewardship and those sorts of things. And we're making investments, and we'll continue to make investments in those areas. And that's about driving to simple excellence. It's not as much about reducing the cost base. But in order to fund those investments and also to continue to deliver distributions and share buybacks and such to our owners, we've got to be as efficient as humanly possible on how we're spending the money. And so it's a balance, right? And it's not a new balance, but we're renewing our commitment to that to say let's go back and re-ask the hard questions, and we'll get back to you about -- both sides of that about progress we're making on the retooling of the infrastructure and making the appropriate investments as well as the cost control side in the future.

[Operator]

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

[Andrei Stadnik, analyst]

I just wanted to ask 2 questions. Firstly, if any, call, in terms of where the rate of flows actually are ceding to start the September quarter? Where they've headed in the month of July?

[Roger Thompson, executive]

Andrei, we don't really talk about monthly flows. We can see that publicly. But as we said, our flows -- the flows in -- the intermediary flows in the third quarter are positive in all 3 regions across the U.S., in EMEA, in the U.K. and the U.K., particularly strongly, and in Australia. As Dick mentioned, we just launched a new fixed income ETF in Australia that will hopefully add to those intermediary flows. We've -- while we've been on the call, we've just filed a preliminary registration for a new CLO ETF in the U.S. So these are all things that we're moving forward with. But we're seeing flows across all regions.

[Andrei Stadnik, analyst]

My line must have been patchy earlier. And another question, a fairly sort of kind of mechanical one. But in terms of the operating margin outlook for FY '20. On the last call, you mentioned lower third in spread in margin would be more likely, but we've seen some things on the cost and revenue side, maybe headed a little bit better. So what should we be thinking about in terms of operating margin at this point?

[Roger Thompson, executive]

Yes. I think a similar answer to my question to Nigel earlier. The guidance we gave at the middle of the year -- at the beginning of the year was -- it was mid-30s, and we revised that down when the markets were lower. So you should be expecting mid-30s margin sort of similar to 2019.

[Operator]

Our next question comes from Robert Lee from KBW.

[Robert Lee, analyst]

I was hoping if you can maybe drill into the intermediary channel a bit more in the U.S. If early placed will have better success. Could you maybe kind of parse that down a bit? I'm curious, so in that there are so many different types of channels and products, they had -- I don't think the sales there kind of just [Technical Difficulty] more traditional funds versus SMAs or more model portfolio -- products that go into model portfolios? And then also, any color on kind of wirehouse versus kind of the RIA channel, in the direct platforms? Just trying to get a feel for where momentum is and the opportunities there.

[Roger Thompson, executive]

Rob, a bit difficult to hear you. So perhaps we can follow-up with you afterwards. I think it was around the different parts of U.S. intermediary. Our SMA channel is certainly growing well. But let's pick up with you. We'll pick up with you off-line.

[Operator]

And we will be taking our final question today from James Cordukes from Crédit Suisse.

[James Cordukes, analyst]

Just an inquiry on the balanced fund, you've obviously had some changes there, interested in knowing what the response of the clients has been and whether there's been any engagement with the rating houses and how comfortable they are with the changes to the team there?

[Richard Weil, executive]

Sure. So yes, we've seen that Marc Pinto has announced that at the end of this coming March after a 26-year career, he'll be stepping down from the fund. The client reaction has been as good as we would hope at this point, but obviously, it's really too early to say what effect that will have on a go-forward basis. Marc's successor has been a co-portfolio manager with him for a number of years. Jeremiah Buckley has been an excellent co-portfolio manager with Marc. So if you drew up a sort of an ideal transition, I think this would probably fulfill all those conditions that you might describe. That said, a transition is always a moment of higher risk for one of your big, very successful strategies. And certainly, Marc has been just absolutely first-class for our business and for his clients in the balance fund for a long, long time, and he will be missed as a person, as a leader, as an investor. But what he's done for the firm is give us great succession in terms of a partner carrying on in exactly the same style and given lots of warning and doing all the appropriate things in terms of client meetings and communications to make sure that this goes as smoothly as possible. So fingers crossed, it is a transition and transitions are moments of heightened risk, but I don't know how we could have done this transition better.

[James Cordukes, analyst]

All right. And maybe just one for Roger on the buyback. I mean, you completed about 10% of the $200 million buyback in the last quarter. And so you're still committed to it. Should we expect purchases to increase in future quarters to make that up? And I guess tied into that is, what have you -- what are your plans for the proceeds from the Geneva acquisition, if you could remind us about again?

[Roger Thompson, executive]

As you say, we did go a little bit slower in Q2, and that was, as we said that at the beginning of the quarter, obviously, there's a lot of uncertainty and markets were at a low. So we did go slower this quarter. We are also kept out of the market a few days because of the 5% rule in Australia. So the buyback was pretty low. And with market levels where you are, then you'd expect us to be stepping that up in Q3. The buyback is a $200 million buyback authorized through -- through the end of Q1 next year. So we've done about $50 million of it. So you'd expect to see us back in the market shortly at an increased level. But again, being very careful and looking at volatility. The Geneva piece is part of our regular cash and capital. So I guess it's part of the $200 million the Board committed to at the end of the first quarter.

[Operator]

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