Janus Henderson Group plc (JHG) Earnings Call Transcript & Summary

Good morning, everyone. I'm Craig Siegenthaler from Bank of America, and it's my pleasure to introduce Ali Dibadj. Ali is CEO and on the Board of Directors at Janus Henderson. Prior to joining Janus, Ali was the CFO of AllianceBernstein. Ali, thank you for joining us.

Thanks, Craig.

So Janus is a global asset manager that expands across North America, Europe and Asia. The firm services clients on both the retail and institutional client channels and manages roughly $300 billion of AUM across most active strategies. Ali, you just wrapped up your first half year at Janus. So what really surprised you? And can you walk us through your business strategy?

Sure. And thanks, Craig, for having us here. Thank you all for joining and for listening. It's been about -- that's right about 6 months, coming up on 7 months. And I guess as I joined the firm, there are really 3 things that I'm very focused on and was looking for. The first one, I kind of knew was that the investment prowess of Janus Henderson is extraordinary. It's very, very strong. I was in your shoes as a sell-side analyst for quite some time. I meet with 1,000s of portfolio managers and analysts quite, quite often. And I knew coming into Janus Henderson that the investment strength, investment acumen was extraordinarily good. What I didn't know was how broad it was. How broad it was across thematic areas or sectors like health care or technology or small cap areas, how global it was within equities, but even how the performance was strong across fixed income and multi-asset and hedge funds and other things that we have. I didn't know the breadth of the investment acumen, that for sure, was something that I pleasantly surprised by when I came in. The second piece was around client service. I knew the client service element was very strong at Janus Henderson. I knew that it was really hard to take a client away from Janus Henderson, while it's competing against the firm. There too, what I didn't know was, we don't just think of our clients, we certainly do, that's how we operate, but we also think about our clients' clients. So we talk to pension plans and we think about the teachers. We talk to firms like Merrill and the Advisors, and we think about the high net worth, ultra net worth mass affluent that they serve as well. So we think about that all the time, and that's a really great base to work from. The third thing that actually didn't have a great idea back Craig, although I tried to do as much diligence as I could, is what was the aspiration of the people in the firm. We want to be a world-class organization. I want to be part of a world-class organization. We're building a world-class organization. And the aspiration was in the firm to be world-class, that I did not have to bring. And it was really exciting to be able to bring that to see that in action. So that was kind of the expectations and surprises when I showed up for the first part of your question. On the second part in terms of strategy, we pulled together about 40 people from across the firm. We call them strategic leadership team, different backgrounds, different parts of the firm, different geographies, different tenures, all sorts of diversity that we brought in. And our whole premise of developing the strategy was to bring the client view forward in everything that we do. So part of that, as you'd imagine, was talking to clients. In fact, we spent time with folks on Merrill Wealth and Schneider, Howard Choe, and Casper, Miller, all those folks Glenfield, we talked to all those folks to bring some of that thought process into our strategy. And we did that with a few select clients along the way. And we came up with after months of debate and discussion and analysis, I'm an old analyst, after a lot of analysis was 3 prongs to our strategy. Now the first one is, protecting and growing our core businesses. The U.S. intermediary, I propose here U.S. intermediary is a very, very big part of that. We think we have enormous opportunity to gain market share in areas where we are underrepresented. And that's in our core business. So protecting and growing our core business is number one. Number 2 is, amplifying our strengths. There are things at the firm that no one knows about that we are world-class in, processes that we're world-class in, investment strategies that we're world-class in. And we haven't taken those diamonds in the rough, so to speak, and brought those out to clients. There's many, many things we can amplify that we have strengths in. An example of that is, I'll pick one of the JAAA ETF that we have. It is institutional level investment acumen, so AAA CLO product and understanding that we have, we've turned into an ETF in JAAA, it's on the Merrill platform, it just crossed roughly $2 billion in terms of capital in it, which is one of the fastest growth in ETFs around in the industry, certainly for us in the industry. That's the classic area that we had, and we had to amplify it and bring it to bear in different vehicles as well. Just launched 7 CITs last year. We have a dozen plus SMAs and we're going to do more. So there's a lot of this amplify opportunity. The last bucket of our strategy is diversifying where clients give us the right. That's a lot of input from clients here, and otherwise, who tell us about what they need from us and what they want us to do. We talked about some of these areas quite publicly, things like private credit. We bought an emerging market debt team over in September. That was because clients told us, hey, you have great investment acumen in emerging markets, we brought over a team a few years ago. [ We don't have any ] emerging market debt. We went out to client and found a team to bring on board to be client-led in terms of what we're diversifying to. That business just crossed $1 billion, they showed up in September, and that has crossed $1 billion of capital. So we are, again, overall umbrella thesis from a strategy perspective, being client-led in everything that we do, and that's in protecting growing, that's an amplifying that's diversified.

Great. So you talked about kind of what you're trying to do with sort of the existing business, but you still have some product gaps out there. What do you view as the key product gaps? And how could you look to fill them?

It's a great question. So we do certainly have product gaps, and we have them across protect and grow amplifying diversify. But as I think about the buckets of product gaps, if you think first off, Craig, of kind of liquid traditional fixed income and equities, right, the core of the business, we don't have municipal bonds. We don't have large cap value. We have small mid-cap value. We don't have large cap value. We didn't have emerging market debt. And we sold that gap. We filled the emerging market equity gap. On the traditional side, that's basically it, maybe some things here and there, but that's basically it. On the liquid alternatives side, we have really 2 areas of focus for us. One is, we have a very vibrant, diversified alternatives business. So think about it as multi-strategy, mostly systematic hedge funds that we pulled together, whether it'd be enhanced index version or whether it'd be just straight investment in those strategies version is a $20 billion business for us. Again, one of the things we talked about on the last earnings call, we've never amplified that business. We can and we showed and we are getting traction with investors on that. But we need more teams on that. We need more strategies to come in. So that's one place that we're focusing on and investing in. The other one is just a pure hedge fund business. We have really good strength in technology, in small cap, in biotech, as I was mentioning before, but we could certainly use some more in that liquid alternatives. The last bucket, which is more on the diversify area is the illiquid alternatives. We don't have much of that at this point. We have some expertise in kind of late-stage pre-IPO type investing in some of our more focused areas of investments. But we don't have, again, private credit. We don't have those areas on the illiquid side. As you know, it's something that I did in my past role, and I think it's something that clients, again, are asking us for, and we can start to look at.

Got it. So given that you have those gaps there, what means would you look to kind of fill them in? Would it be management team lift outs? would it be small acquisitions? Could it be a larger acquisitions with several components of the strategies?

Yes. So yes, I guess, is the answer to that question. We are fortunate enough to have very strong cash flow generation, fortunate enough to have a very solid balance sheet. So all of those options are available to us to buy, build or partner to fill those gaps. We're going to be client-led, we aren't going to deviate to areas where clients don't think we can have the right to win with an acquisition or team with that or a partnership. And we're going to be very disciplined from a financial perspective, making sure we deliver shareholder return that's outsized when we bring on board either a team or a large acquisition. So we're open to whatever it is to deliver for our clients.

So going back to your amplify point. You have a lot of small, mid-sized strategy, some of them have great performance, 5-star rated. Do you see opportunities to either add vehicle or add distribution resources around them to really reaccelerate the growth? And which of those strategies should I really focus on?

Yes. Look, it's a great question. It's something that I was -- I guess, maybe I should add it to the first answer to the question. I was surprised by where -- I've seen many other strategies, I've seen other places as well. And I look at our investment philosophies, I look at our investment processes and look at our performance, and I say, wow, these are really world-class, again, investment acumen is very strong. We have performance that's through the roof in a lot of these things. And then I look at the AUM, and I say, well wait a second, these aren't the size of even the middle competitor, let alone the best competitor in the field from a size perspective. We're better than them from everything a client would want fundamentally, but we're not their size. And look, I'm thinking about our strategies right now where I'm not exaggerating when I think with what we have now, we should be 2x to 3x our size. Because of the philosophy, because of the process, because of the performance relative to our peer group. Now how are we going to do that? Well, we actually have to invest in the business to bring those sort of quiet diamonds in the rough, so to speak, and bring them up. We have to communicate better. We have to invest in marketing. We have to invest in connectivity across the firm. We certainly do have to think about taking some of those investment strategies and having different vehicles for them. Again, the CITs, the SMAs, the [ OX, ] the others that we're rolling out for sure is a way to kind of bridge that gap. We have investment prowess. Let's make sure we can get that to our clients, because guess what, it's better for our clients and our clients' clients if they actually deliver AUM to our funds because our performance is better in many, many, many instances across the board.

So as I watch Janus Merchant Henderson, and I watched some of the growth in Asia, some of it helped through Daiichi. You have a nice geographic footprint around the world. As you sit in your CEO seat today, which geographies are you most excited about for future growth?

Yes. Look, the good news is, again, that there is enormous amount of opportunity. It's really a question of resourcing for us. The U.S., both on the intermediary side serving the thundering herd as an example, but also on the institutional side is absolutely where you're seeing us invest. We're investing a boatload in that, that is people, that is technology, that is communication. That is all sorts of things that we're bringing to bear to deliver in the U.S. business, intermediary and institutional. That's right now, in my mind, our kind of largest focused scenario. But that also doesn't mean that there aren't other areas where we're having quite significant progress. So take the institutional business that we have in the EMEA region, are -- we are winning mandates from probably some of the most sophisticated sovereign wealth funds in the world, for example, in the Middle East. We're winning mandates with some of the most sophisticated insurance and reinsurance companies in Northern Europe. We're just starting to do that, and we think there is a lot more potential there. You mentioned Asia as well. We've been in Asia for a very, very long time. We are growing in Asia, right, last year, we did. Let me repeat that we're growing in Asia, which isn't necessarily common. And we have extraordinarily low market share there. Our brand is known, we have great relationships in that region. They're too, not a place we've invested, invested in terms of people on the street, invested in terms of marketing, invested in terms of support mechanisms for our clients like client portfolio manager center.

So I think I've exhausted the strategy questions for a moment. Let's move on to excess capital. We've watched the prior leadership at Janus kind of rebuild up the balance sheet. You're at a point where you have that tease amount of excess capital. I'm actually adding it back in my evaluation process at this point there so much. So what's your view on capital today? How do you think about excess capital? And what type of liquidity do you think is appropriate for an asset manager like yours?

Yes. So as you said at the outset, I've only been here for coming around 7 months, but I'm grateful for what past Boards and past Management Teams have done, our finance organization now, for example, has done a great job at making sure that our balance sheet is extraordinarily strong. I mean as a -- to your point, extraordinarily strong balance sheet, a fortress balance sheet, and we deliver a ton of cash flow every year. Last year, it was in the $470 million range. So that is a very strong position to be in, and it allows us for a lot of flexibility. It allows us for a lot of flexibility under 2 circumstances. One is market volatility. We've had that. We feel pretty comfortable with what's happened with market volatility and our positioning from a balance sheet perspective. The foundation is going strong. It also allows us flexibility a little bit to your question from a strategic perspective. So to your earlier question, could we acquire things? Absolutely. Should we acquire things to deliver better results for clients? Absolutely. And so we are looking to acquire things, for sure, buy, build or partner to invest in things to deliver for our clients. Now the hierarchy is investing in the business organically from the cash that we generate; inorganically, investing to deliver for our clients and then returning cash to shareholders, which we did last year on the order of $360 million worth. So think of 8% to 10% of our market cap being returned to investors. And I guess the last just bit of your question around broader asset management. Look, as I said, asset management and certainly, we generate significant capital is cost betas paid. Even the best asset manager when they're at any size aren't growing 10% or 15%, right, on a consistent basis. That kind of -- if you're doing really well, low single-digit type growth organically from a revenue perspective. That suggests to me that we have a reasonable expectation to return cash to shareholders in a manner that creates a dividend yield like we have now and allows investors to reap the benefits of that cash flow and take that money, invest where they want to invest. So I do believe that returning cash to shareholders is an important part of the story for us and all asset managers because we don't need it. And let's return it back to shareholders.

So you did return a high percentage last year. I think a lot of it was front-end loaded. You actually didn't buy back any stock in the second half, which I was a little surprised about. Since you gave, the stock had dip then.

Yes.

So on a go-forward basis, how do you think about investing, raising the dividend and buybacks?

Yes. So the hierarchies I mentioned is exactly described. It's investing back in the business organically, finding ways to invest back in the business inorganically: buy, build, partner, right? And then we believe, as I mentioned a moment ago, and obviously, it's a Board decision, right? But my view for its worth, is that returning cash to shareholders in the form of a dividend, right, a healthy, sustainable dividend is higher priority than buying back stock. Not that we'd never do it or won't do what we've certainly done in the past. But my view is that what we're doing right now, which is returning more of that cash to shareholders to dividends is likely the right decision by the Board.

So Ali, you have an expense in place. You're looking to say $40 million to $45 million on a gross basis, but you're going to reinvest it back in. The $40 million to $45 million, where do you find that?

Yes. So we've always been disciplined from a cost perspective, there's no question. And yes, you're right to say that we have an expense plan that we've really developed over the course of the summer and start to articulate. Now when we talked about saving $40 million to $45 million, it had a much fanfare because no one else was doing it yet. Kind of knew it was going to happen. Everybody in the industry was thinking about it, I'm sure. For better, for worse, we're the first ones to do it. And we looked at the $40 million to $45 million, looked at the opportunities and came up with $40 million to $45 million in many different ways. We looked at, for example, where there were still remnants of processes that are different in different geographies that we could standardize and put together. We looked at areas where decision-making was being slowed by layering and we took those layers out. We took a whole layer out of the organization and decisions are happening much more quickly. We very importantly, looked at areas where we could offer blue sky to our less tenured high, high-potential, high-performing talent. And so we looked at that. Now that's all on effectively the -- most of that is on a people side, the comp side. But half of the savings were on non-comp areas. So did we really need to fly first class business class everywhere? And what circumstances can we do that? Do we need all this market data? We have these subscriptions. We haven't really been using them, those types of things. So those are the expense. So we were early in looking at it. We've identified $40 million to $45 million. The one thing I want to emphasize, and you mentioned it, is we are investing that back. We're investing that back in things that clients care about. And that's very different than what you're hearing from other folks at this point, some of our peers, competitors. People are doing a bunch of cost cutting, x percent of our heads, whatever that they're talking about. But you can ask them why? It's to drop to the bottom line to get a margin of x determinative margin, x plus 50 basis points, right? Again, our whole strategy, our whole firm is client-led, which we believe, I believe, and have seen it delivers for the longer term. A client doesn't care if your margins are x plus 50 basis points or x. As long as you're not concerned, as long as you have a fortress balance sheet, as long you can deliver for them, that's what they care about. So we are investing in things like U.S. intermediary, just serve the Merrill advisers better. We're investing in those things. Some people may be doing disinvesting. We're not. We're investing in those things in the $40 million to $45 million because we think it drives growth. That is people, that is technology, that is bringing more vehicles on board, that's really delivering for client needs. So that's why we're doing cost cutting. And again, I think it's really important to differentiate to why. We're doing it to invest back for the clients.

So now that you've been there for 7 months. Are you looking to hire more senior leaders? And is that part of the reinvestment? And do you see opportunities to expand or upgrade your team just given your new strategy in place?

So if you have a resume in your pocket and you want to hand it in, please feel free to. You're looking for a role. We are absolutely building a world-class business with world-class talent. That is the aspiration. That is the mandate. That's what we're trying to do. And that world-class talent is internal and coming from external. So yes, we're looking for people to be added to our team. And again, we're cost-cutting so we can invest, right, to face client needs. And so look, we hired our Head of North America client group. That cost money. That person is world-class in terms of what they did. We hired a Chief Responsibility Officer that came on board. She is world-class. We promoted people. Our COO Investments, for example, as somebody who's internal, I put her up against anybody else out there that I've seen as the CEO of Investments. We brought on somebody who spoke with -- yesterday, spent some time with yesterday to relook at all of our data infrastructure. So our Head of Data is going strong. We brought in a new Head of Asia. You mentioned Asia before from a sales perspective. We actually hired back people and our investment teams who had left the firm and now they're back, world-class talent, right? So absolutely, we're investing back in the business. And again, just to deliver for our clients. I mean if you go back to your earlier question about cost savings, the instructions on the cost savings were go find cost opportunities, don't mess with the regulatory. We have to deliver there and don't mess with clients, in fact, tell us where you need to invest more back for our clients. And the people element to it is a really good profitability.

Ali, how do you feel from a vehicle standpoint? I mean, SMAs in the U.S. are taking share, especially with active. You have CCAPs in Europe. You have CITs in the retirement channel. How do you feel that your products are positioned across vehicles? And should we be looking for Janus to launch new vehicle, maybe a similar product in the near future?

Yes. So we have the capability to do all of those vehicles. Again, 7 CITs that we launched last year, should we done it before? Yes, of course, but we launched them last year. We have a dozen plus SMAs. We will do more of those. We will do more CITs as well, by the way, across the world, whether it be Irish funds or Lux Funds or OX or CCAS. We have the tools to do all of the vehicles that clients will want, the wrappers, the vehicles that clients will want and need, even some that we haven't launched yet that are more on the kind of semi-liquid side of things. We have those capabilities. What we haven't done, and it's really important as part of the amplified bucket in a very big way is to take those investment strategies and put them in all of the right vehicles that clients and clients' clients want. We haven't done that perfectly yet. That's clearly an initiative within the amplified bucket, we think there's enormous potential.

Got it. And I have one on the U.S. intermediary channel. I know it's a big investment focus for you guys. How critical is this segment for Janus right now? And what is your strategy? And maybe how is it different in terms of how you interact with both gatekeepers and financial advisors?

Yes. As I was mentioning earlier, it's one of the most important elements of our business by a long shot. We are very well placed here. Our brand is very, very strong in the U.S. intermediary channel. Our investment strategies have tentacles in many different areas. Are they at the scale that they should be? No, but they are the right tentacles to start and grow those businesses. So it's absolutely a place that we're investing in quite significantly, again, from a people perspective. We're hiring wholesaler. We're hiring people to support the Merrill advisers and other advisers are out there. And we're absolutely investing in getting to know the home offices and the gatekeepers as well. So again, I've met with folks here several times, whether it be Snyders of the world or the Ben Phil's and others and Howard's and Ryan's that I mentioned before Jeff Miller. We need to deliver what they want, so we better understand what they want. So we're investing significantly, again, not just in the people, not just understanding what our clients want, but also importantly, in technology and to your earlier question on the vehicles that we can bring to bear deliver for our clients and our clients' clients. We are -- some people may be disinvesting in this space in the U.S. intermediary space. We are massively investing because we have enormous confidence in folks like Merrill and others to deliver better results for their clients, invest us as well.

So Ali, at this moment, let's just flip to the audience to see if there's any questions. Please raise your hand. We can get you a mic. We have one here in the front.

So with the new reinvestment initiatives that you've spoken a lot about, can you maybe expand more on where you expect most expenses to be invested in, like areas or which segments of the business are you most focused on?

Sure, absolutely. Thanks for the question. So if you think about the Protect & Grow the Diversify and the Amplify area, the biggest opportunity we think we have is to get the Protect and Grow business to be bigger. Now what does that really mean? That's areas like the area that Craig was asking about just a second ago, the U.S. intermediary business. That's both people and that's technology, right, as well as marketing and communications to folks around in this room and otherwise. So that's a big, big chunk of our investment. We have about kind of less than 10 areas of major investments. That's the -- a really big central one for us for sure. There are other tentacles in Protect & Grow, but that's the biggest one. In the Amplify bucket, vehicle expansion is absolutely one of the areas we want to go into. But 2 others that -- one of which I mentioned, one of which I have not yet are really important to us. This diversified alternatives business that we have. Again, it's $20 billion. I bet you most clients don't know about it. I bet you if they saw the process and the performance and the people who are involved, they want to know about it because it gives better results to the end client, your clients and the end clients as well. So we're investing there from a technology perspective. We're investing there for bringing on teams as well to fulfill more sleeves that can bring differentiated uncorrelated returns to our client base in different formats, enhanced index or otherwise, stressed. The other part of the amplify bucket that's quite important to us is on the institutional side. We are massively underrepresented in institutional, I would say, globally, but certainly in the U.S. as well. Public numbers, we have just north of $7 billion of institutional -- pure institutional in the U.S. That should be several factors greater than that given what we have, which is institutional quality investment prowess throughout the country and throughout what we can do in North America. So institutional is where we're investing as well. You've seen us hire ahead of institutional in North America. You've seen us hire a Head of Consulting Relations in North America. You've seen us hire a team around them. See us invest in reporting and other things there, and that's hopefully going to bear fruit for us. That's a big chunk of investment. And then there's a little bit of a wild card to your question on the diversified bucket because much of that is going to be through capital acquisitions, inorganic partnerships, those types of things. Unclear at this point, what that's going to be, right? That's a swing factor to Craig's earlier question, we believe in doing acquisitions that are client-led, meaning they add capabilities as opposed to just reducing costs. Again, clients don't really, really care for reducing costs. They want to see improved capabilities. So if it's a larger acquisition that we can bring on board that takes several boxes from a client-led client need perspective, we're happy to do that. So that might skew the answer to your question, one way or the other depending on what we find from a viable partner pie... Thanks for the question.

Any additional questions? Well, with that, I think we are out of questions and out of time. So Ali, on behalf of all of us at Bank of America, thank you so much for joining us.

Thanks, Craig. Thanks very much.