Janus Henderson Group PLC

NYSE:JHG

Earnings Call Transcript 2018-Q4

[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 Fourth Quarter and Full-year 2018 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer period in the interest of time questions will be limited to one initial and one follow-up question.

In today's conference call, certain matters discussed may constitute Forward-Looking Statements. Actual results could differ materially from those projected in the forward-looking statements due to a number of factors, including, but not limited to, those described in the forward-looking statements and Risk Factors section of the Company's 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, Chief Executive Officer]

Welcome, everyone, to the fourth and full-year 2018 earnings call for Janus Henderson Group. I'm Dick Weil, and I'm joined by our CFO, Roger Thompson. In today's presentation, I'll first touch on what was accomplished during 2018 and then I'll provide an update on our focus for 2019 as we move out of merge integration and into business execution mode. after which I'll turn it over to Roger to review the results in some detail and following our prepared remarks Roger and I will be happy to take your questions.

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

First, looking at investment performance. Despite mixed results across capabilities, the majority of AUM outperformed benchmark over one three and five year period. More specifically, eight of the 10 largest U.S. managed equity and multi asset portfolios beat their benchmarks over one net of fees. So some early strong results were had in those large strategies and most importantly this performance is gaining market attention from our clients.

Over 60% of our mutual fund AUM is in the top two MorningStar quartiles over one, three and five years as of 31, December 2018. And finally, 55% of our U.S. mutual funds have a four or five star overall MorningStar ratings.

Second, as we continue to seek to expand our distribution efforts to better serve our clients, I want to call out some highlights around client relationships. First, we are gaining market share in U.S. equity category in the U.S. retail market, which is a great result. This is the largest market in which we do business today and our result in 2018 is very encouraging.

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

Third, in our multi-asset capabilities, we are seeing outpaced organic growth with 6% organic growth during the year, driven by strong net inflows in our balanced funds. Lastly, we are seeing early wins in new product areas including adaptive allocation, multi sector bond fund, absolute return income which are all very encouraging.

Finally a few comments on integration capital management and culture. I'm very pleased that during 2018 we were able to substantially complete our integration efforts. This delivery was nearly 18 months ahead of the original timeline we set out to achieve and was made possible by the very hard work and commitment of our many employees.

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

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

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

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

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

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

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

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

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

Over the near-term, we will be particularly focused on further building out of our multi-asset and alternative capabilities, our Asian business, ex-Japan and we also have some new developments in EPS.

We believe that by delivering excellence across these five areas we will be winning for our clients and we will be gaining market share in our business. As we progress through the year, we will seek to provide you with updates on how we are executing across these initiatives.

Now please let's turn to Slide 4. In addition to our priorities I also want to review our vision for our business, which guides us in our efforts. Naturally there is quite a bit of overlap between these two things.

At Janus Henderson, we are aspiring to be a firm that clients want to loyally invest with for many years and that shareholders seek to invest in for long-term. Our vision to fulfill this aspiration is built on three key pillars, first delivering excellent dependable investment results that outperform both the active and passive competition.

Second ensuring industry leading client experience, and third, enhancing the infrastructure built on a foundation of market leading technology and operational efficiency. This combination of vision and our priorities for 2019 will guide us as we manage our business ahead.

Before turning it over to Roger, let me last provide you with some comments on the outlook for Janus Henderson as I see it. In our industry there are always many factors that we can't control, markets, client behavior, industry trends, but one important thing is that we continue to make progress on the areas that we do control.

As we look forward, we do not expect the competitive pressures to ease, rather we expect them to become stronger. We also do not see a slowdown in regulatory change in our industry and we see no reversal in the increased volatility that the markets have demonstrated.

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

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

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

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

[Roger Thompson, Chief Financial Officer]

Thanks Dick and thank you everyone for joining us. 2018 was a year of effective continued transformation for the firm and ongoing challenges across the competitive landscape of market environments and our full-year results reflect these factors.

From a market perspective, 2018 saw a reduction of nearly $12 trillion of world market capitalization, 90% of which or $11 trillion occurred in the fourth quarter. Against this backdrop, full-year total adjusted revenues held up well and were 1% higher than the pro forma prior year at stronger management fees offset lower performance fees.

Adjusted operating margin for the year continues to be very healthy at 39%, virtually flat year-over-year. AUM did end the year 11% down from prior year driven by the negative impact of markets in the fourth quarter and full-year outflows of $18 billion.

That said, given that we have seen a meaningful improvements in the market since the end of December, we thought it would be helpful to provide a sense of where AUM sits today. This isn’t an update we will provide on a regular basis however following the drawdown of assets in December and the rise in January we thought it would be helpful.

As we sit here today, AUM is up roughly 5% from the end of the year, which reflects a combination of market appreciation and some notable improvements in net flows particularly in the U.S. retail business. Finally on the capital management front, during the year, we increased the dividend price to shareholders by 17%.

We completed $100 million of share buybacks and I'm pleased that today we are announcing that the Board is authorize a $200 million share buybacks which we expect to complete over 12 months. We will go into capital management a bit later in the presentation, but these results reflects the execution of plans we have been communicating with you since the mergers close.

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

Net outflows increased $8.4 billion in the quarter as a result of an increasing redemption among retail clients and a slowdown in gross sales, which the entire industry experienced in the quarter. We are also disappointed with the net flow results, we don't want that to take away from the accomplishments in 2018 as Dick mentioned.

Assets under management declined to $329 million at quarter end. Adjusted EPS of $0.59 reflects lower revenue due to the marketer declines, as well as the higher tax rates, which was largely driven by a true up in the quarter for the mix shift in regional profitability. Finally, we would spend approximately $119 million of cash to shareholders during the quarter by dividend and share repurchases.

Before getting into more detail around the fourth quarter results, I wanted to take a minute to recognize the great work that has been done by our employees on the firm integration assets. As we mentioned earlier, we are very pleased during 2018 we were able to substantially complete our integration and realized the $125 million in cost synergies as of the end of September.

This level of savings is greater than we originally forecast and it came nearly 18 months ahead of the timeline we set out to achieve it. This achievement was made possible by the hard work and commitments of our employees. So thank you to all of you worked for these efforts.

As I said previously, while there is still efficiencies to unlock looking our business some of which is still to comes from the merger, we will not continue to separately report on synergies as we want to focus on running our business for the future rather than entering on a backward looking metrics. Future efficiency sales continue to come through in our results and our margin.

Moving to Slide 8 on our investment performance. Overall investment performance in the quarter was mixed across our capabilities. We saw continued strength in the performance in our equity and multi asset capabilities across one, three and five year time periods, we don’t see weakness in the one year results to several of our largest fixed income alternative strategies along with ongoing one with Intech.

In our fixed income [Technical Difficulty] we have some modest underperformance in the core platform strategy and in the alternative capabilities the UK [Technical Difficulty] turn fund finished behind its benchmark for the year.

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

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

Now turning to total Company flows. For the quarter, net outflows were $8.4 billion compared to $4.3 billion last quarter. This result reflects a very challenging market environment that we saw during the quarter.

The outflows in the fourth quarter were driven by lower gross sales a trend we have seen across the industry during the quarter, and investors did not put money to work in risky asset classes due to the significant market volatility.

Additionally, we also saw an increase in retention from our intermediary clients in North America and EMEA. These retentions were most significant in our international equity, global equity and UK Absolute Return strategies.

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

Moving to Slide 10, it shows the breakdown of flows in the quarter by capability. Equity net outflows in the fourth quarter declined to $4.1 billion. This decline was primarily in our intermediary business and was partially caused by the increased reductions in the U.S. this elevated level of outflows looks similar to what the industry as a whole has experienced during the quarter.

Flows into fixed income improved slightly and were negative $1.3 billion for the quarter. The improvement in the quarter was led by positive flows and the absolute return income products. We are excited about the opportunities around the globe to this strategy and in 2019 we will be launching additional vehicles across regions to meet the needs of clients. This strategy is another emerging example of what we expect to be able to deliver as a combined firm in the future.

Outflows of Intech were $1.1 billion due to lower gross sales during the quarter. For the fourth consecutive quarter, multi asset flows remain positive at $300 million this quarter. This results continued to be driven by the balance fund reflecting the strategy’s exceptional investment performance and the global strength of our distribution team.

Finally alternative net flows decline to a negative $2.2 billion the decrease was attributable to outflows from our UK absolute return and property strategies. Slide 11, is our standard presentation of the U.S. GAAP segments of income.

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

Full-year adjusted operating margin continue to be very healthy of 39%. Adjusted diluted EPS for the year was $2.73 compared to $2.48 in 2017. The 10% increase in adjusted EPS was driven primarily by reduction in the full-year tax rates as a result of the Tax Reform that took place in the U.S.

Now looking at a quarter-to-quarter comparison. Our fourth quarter adjusted financial results primarily reflects the weak market conditions during the quarter. Average AUM decreased 8% over the third quarter driven by negative markets, outflows and negative currency movements.

Lower average adjusted drove lower management fee revenue, which is partially offset by the expected seasonality and performances fees, resulting in a 6% decline in total adjusted revenues from the prior quarter.

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

On Slide 13, we have outlined the revenue drivers for the quarter and also the full-year. First looking at the quarterly change and adjusted total revenue. Lower average assets were the biggest driver of the quarterly change resulting in a 9% decrease in management fees. Net management fee margin for the fourth quarter was 43.5 basis points down compared to the prior quarter and the same period a year ago.

The decrease is primarily due to mixed shifts resulting from the negative markets during the fourth quarter. This decrease is consistent with our continued expectations that we will see roughly a one basis points decompression a year.

Over to the full-year despite the negative markets in the fourth quarter and a meaningful decline in performance fees, total year-over-year adjusted revenue increased 1%.

On Slide 14, given the significant change in performance fees year-over-year, we wants to walk through 2018 results and highlights opportunities for 2019. Performance space in 2018 was $7.1 million down from the pro forma $84.7 million in 2017. The biggest factors in the decline, were the performance fees earned from the UK absolute return, and the European equities strategies.

Additionally, as a result of underperformance of Intech, we did see lower performance fees from these strategies in 2018, which you will see reflected in the year-over-year change in segregated mandates category on this page.

Whilst we can’t predict what performance space will look like in 2019, there are a few items of notes as we begin the year. First, while the 2018 underperformance for the UK Absolutely Return strategy will impact 2019 performance fees as the fist needs to recapture this underperformance before the performance fee can be earned. We are encouraged that during January this strategy has made up well over 1% of underperformance thus far, so it's off to a good start.

Secondly, on our U.S. mutual funds token fees, the investment performance in the first quarter of 2016 was particularly weak and this period will roll out to the calculation this quarter. [Technical Difficulty] calculating these performance fees, there is potential for improvement that dependant on what performance is for the first quarter of 2019. As of the end of January, relative performance looks good for most of these larger funds.

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

Moving to adjusted operating expenses, and the non-operating line items in Slide 16. Adjusted operating expenses in the fourth quarter were $277 million. Adjusted employee compensation, which includes fixed and variable costs was flat compared to prior quarter. While there was no change in the prior quarter there were few moving pieces that offset.

During the quarter both fixed and variable compensation was down. The later as a result of lower profits, due to the weak financial markets in the quarter. The impact of these two items was offset by year-end adjustments to our cash and non-cash payout mix.

Adjusted LCI was down 76% in the third quarter, primarily due to the impact from mark-to-market adjustments and the impact of departures during the prior quarter. In the appendix, we have provided further details on the expected future amortization of existing grants along with an estimated range for 2019 grant BTUs new models.

The fourth quarter adjusted comp-to-revenue ratio was 41.5%. For the full-year, the total comp-to-revenue ratio was 41.4% in line with the guidance we provided throughout the year as low 40s. Turning to adjusted non-comp operating expenses, collectively there was an increase of 9% quarter-over-quarter. The main drivers of the increase were marketing which saw a seasonable pickup in spend and slightly higher G&A costs.

Finally, our recurring effective tax rate for the fourth quarter was 28.9% which is higher than our prior guidance. A higher tax rate during the quarter was primarily driven by year-to-date trough in the quarter for the mix shift in regional profitability as a larger portion of firms’ profits were being generated inside the U.S.

For the full-year, the firm’s effective tax rate was 24.5% slightly higher than our guidance again, due to a larger portion of the firm’s profits being generated in the U.S. The fourth quarter adjusted EPS of $0.59 is down as of the third quarter and the same period a year ago.

Looking forward to 2019, I want to take a few minutes to provide some insights into what we anticipate in our expense base. With AUM start in the year at only 11% we know we will see additional pressure on margins, all other things being equal.

As a management team, we are focused on balancing the appropriate amount of investments that’s required to grow our business and maximize profits over the medium-term with sound financial discipline and awareness of margin pressure. But it’s important to note that we run the business with an emphasis on the long-term rather than quarter-to-quarter margin results.

With that said, let's walk through a few points for your models. First looking at compensation, as we have realized the cost synergies of the merger, we have seen fixed comp come down and we will continue to see the variable comp pool flex the business results. That means we would expect an adjusted comp-to-revenue ratio to continue to be in the low 40s.

Second, as we previously disclosed non-comp expenses in 2018, saw an exceptional amount of increase year-over-year and looking forward we do not expect that to continue. In 2019, even excluding the $12 million legal outcome we had in 2018, we would expect to see non-comp expenses flat year-over-year.

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

Lastly, Slide 16 is a look at our Capital Management since the merger. We remain committed to returning excess cash to our shareholders and on this slide you can see those results over the last seven quarters as we have been able to gradually increase the payouts while retiring outstanding debt.

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

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

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

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

At today share price, we do not see many opportunities that provides compelling an option but our own shares do. And with this in mind, we are very pleased to announce today that the Board has authorized an additional on-market share buyback up to $200 million over the next 12 months. In addition to buyback, we are paying a fairly healthy dividends which offers a very attracted yield to shareholders at the current price.

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

[Richard Weil, Chief Executive Officer]

Thank you, Roger. I just now want to turn for a moment to one last thing the retirement of Bill gross. As was recently announced, Bill approached us and let us know that he has come to the point where he would like to focus on the work of his very substantial family Charitable Foundation, focus more on perhaps giving away money than earning it in the last chapter for him.

Bill is [indiscernible]. I don't think anybody has ever made more money for their clients in the fixed income industry. He is the best there has been and it has been an honor for us to work with him and have him on our team here at Janus Henderson and as he goes off to the next chapter in his life, we wish him well and mostly we say thank you for the time he has shared with us.

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

[Operator]

Thank you. [Operator Instructions] And we will take our first question from Brian Bedell with Deutsche Bank.

[Brian Bedell, Deutsche Bank]

Hi good morning. Maybe to start off with the fixed income strategy, just overall I know the performance weakened a little bit in the one year period, but any overall change to that strategy and just as you also think about the development of the new growth initiatives is there any - are there - you mentioned I think there is more vast and alternative [indiscernible] but anything in the fixed income area that you would focus on as well?

[Richard Weil, Chief Executive Officer]

Yes. Thanks Brian. First I guess I would say that we have diversity of performance across our fixed income landscape. We have a number of our strategies which are fairly conservative credit based management and through the really hard period of returns and strong credit markets they struggled to keep up, but have a little bit less than exciting track record right now.

And complementing that, we have a few areas that are strong bright spots, one is our multi sector income strategy and another one is our absolute return income strategy. And those are strategies that we think have opportunity to grow in various markets around the world in particular.

I mentioned earlier, the absolute return income strategy where we are opening some new vehicles in Europe and elsewhere to make sure that we have the right legal structure to make those properly available to clients who are interested.

So there are some really nice bright spots in our fixed income business, but also some challenge in some of the more conservative credit based strategies that have shown modest underperformance for a while now.

[Brian Bedell, Deutsche Bank]

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

[Roger Thompson, Chief Financial Officer]

Okay. Brian its Roger, thanks for the question. I guess first I would say is that I would normally answer that question, but we don’t talk about short-term flows, but there has been a very dramatic change in markets going - as we went through the fourth quarter and going into Q1. So that’s why we updated a little bit in the script and I'm happy to answer the question now.

The turndown in the fourth quarter particular December in the U.S. was pretty dramatic and the comeback in January has been pretty dramatic. So again you will see these flows publicly shortly, but we are in positive flows in the U.S. in January.

In Europe, outflows have slowed, but we are still in small outflows. Institutionally as you say, it’s a lumpy environment and two soon to tell, we have got a pipeline of interesting prospects, I guess what I can tell you is we are not sitting on any big losses as we sit here today.

[Operator]

Thank you. And we will move on to Ken Worthington from JP Morgan.

[Kenneth Worthington, J.P. Morgan]

Hi good morning. Thank you Dick for taking my question. You have executed on the promise cost synergies. Can you share the plans for driving revenue synergies from the combination of Janus Henderson in 2019? What I’m really after is, what are you hoping to accomplish from the combination this year from the merger?

[Richard Weil, Chief Executive Officer]

Yes. Well, first, I think we are starting to put away the use of the term synergies because it's backwards looking around two legacy companies that no longer exist and as we are through sort of the bulk of the integration process at this point, we are really just focused on managing our company ahead. And so you will probably find us not referencing synergies very much anymore either other costs or revenue.

But I do think that the promises we made in the merger around the power of having strong global distribution coupled with well performing products remains true and there is probably no better example of that than our balanced strategy which is gaining significant assets and markets around the world through different sales force.

We already mentioned ARIs another example of something that that I think through different sales teams that are legacy one or the other. There is significant interest there. Previously, we have seen significant interest in emerging markets sold by legacy teams from both heritage and I could go on.

So, we have said this before, you are always going to be able to point to bright spots and dark spots in our very diversified book of business and that remains true. But I think we see in the data lots of evidence that where we have well performing funds, we can deliver more of them across more markets effectively. And that gives us a reason to be optimistic and its why we believe we will prove out the value of the merger with stronger flows in the future.

[Kenneth Worthington, J.P. Morgan]

Okay. Thank you. Maybe second, we are seeing a step up of managers expensing the cost of research in the U.S., what are your thoughts about extending how you treat your team under research in Europe under method to the U.S.? So I believe you are on bundled in the U.S., but I don't believe you expensed the cost of research. So what are your thoughts there? And are there any lessons learned in Europe about bringing the cost of research on to your P&L here?

[Richard Weil, Chief Executive Officer]

Well, to take your last part first, there are certainly lessons we are learning in Europe where all the sellers, the providers of research and the consumers of research are trying to define sort of new market patterns and get together effectively and that as you probably know personally from JP Morgan's experience, this is a complicated restructuring of the markets for research and I would say that's still in flux.

We did a good job of estimating what that would cost on our P&L and in Europe and this past year, well done, Roger and team. And I think we have managed it pretty effectively, but the pricing, the structures and all that are in flux, and I think it's too early to talk about big lessons, but there will be lessons that apply in the U.S. if that markets changes structure to match Europe.

And I guess, following on that comment, we don't see that happening yet. It may happen in the future, but we don't have any plans currently to change how we are treating the research in the U.S. But we are aware that some other competitors have changed their treatment and we know how this happened in Europe over a reasonably compressed period of time and we see that could happen in the U.S., but so far we are not seeing a lot of strong demand out of the client side yet. So for us its watchful waiting.

[Operator]

Thank you. We will take our next question from Nigel Pittaway with Citi.

[Nigel Pittaway, Citi]

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

[Roger Thompson, Chief Financial Officer]

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

[Nigel Pittaway, Citi]

Okay, alright. So that actually impacts the long-term incentive timeline rather than the employee comp line. Does it, is that right?

[Roger Thompson, Chief Financial Officer]

It will reduced the future amount going throughout the LTI. [Multiple Speakers]

[Nigel Pittaway, Citi]

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

[Roger Thompson, Chief Financial Officer]

Roughly as we said on the call, so comp is down, variable comp is down with profits and that is offset by that the buyback cash drop mix.

[Nigel Pittaway, Citi]

Alright, okay. And then obviously you gave guidance for comp ratio, et cetera, but there was also the mention of the op margin, is that sort of still high 30s is what we can expect or?

[Roger Thompson, Chief Financial Officer]

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

[Operator]

Thank you. We will take our next question from Patrick Davitt with Autonomous Research.

[Patrick Davitt, Autonomous Research]

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

[Roger Thompson, Chief Financial Officer]

I guess the non-equity parts of our portfolio, so about half of our book is equity. The rest is pure equity, we have got the contact with e-book as well, but then we got fixed income and LTF. And also it's going to be, we go up slightly less, we have slightly less basis in the pure equity market because of that Patrick.

[Patrick Davitt, Autonomous Research]

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

[Richard Weil, Chief Executive Officer]

Yes. Obviously we have tried to be transparent that that this underperformance is significant and we are concerned about its effect. But we have also been transparent that nobody really knows and in AUM spaces a few decision makers and Intech's book a big institutional business can move a lot of money. And so we have called it a lumpy business for that reason and it remains so.

So we are not sitting on any big news at the moment as Roger said earlier, but we are obviously concerned that the underperformance will have destabilize clients and hopefully they will stick it through.

Often in the past Intech's best performances as come on the heels of some difficult periods and Intech's actually put up more reasonable numbers more recently. And so, we will hope that the client stick through some challenging performance, but we don't have a good way to predict it.

All I can tell you is that, we are on sort of high alert and making every extra effort to touch the clients and service the clients and answer their questions and concerns as best we can so that they have the full information as they make their decisions. But so far, we haven't seen big new trends out of their assets but again it's a lumpy business and it can change quickly.

[Operator]

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

[Andrei Stadnik, Morgan Stanley]

Good morning. I just want to ask my first question around investing in further growth. Can you comment maybe on the number of strategies and maybe the formal strategies that are on the incubation now versus one and a half to two years ago when the merger occurred?

[Richard Weil, Chief Executive Officer]

You know, we don't track a number, sort of strategies under incubation. We don't actually use the term incubation here. So I don't quite know how to answer your question. We as part of our effort to be focused, we are going to periodically prune the number of strategies. We have been and we will continue to do.

And that to us is just as important as adding new ones. We have an awful lot of well performing strategies, our successes is more determined by how we bring those to market and how we carry those forward than it is, bright new ideas. And so that's our first priority.

But we have a discipline around sort of trying to constantly prune our lineup and we follow that and I don't think that the overall number of strategies is probably changing in a radical way. But it's probably decreasing modestly as we prune.

As we said, we are also adding from time-to-time new ideas. Our ARI strategy is launched a new sort of more concentrated version of that absolute return income on the fixed income side and we have some new ideas coming forward and ETS space and elsewhere.

So, it's a balance of new and old and our commitment is we want to do the things we are really good at and that are going to matter to our clients so as we discover that maybe some of the things we have tried and haven’t worked so well, we will be focused on pruning as well as them.

[Andrei Stadnik, Morgan Stanley]

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

[Richard Weil, Chief Executive Officer]

Well speaking of Japan we didn’t have our biggest year last year in Japan. They have had an awful lot of years of good growth and last year wasn’t one of them. That said, we have a lot on the boil right now in Japan and we are hoping that as this current year progresses that we are able to do a lot more.

Our very good partners and owners Dai-ichi Life have committed to bring to market in Japan as part of insurance products. Our adaptive asset allocation run by Myron Scholes and Ashwin Alankar, which is a new product we have been building here in recent years.

And Roger I think mentioned that they are starting to see some early wins. And its excited that Dai-ichi Life has decided to make that a core part of some of its insurance products and bring that to market in Japan as they have publicly announced themselves.

And so that’s an opportunity and there are more. We had a big success with the Dai-ichi Life affiliate TAL down in Australia last year and we are hopeful that we will find ways to be a good partner for them and serve their needs and continue to grow that relationship.

So we have opportunities to work on and lastly, we mentioned that one of our significant growth initiatives has been to retool and focus on Asia ex-Japan and we hired a gentlemen named Scott Steele out of PIMCO to help lead that effort reasonably recently I guess it was at last year or maybe the end of the prior year.

[Roger Thompson, Chief Financial Officer]

June last year.

[Richard Weil, Chief Executive Officer]

June last year, and so he has been putting together a bit of a revised team and making some hires and we are hopeful that in the one, two, three years ahead they can start developing a positive momentum there to match the positive momentum we have seen in Japan and Australia.

[Roger Thompson, Chief Financial Officer]

I think the other bit to add will be around obviously intermediary sale in Australia as well as the talent mandate which is obviously a substantial piece of lumpy institutional business. We continue to see strong retail flows from the two strong fixed income businesses that we have in Australia two fantastic businesses.

And that's more in the model portfolio type of retail account, so small amount of money coming in every day into tactical income, absolute return income. And that will - and with the - obviously a return income class which is hat more leveraged version that they talk about, so it’s a really strong intermediary flows into fixed income in Australia which is really important for us.

[Operator]

Thank you. And we will take our next question from Craig Siegenthaler with Credit Suisse.

[Craig Siegenthaler, Credit Suisse]

Thank you. First just on the multi asset business, we have five star rated balanced fund is really performing [Technical Difficulty] it was actually up in 2018 that it looks like if the big trade is underway international equities and a little over a fixed income. So I'm just wondering are there factors you can attribute the strong performance to? And also as my follow-up, which investors segments are generating highest level inflows to this funds?

[Roger Thompson, Chief Financial Officer]

The balance strategy the investor segments that are most interested in that historically have been more of the retail sectors come more in the fund space than in institutional separate accounts, if that's what you are asking.

[Richard Weil, Chief Executive Officer]

That's now coming from around the world, we are seeing strong sales of that in Europe, some sales in Latin America, in Asia as well as into traditionally strong selling of that in the U.S. So that that really is - I talked about green sheets before and some of those turning to significant trees I guess that's one we are starting to see turn that way.

So I think growth, so next flow is balance last year across the world we are around $3 billion. And that’s the sort of thing we are looking for in the future is to more products like that that we can sell around the world through the distribution we have now got at Janus Henderson.

[Roger Thompson, Chief Financial Officer]

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

[Richard Weil, Chief Executive Officer]

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

[Operator]

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

[Simon Fitzgerald, Evans & Partners]

Good morning and thank you for taking my call. Just the first question relates to your comments in regards to U.S. equities intensive revival there, intensive interest. Just wanting to know a little bit more if you could elaborate that. Is that interest - in general or these mandates that you have been working on in the background that are now signed come together?

[Richard Weil, Chief Executive Officer]

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

[Simon Fitzgerald, Evans & Partners]

Okay. That sounds very encouraging. And also just want to get a little bit guidance, just in terms of distribution expenses. Obviously that came back to fair bit in the fourth quarter 2018 from a 112 and 102. But I just wanted to get a bit more of a sense about the market sensitivity in the AUM sensitivity in regards to those distribution expenses going forward?

[Roger Thompson, Chief Financial Officer]

You should think about them in line with AUM Simon..

[Richard Weil, Chief Executive Officer]

So you are right. They came off in the fourth quarter as management fees came up.

[Roger Thompson, Chief Financial Officer]

They are lot of gross sales not a gross sale.

[Operator]

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

[Alexander Blostein, Goldman Sachs]

Thanks. Good morning. First question around just capital use. Can you guys give us a sense of the pace of the buyback so as you saw pick up an authorization here. But how should we think about the pace of that being implemented and I guess bigger picture question, it sounded like you don't really see any inorganic opportunities right now, but curious to hear your thoughts on the disharmony down the road whether smaller kind of bolt on or more transformational deals?

[Roger Thompson, Chief Financial Officer]

Hi Alex, I will take the first part and I will let Dick pick up on M&A. yes, I mean we just executed up over and $100 million. You still have, we did that across both markets, pretty much in-line with the mix of the markets or where are our investor base is. And we obviously won’t buy too much on a particular day. So we are limited in what we buy because of market volume. So you should probably use that as a guide, we will put a programmatic trade in place and execute in that way. So hopefully that answers that part of question.

[Richard Weil, Chief Executive Officer]

And I'll talk about M&A Alex. Right now, I think what we are very focused on is delivering on the promises we have already made in the merger that we have already obviously recently completed. And that's the highest priority.

Never say never about it, but I think another transaction of really significant size right now would be a real stretch and would be very unlikely. It's not impossible again. So, never rule anything entirely up, but would have to be viewed as pretty far out their tail kind of case.

We have a lot that we are focused on to do with what we already have. In the fullness of time, look, we learn, we listen, we watch market developments and we are focused on making sure that we are going to be able to compete and build the right kinds of relationships with our clients going forward.

And if we were to determine that we needed to somehow go through a big transformational merger to position ourselves to win, we wouldn't be afraid to do that down the road, but I would say in the near to medium-term it feels pretty darn unlikely.

[Operator]

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

[Michael Carrier, Bank of America]

Thanks guys. Just a question on the European front. You mentioned some improvement, but still outflows year-to-date. Can you provide some context on what you view as maybe industry trends versus some performance or prior think issues any potential like green shoots to potentially ship that trend?

[Roger Thompson, Chief Financial Officer]

You are better pretty challenge here last year, I think the total industry had almost EUR130 billion of outflows, which is the first year and - outflows. There are bright spots in that mixed up that sounds positive. Europe actually was slightly positive by the end of the year, global was negative. So we have got offerings in each of those spaces, we will compete, we have got a great ground in Europe, we have got a great Salesforce in Europe, we got some great products. So we will compete in those areas as well as defending the franchise and the products we have got in place now.

[Operator]

And we will move on to our next question from Dan Fannon with Jefferies.

[Daniel Fannon, Jefferies]

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

[Roger Thompson, Chief Financial Officer]

Yes. Headline numbers will be down $12 million. If we flat that that will look like we are down $12 million because we had a one off $12 million charge in 2018. So I’m saying we will be roughly flat excluding that.

[Daniel Fannon, Jefferies]

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

[Richard Weil, Chief Executive Officer]

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

[Operator]

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

[Christopher Harris, Wells Fargo]

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

[Richard Weil, Chief Executive Officer]

Yes, so as I mentioned, we hired Michael Ho to help us work through the answers to that. I think some of it is making sure that that we have got the right combination of skills applied for our clients. So some of that is product positioning or effectively capability positioning and how you explain yourself to clients.

Some of it is how you use your various capabilities and combination to solve problems. So drawing the skills from various different teams our liquid alt teams are some of the historic Henderson alternative teams here in London, and putting those things together in the right way to serve client needs.

So I think there are a number of things to do form always ensuring that you have the highest quality effort going into generating alpha and the risk control to positioning and explaining your products properly and connected them well to the client base.

And, frankly, I think we are decent at those things, but we can we can get better. And I think Michael Ho is an important part of getting better, but certainly there is more to do.

[Operator]

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

[Robert Lee, Keefe, Bruyette & Woods]

Great, thanks. Good morning and thanks for taking my questions. Maybe my first question just, as you have talked about and we all know there has been a pressures in the industry, fee pressures and whatnot. When you do your own budgeting and forecasting internally, I mean how do you think of a fee pressures, fee compression, I mean do you kind of have a base assumption that it's I think you may have talked about this before in the past Roger, but maybe it's you know one or two basis points a year, how do you yourselves kind of factor in that industry term?

[Roger Thompson, Chief Financial Officer]

Yes, I mean, it's obviously different in different areas, but overall, we do assume that there has always been fee pressure in our industry and we expect that to continue. So yes, we model in a mild fee compression, I have been pretty consistent and talked about around a basis point of fee compression a year.

I have also said that you haven't really seen that in the past because of the equity market strength over the last decade I guess. But yes, we do build in a expectation of mild fee pressure in our budgeting process as we go through the year.

[Robert Lee, Keefe, Bruyette & Woods]

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

[Roger Thompson, Chief Financial Officer]

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

[Operator]

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

[Alexander Blostein, Goldman Sachs]

Hey guys just a quick follow-up. I think you talked about the UK absolute performance fund made up about one percentage point back from there underperform - can you tell us what the -markets or kind of how much more did they need to make up in order to get back into positive performance fee generating mode?

[Richard Weil, Chief Executive Officer]

Yes, happy to see you Alex. At the end of the year I think it was about 4% behind its benchmark. And it's again that's cited for the January fundraiser will become fully public. But it's over percent in January.

[Alexander Blostein, Goldman Sachs]

Got it. Great, thanks.

[Operator]

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