Janus Henderson Group plc Ordinary Shares

Good morning. My name is Seb and I will be your conference facilitator today. Thank you for standing by and welcome to the Janice Henderson Group first quarter 2022 results briefing. All lines have been placed on mute to prevent any background noise. After the speaker's 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 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, 10K, and other more recent filings made with the SEC. Janice Henderson assumes no obligation to update any forward-looking statements made during the call. Thank you. Now it is my pleasure to introduce Roger Thompson, Interim Chief Executive Officer and Chief Financial Officer of Janus Henderson. Mr Thompson, you may begin your conference.

Good morning and welcome everyone to the first quarter 2022 earnings call for Janus Henderson Group. I'm Roger Thompson, CFO and Interim CEO. Before I discuss our quarterly results, I'd like to start by giving a few updates. First, as we announced back in late March, we're extremely pleased that Ali Dibaj has been named as the next CEO of Janus Henderson. Ali is highly regarded and well respected in the asset management industry and the feedback we've received both internally and externally has been overwhelmingly enthusiastic and positive. I've had the chance myself to meet with Ali and I echo that feedback. I, along with the rest of the executive committee, am excited to work with Ali and we look forward to meeting with clients and shareholders and employees when he begins as CEO next month. As we transition to a new CEO, it's important to emphasize that in the interim, the firm continues to operate as business as usual, and we continue to make progress in delivering our strategic initiatives. In that context, I'm pleased to announce that we have completed the previously announced sale of Intech as of the 31st of March. The closing of the transaction was a culmination of the efforts by dedicated teams on both sides, and we wish Intech all the very best for the future. We also continue to grow our active ETF franchise, with assets now exceeding $5 billion. During the quarter, we launched two ETFs, a BBB CLO ETF in the US, further capitalizing on the back of the success of our AAA CLO ETF, which raised $800 million in the first quarter and now has $1.1 billion of AUM. And in Australia, we launched a Net Zero Transition Resources ETF, which was also one of the five US sustainable ETFs that we launched in September 2021. With that, let me turn you to the quarterly results starting on slide three. Our investment performance remains solid with 62% of our assets beating their respective benchmarks over three years, which is up compared to 58% of assets last quarter. Assets under management are down due to the closing of the InTech transaction at the end of March, the effects of markets and net outflows. Excluding Intec, net outflows were disappointing at $6.2 billion, driven primarily by outflows in equities and the institutional redemption in the balance strategy that we communicated to you all in the last quarter's earnings call. Our financial results remain solid, but are down compared to the prior quarter, primarily from weaker markets and lower performance fees. And finally, we remain committed to returning excess cash to shareholders, In the quarter, we completed $43 million of share buybacks, and the Board has authorised a new buyback of $200 million to be completed prior to the 2023 AGM. Additionally, given strong earnings growth in 2021 and our progressive dividend policy, we are pleased to announce a $0.01 increase in the quarterly dividends to $0.39 per share. Moving to slide four, we're going to look at investment performance. While one-year investment performance reflects the very challenging environment, long-term investment performance remains solid, with 62% and 74% of assets beating their respective benchmarks over a three- and five-year time period, as at the 31st of March. Performance of multi-asset and alternatives is excellent across all time periods. Equity is more mixed, but with continued improvement in strategies such as US mid-cap growth, which is now above the benchmark over all periods presented. and fixed income investment performance is doing well despite an extremely challenging quarter for bonds in the first quarter. Switching to relative investment performance compared to peers, this remains solid, with over 60% of AUM represented in the top two Morningstar quartiles over all periods. Slide five shows company flows excluding Intec. For the quarter, net outflows excluding Intec were $6.2 billion compared to $1 billion last quarter. Over the next few slides, I'll provide insight into the outflows, but in summary, the quarter saw continued outflows in equities, coupled with the outflow in the multi-asset capability previously disclosed. Let's turn to slide six, which shows the breakdown of flows by client type. Net outflows for intermediary were $1.7 billion. By region, intermediary flows were negative in the US, EMEA, and Latin America, and positive in Asia-Pacific. In the US, the outflows were dominated by our US mid and mid-cap growth strategies due to the performance challenges we saw in 2020. But with the strongly improving performance that I previously mentioned, we're optimistic that we're beginning to see the pace of outflows slowing. In looking at the first quarter highlights in the US intermediary channel, the SMA channel had $800 million of net inflows coming primarily from the concentrated growth strategy. And net inflows into ETFs were $800 million, with the majority coming from the AAA CLO product. As I mentioned, our ETF business is now over $5 billion in assets and we're well positioned with our AAA and BBB CLO strategies in a rising rate environment. Similar to trends across the industry, EMEA growth inflows slowed compared to the fourth quarter due to a risk-off sentiment caused by the Russian invasion of Ukraine, inflation, and tightening monetary policy. Institutional outflows were $3.6 billion, which was primarily the result of the $2.2 billion redemption of the balance strategy. The pipeline has a broad and diverse range of opportunities, but results will be lumpy quarter to quarter, as we saw this quarter. Finally, net outflows for the self-directed channel, which includes direct and supermarket investors, was $900 million. Slide 7 shows the breakdown of flows in the quarter by capability. Equity net outflows for the first quarter were $3.8 billion, compared to $3.2 billion in the prior quarter. The outflows were primarily driven by US mid- and mid-cap growth strategies in US retail and institutional. Areas of flow strength included US concentrated growth, global equity income, and the biotech innovation hedge fund. Flows into fixed income were flat in the quarter, which is a good result against the tough backdrop for bonds during the quarter. In the US, our fixed income strategies captured retail market share and were led by inflows into the fixed income ETF strategies. Total net outflows for multi-asset were $2.2 billion, entirely made up by the one-off redemption in the balance strategy that I told you about in the last quarter. Alternative flows were negative 200 million for the quarter. Before moving on, I do want to call out two redemptions that will impact 2022 flows. First, A long-standing European insurance client has made the decision to bring the management of a sterling buy and maintain credit mandate in-house. This was unrelated to either Janus Henderson's investment performance or client service and due to an internal decision to build their own investment management capabilities to support their growth. The mandate was low fee with total AUM of approximately $7.3 billion and $2 billion has already been redeemed in April. The balance will redeem over the remainder of 2022 in tranches yet to be confirmed. Secondly, we recently announced the sale of our UK property fund, which will result in an estimated $1.4 billion outflow in the second quarter. Moving on to the financials, slide 8 is our standard presentation of the US GAAP statement of income. Slide 9 is a look at the summary financial results. Before diving into the financial results, Note that the sale of Intex closed on the 31st of March. Therefore, Intex financials are included in the entire quarter. However, as I stated last quarter, Intex impact to the consolidated results is not meaningful. Adjusted first quarter financial results were down compared to the prior quarter and prior year, primarily from lower average AUM and performance fees. Adjusted revenue in the quarter decreased 13% compared to the prior quarter due to lower average AUM, performance fees and fewer calendar days. Adjusted operating income in the first quarter of $180 million was down 25% over the prior quarter, principally driven by lower revenue. First quarter adjusted operating margin was 37.4%. Before moving on, I wanted to clarify the difference this quarter between US GAAP and adjusted diluted EPS. The primary difference was the $33 million non-cash tax adjustment on the impairment of goodwill that we recognised in 2020, with other small adjustments including the loss on the sale of Intec and LTI accelerations on departed executives. On slide 10, we've outlined the revenue drivers for the quarter. Net management fee margin for the first quarter declined to 46.8 basis points compared to 47 basis points in the prior quarter. However, it splat to a year ago, highlighting the strength and stability of our fee rate. The quarterly decline is due to the mixed shift resulting from weaker markets. Excluding INSEC, the net management fee margin for the first quarter was 49.4 basis points. First quarter performance fees were lower compared to the prior quarter due to US mutual funds and seasonally high performance fees from segregated mandates in the fourth quarter. Regarding the US mutual fund performance fees, the first quarter was negative $14 million compared to negative $7.7 million in the prior quarter. Looking at 2022 performance fee revenue, based on current investment performance, we expect full year performance fees to be negative in aggregate. U.S. mutual fund performance fees are projected to be approximately negative $60 million if we assume benchmark performance for the rest of 2022. Based on current investment performance, these negative fees would only be partially offset by performance fees generated from segregated mandates, CCABs, UK OITs, and investment trusts. Turning to operating expenses on slide 11. Adjusted operating expenses in the first quarter were $299 million, down 3% from the prior quarter. Adjusted employee compensation, which includes fixed and variable costs, was up 3% compared to the prior quarter, primarily as a result of annual merit increases and seasonally higher payroll and retirement costs, which were partially offset by lower variable costs given the lower pre-bonus profit. Adjusted LTI was down 10% from the fourth quarter, mostly due to mark-to-market. In the appendix, we've provided the usual table on the expected future amortization of existing grants for you to use in your models. The adjusted comp to revenue ratio was 42.5%, which is in line with the guidance we've given, and less than the 44.2% ratio in the first quarter of last year. For the full year, we anticipate a comp ratio in the low 40s. Adjusted non-comp operating expenses were down 10% from the prior quarter, primarily from marketing and general and administrative expenses. For 2022, the expectation of non-comp operating expense growth in the low teens remains unchanged. Finally, our recurring effective tax rate for the first quarter was 26.1%. For the full year, the firm's statutory tax rate is still expected to be in the range of 23 to 25%. Finally, slide 12 takes a look at our liquidity. Cash and cash equivalents were 782 million as of the 31st of March, a decrease of approximately $324 million, resulting primarily from the payment of annual variable compensation. The first quarter cash position is typically our lowest given seasonal cash needs. We returned $107 million to shareholders via the dividend and share buybacks. We purchased $1.3 million of shares of our stock for $43 million, and we paid $64 million in dividends And as I previously mentioned, the board has approved a 3% increase in the quarterly dividend to 39 cents per share. This increase aligns with our capital philosophy of paying a progressive dividend that grows with profits. Finally, the board has approved an accretive share buyback authorization of $200 million to be completed prior to 23 AGM. I look forward to Janet Henderson continuing on its journey of organic growth in Q2 and by being joined by Ali in our Q2 earnings call in late July. Now I'll open it up for Q&A. Operator?

Thank you. If you would like to ask a question, please press star one on your telephone keypad now. If you change your mind and wish to withdraw your question, please press star two. In the interest of time, questions will be limited to one initial and then one follow-up question. Our first question today comes from Dan Fannin, Jefferies. Dan, please go ahead.

Thanks. Good morning. So I guess just wanted to follow up on flows. You mentioned a broad range of opportunities within kind of the institutional pipeline. So just hoping you could expand upon that. And then if you could clarify just the timing of the redemptions, just so I understand, I think $2 billion is already left in April on the total of 7-3, but the timing of the property fund. And I guess just in general, in the context of consultant, asset allocator, and kind of intermediary conversations. You know, how has the change within the ranks of the management team at Janus, as well as having an activist, potentially impacted those conversations, if at all? So sorry for the multi-part question, but I wanted to get some broader context.

Thanks, Dan. That hopefully covers quite a few things. But let me take them... Sort of one at a time and see where we get to. So the first one is the biomethane mandate in the UK. As I said, that's a 7.3 billion mandate. It's very low fee, but that will come out in the course of it all during 2022. Just over $2 billion came out in April, and we're working with the client as they insource that money. But we don't have the full details of when the remainder will come out. So that will be $7 billion coming out over the remaining three quarters of the year, starting with two in April. The real estate transaction we completed or rather exchanged last week, so very pleasing to get that done. It's at a small premium to the NAV. So given the ongoing changes and reviewed by the FCA of open-ended or real estate open-ended funds, we believe that is a very good outcome for investors. That will happen over the next month. So again, that will be within our Q2 results. In terms of the pipeline, there are a number of things in there that have taken a little bit longer to fund than we wanted or expected. They're things we were working through with clients. mainly on clients, the ability or the needs of clients to be able to do their reporting and regulatory returns. So some of these things are quite complicated and take a little bit longer than originally thought by the client. We're pleased to be working through those. It's a range of things and it's a range of fee rates as well. So again, we've got some some higher fee products that is lower assets and some bigger things that's at lower fee. So I recognize that, you know, I've been talking about this pipeline for a number of courses now and we've got to deliver it. So that's something that hasn't come through in the last quarters, but it will be. It will be bumpy in this. This outflow from from buy and maintain will sort of dominate the flow picture and institutional. But again, it's more important to look at revenues rather than flows. And we'll see that coming through over the next over the next few quarters. And then finally, in terms of the feedback we've received on Ali's arrival has been sort of universally positive, both internally and externally. He's a very well-respected investment professional with a background as an analyst, as a portfolio manager, and then in strategy and CFO. Those who've worked with him have very strong feedback in either directly working with him or or the professional capacity across different firms. So that is, and Ali joins us next month, as I said, so that's going to be very soon. Client feedback has been very positive so far. So I don't think there's anything that's changed in terms of our outlook. If anything, I'd say hopefully it's going to be positive rather than negative in terms of client reaction. and we look forward to getting Ali on the road, seeing shareholders, analysts, clients, and staff as soon as he joins, like I say, in late June. So I think I've covered... Oh, sorry, you mentioned trial. There's no change there. So trial have been invested in Janus Henderson for almost two years now. So I think that's an ongoing relationship which... Again, I think that settled down quite nicely. So you've asked one question, Dan. I guess you're allowed a second one. I'm not sure if that was really one or four. Any follow-ups?

Yeah, no, I'll take that. Appreciate the long and detailed response. So thank you.

Thanks, Dan. Our next question is from Liz Meliatis from Jordan. Liz, please go ahead.

Good morning, your time, and thanks for taking my questions. I might just start on the cost management and capital management side of things. Obviously, you've maintained your guidance on the POS side and have announced another buyback. I suppose it is early days with Arlene, it isn't officially landed yet, but is there any sort of anticipation that you might sort of reassess those targets at all, or do you think that it might be quite a steady ship going forward?

I think you've got two quite separate things there. One is around our capital management philosophy, which I think is settled in terms of a regular progressive dividend, which we've increased by a cent this quarter, and a consistent buyback if we have true excess cash So the buyback of $200 million that we've announced today is pretty consistent with what we've done over the prior years. We did a little bit more last year. So that's a consistent philosophy around capital. But again, that's really a bold decision. But again, hopefully that's well understood in terms of capital. In terms of costs, we're going to have to look at the year as it plays out. We've been investing in the business. We're excited about the future. We always manage the business as tightly as we can from a cost point of view. There are, you know, I'm guiding to higher non-comp costs this year. Again, as we talked about in Q1 results, that's a culmination of three things. That is, you know, a return to normal in areas such as tea and travel and entertainment and marketing, which were low in 2021. a return to normal and maximising some of the opportunities we've got by increasing marketing spend. Again, that was low in 2021 with COVID. We have a number of major infrastructure upgrades that we've been working on for the last few years. A couple of those will go live in 2022, which is great news. That means we start to amortise the work that's been done over the last couple of years. And then there is inflation obviously in the system. So we will continue to manage that. There are dials to turn and we'll continue to be as efficient as we can. But I guess I'll come back to you in Q2 results should any of that guidance change.

Okay, got it. And then just quickly also on the investment gains and losses, I mean, obviously it's really hard to sort of help us out with that, but that number tends to sort of bounce around quite significantly just in relation to the seed assets. Is there any way to think about that in a better way to get that number right? Because it does sort of have a fairly meaningful impact to the bottom line.

Yeah, there's an accounting piece in there. So you've got to look at it net of NCI, so the non-controlling interest part. So you net those two numbers. We have to show it gross. So in a quarter where seed and therefore consolidated seed has gone down with the market, there will be losses, but those losses are offset in NCI. That's the first piece. Obviously, we don't hedge interest. the client positions which we need to consolidate in that line. That this quarter still results in a relatively significant loss. We hedge what we can efficiently in our seed book, but there are certain seeded instruments that we don't hedge, and we don't hedge or we can't hedge as efficiently as we'd like. So this quarter, there is a net seed loss of around $10 million, which is a bigger gross number offset by a hedge, but the hedge is not perfect. So we'll continue to look at that. That number, you know, I'd like to be as little as possible. It obviously includes alpha as well. but where we've got things like hedge funds, they are unhedged in terms of those results. So hopefully that helps Liz. We're happy to take you through that offline as well.

Okay, thank you so much.

Our next question comes from Ken Worthington, JP Morgan. Ken, please go ahead.

Hi, good morning. Flying up on Dan's question on the institutional business. How do we think about that institutional franchise? I recall that in-tech was the single biggest part of the U.S. institutional business. Does that divestiture impact your broader franchise overall? You were more scaled with in-tech, you're now less scaled without in-tech. You had big outflows this quarter, even without the balanced one. There's bigger redemptions to come. I assume that $7.3 billion is also bucketed as institutional. What does this shrinkage mean for the outlook for that franchise? Can you further flesh out the steps that you're taking to stabilize the platform and really break the ship?

Yeah, thanks, Ken. It's a good series of questions. So first of all, our institutional business exit tech is $82 billion. So it's a sizable book. And that is global. And it's well diversified. It is an area that we've been investing in, making sure that we've got the right products, the right people. and building the client relationships. So we've talked a little bit in the past about the investments we've made. New consultant relations team, which is working really well. Again, these things do take time, but the team underneath Richard Graham, who joined last year, I think really establishing much better relationships with consultants globally The institutional team in the US, we've upgraded that team over the last couple of years. And we've got products around the world which we believe is of interest to institutions. So we are having a lot of good conversations. I talked a little bit about the pipeline. And like you say, I realize that I've been talking about that for the last few quarters and we need to deliver that. So now that's obviously the intention there and we believe we're seeing some good results. You're right, the large buy and maintain mandate that I've just told you about is in the institutional book. So that will be a sort of headline loss from an AUM point of view. Again, now I continue to point you towards towards revenue rather than just assets. Some of the business that is in that pipeline is significantly higher fee product. It's a mix. We'd like to say we've got some bigger mandates, which we hope and expect to fund at the lower end. And we've got some business, which again, we hope and expect to fund at higher fee. But, no, the institutional business is very important to us. It's been successful. You know, we've seen success in various areas. Our Australian institutional business has done very well over the last couple of years. We've got a growing business in the Middle East. We've got some great relationships on the continent of Europe. We've got an established UK business. The US is where we've consistently, you know, Both before the merger and post the merger, our institutional business is sort of too small for the size of Janus Henderson. And that's something, as I say, we've made a number of investments there and will continue to push there and hope and expect that to continue to grow over time.

Okay, I think that's fair. Just maybe to follow up, to call it out, I don't think the results were all that impressive, and the outlook is more challenging here. You've got a 20% owner. I assume the pressure is going to be going up meaningfully. You have plenty of cash. You announced the $200 million authorization. You called out that that's the authorization level that you guys have been looking at for the last couple of years. Given the weakness in the business and the downturn that we're seeing in the stock, I'm sure you anticipated that, why not go bigger than the $200 million authorization? You've got plenty of cash. You've got a clean balance sheet. It would seem like you're in a very powerful position.

to take advantage of sort of near-term inefficiencies um you know why not substantially bigger than the authorization that was uh uh was made here again i think that's really yeah that's part of our con yeah we are we are conservative in our balance sheet uh we recognize that uh and and that has been um that is that is deliberately cautious you know, we see opportunities for the business going forwards. We want to maintain that ability to act. So we're not looking to leverage up the balance sheet in any way. There is, as you've seen in this quarter, there is a lot of beta in this industry and a lot of, and Janet Henderson is is a high beta stock. So we don't want to be over leveraged. The 200 million authorisation is something that we could work through and should we be confident we've got true excess cash going forward, we could add to that in the future. That doesn't mean that's the only thing we do this year. Equally, we may find other opportunities over the year and spend the money the other way. But our expectation would be to do that 200 million buyback. And when you look at that, that's really the increased dividends and the 200 million buyback would represent around the vast majority of this year's earnings. So we're paying out, our expectation is to pay out this year's earnings. You're right, we're well covered on earnings. on a starting position. But like I say, that is a deliberately conservative policy.

Okay, great. Thank you so much. Our next question comes from Alex Bloestein from Goldilocks. Alex, please go ahead.

Hey, good morning, guys. Thanks for the question. A little bit of a bigger picture question as well, and not sure if you're able to answer before Ali ultimately starts, but how do you think the firm's strategy could broadly change over the next year or so? What will be the same? What will be different? And I guess what is sort of kind of like the near-term plans for the company in the interim as he joins and kind of gets his feet wet in terms of what he wants to do?

So like you say, I think that's, you know, that will evolve over time. You know, what will not change is our focus on delivering, you know, consistently strong investment performance and client service for clients. So, you know, that is the bedrock of what we look to do. You know, there has been, you know, we've made a lot of progress over five years in delivering a combined business and an improved chassis, if you like, on the car. We've made what we would say is some real tangible progress there, but I accept it's not really come through yet in the financial results. So obviously we're going to be working closely, and particularly me, working closely with Ali as to what that looks like and how that evolves over time. The strategy that we've been on has been the right strategy, but no doubt that will evolve with a new CEO on board. But I think that's probably an evolution rather than a revolution. Ali joins in a month. He's He's met quite a few people over the last couple of months just to say hello. That just gives him a great start and be able to be off and running as quickly as he can when he gets here as opposed to putting names to faces. I think he's off to a great start. He's gone down very well with the people he's met. But obviously, you know, we'll come back to you over the course of the next few earnings calls as we evolve the strategy and push the business forward.

Got it. Great. And a quick question just on the numbers. The management fee rate of the net fee rate margin, the way you guys described it, I think it was 46.8 dips. It's quartered down a little bit. It's like due to mix. A number of moving pieces happening here, obviously, with Intac out of the run rate. There's a large insurance mandate, albeit it sounds like it's a very low-fee rate business. But also equity markets are coming down, and it's a high business. So any way to frame the jump at no point for the second quarter on this net management fee margin?

Yeah, so ex-intech, the jump-off point is 49.4 basis points. So as you say, it's higher ex-intech. And you've got all the pieces there, Alex. Our fee rate will be influenced by equity markets, given that equity fees are higher. So should equity markets continue to fall, then our fee rate will come down a little bit with that just because of mix. The I maintain mandate, yes, as I said, is large assets, very low fee. So that will actually improve the fee rate. And yeah, we're starting to see some improvements coming through in, you know, we've seen some sizable outflows in US mid and smid over the last couple of years, as you've seen. The performance of, you know, particularly the enterprise fund, which is the mid cap fund, has been excellent, really excellent over the last, I guess, you know, all of 21 and the first four months of this year. And we're starting to see those flows turn. Again, that's high fee business. So that's an important one to come back. The European intermediary business, also high-fee business, that did slow in Q1, as I said. Gross flows slowed on the back of a multitude of reasons, as I said. That's an industry phenomenon. Should that continue, then we don't get the kicker from from a higher fee European intermediary business. But again, that's been a real strength over the last year or two. So hopefully things settle down and we start to see positive flows again coming out of European intermediary.

Very good. All right. Thanks, guys.

Our next question comes from Robert Lee from KBW. Robert, please go ahead.

uh great thanks uh thanks for taking my questions you know maybe just a little bit on uh first one on uh your expense guidance and the comp ratio so you know when we think about you know you know what's just quarter a year today quarter today returns you know you know the uh comp ratio guidance still in that kind of low 40s range you know with know how much flexibility do you really have in that obviously there's variable comp related to profitability and performance but you know should we really be expecting that uh you know the pressure just stays that we've had so far that that comp ratio it's going to you know at the least will be towards the high end of that low 40s or should we really think that there's you know this continues um you know it's going to really get to more towards mid 40s is trying to how you guys think about the real flexibility you have in managing that.

Yeah. So you're right. A significant part of our comp cost is variable. About 40% of our total cost base is variable comp. So that naturally flexes. So that piece sort of looks after itself. In Q1, you have to remember that there are some lumpy pieces, US payroll taxes, stock vesting. So Q1 is always a higher fixed cost base, and that wears itself through to the other three quarters. So I think we were at 44% last year, we're at 42% this year. So the guidance of 42% comp ratio, given where we are with markets and what I've talked about, I'm pretty confident with that as a comp ratio. We'll continue to manage the business tightly. So that comp ratio does stay. On non-comp, as I said, Q1 was actually a relatively light quarter. We do expect to see increased non-comp in the remaining three quarters. But again, we will be reviewing that and being careful with it. But there are things that we want and expect to come through in the remaining three quarters.

Okay, great. My other questions were asked already, so thank you.

Okay, thanks Robert. Our next question is from Ed Henning at CLSA. Please go ahead.

Hi, thanks for taking my questions. Just first one, look, you've talked about a strong balance sheet today. You've also talked about, you know, reducing scale of institutional business. Can you just talk about the appetite for acquisitions to accelerate growth? and gain some more scale in your institutional business? I know you've obviously been growing ETFs and growing organically, but just interested to start with just about acquisition appetite.

Okay, thanks, Ed. I guess the first piece is the most important thing for us is maximising the value of what we've put together and what we've been building over the last five years. And we haven't fully done that, obviously, yet. But there are... And we are... We are a truly global firm and have the right geographic footprint in all client channels, but I guess you were asking specifically around the institutional channel. We've got an institutional business which is established around the world and we've been investing in that over the last five years. we're not short of capabilities or products, and we've got some really strong performing capabilities and products. There are, and we talked about this in Q3, I think it was, there are areas that, you know, we continue to look at, and you shouldn't be too surprised if over time, you know, we do more in those areas. So they're more in investment capabilities rather than in distribution. So, you know, we've talked about potentially some other areas in fixed income that we're not fully in yet. We've talked about moving into some areas around in alts. But again, that's all, as Alex asked earlier, I think, that's all going to be part of an ongoing strategy. I think the most important thing for now is it's very much business as usual. We're always looking at things. We look at a lot of opportunities. There are very few that are very, very good, and we only want to do the very, very good ones. So it's business as usual. We're looking at things as we always are now, and we'll continue to look at them when Ali joins in a month. But like I say, the most important thing is maximizing the value of what we've got, and we'll continue on that road.

OK, thank you. And just some mechanical questions just on the numbers. You talked about performance fees likely down year on year. Will that likely just trend through each quarter or is there a lump that potentially comes through in performance fees if status quo stays as is?

Yeah, we had a very strong Q2 last year. So that was... Again, it's difficult to project forward performance. Obviously, it depends on what performance is in the time period. But given what we see today, if we cut that today, Q2 would be a significantly weaker performance fee quarter than we had last year. There's two pieces in that. The first is the Falcon fees we have on the U.S. mutual funds. And as I said, we've got a couple of – again, you can – calculate this straight through and we can talk through it. But we would expect that to be, given current performance, if it was zero alpha between now and the end of the year, the Falcon fees would be $60 million negative. And as I say, again, just looking at what we see now in terms of performance fees, Again, if we cut them today, the positive performance feeds from our segregated accounts, from our CCABs, which were very strong in Q2 last year, from our absolute return funds, from our OICs, would not fully offset that $60 million. So again, it'll be what it'll be. Hopefully performance is very strong over the rest of the year and those numbers are a little bit better. But that's what we can see given performance of where we are today and just saying there was no alpha between now and the end of the year.

Yeah, and that's saying absolute number of the dollar of performance fees is negative, not just down year on year. Correct. Yeah, OK.

Thank you for clarifying. Our next question comes from Patrick Devitt from Autonomous Research. Patrick, please go ahead.

Good morning, everyone. One more on the expense. As we look kind of beyond this year, is there an opportunity for that to then step down when some of these big infrastructure build-outs are finished, or is that kind of the new run rate once we get to the end of the year?

You always want that. There are things we're certainly turning off. So as we modernize our infrastructure, there are systems that we're able to turn off and there are savings there. But the truth is we're continuing to – there is more you need. There is more data. There is more cloud cost. So I think you probably – this is really around leverage. As I said, we will continue to try and squeeze where we can and be as efficient as where we can. turn things off, et cetera. But I think really we're talking about this being the run rate, and therefore that's why it's so critical for us to grow this business organically, because this is about leverage.

Got it. Thanks. And then in the $82 billion institution number you gave, Are there a lot of these kind of 5 billion plus mandates in that number? Just trying to frame the risk of this if it becomes a more common theme.

No, that's probably one of the biggest ones. I think we do have a sort of barbelled institutional business. We have a number of larger clients, this being one of them, like I said, probably one of the biggest. And we have a very long tail of small mandates. One of the things we're looking at is trying to make sure that we're filling the piece in the middle as well. But yeah, this would be one of the biggest. There's probably a couple of others in the five category, but with a very long tail. Thanks, that's helpful.

Our next question comes from Nigel Pitaway from Citi. Nigel, please go ahead.

Thanks very much. Hi, Roger. Just first of all, maybe just delving a little bit more into smid and mid, you've partly answered this already. But obviously, what was the quantum of outflows from those two strategies in the first quarter? And with the sort of mid-cap turning, I think, positive in the month of March, I mean, you know, how confident are you now that those sort of flows are going to improve? Because it's something you've said before, but obviously it's taking a while. So can we just sort of maybe delve into sort of a level of confidence as to where you're at with those two strategies?

So, yeah, we've seen some sizable outflows over the last five quarters. I think probably when those outflows started at the beginning of 21, probably. I think in Q1, it's about $2 billion of outflows across mid and smid. That is, and like I say, that was a tough performance period in 2020. The team have made that back and a bit more, particularly on Enterprise. The numbers are very strong. And, you know, we're now into positive territory over all time periods. So, you know, we're starting to have some, you're always still concerned, but that is a great franchise. and it's starting to look really interesting for clients. So, you know, you've got to flow the outflows before you get to inflows. You've got to go through zero. That's something that hopefully will happen, you know, in the short run. But now the team are working hard on that, both the client relationship teams as well as – as Brian and Jonathan and the teams working on the investment side of that, who, like I say, delivered some fantastic numbers over the last five quarters. So we're pretty confident that's been a painful outflow over the last year or so. But I think we're seeing the end of the tunnel.

Okay, thank you. And then, you know, it's a common topic over the Q&A, but just back on the expenses, I mean, you know, obviously, you know, you've got lower expenses first quarter. So as you've highlighted, there's a fair bit of catch up in the last three quarters. Yeah, obviously, there's sort of mild average AUM headwinds and the markets are down a fair bit already in 2Q. So at what point do you actually have to reassess that and say we really can't invest so much this year given what's happening on the revenue line?

Yeah, I think there's two sides of investment. There are things that we really need to do and want to do to ensure that we've got the best business going forward. And then there are things which are a little bit more discretionary. You know, the discretionary pieces are things that we'll look at much quicker. You know, are there opportunities for us to be winning business? If the market environment is such that the opportunities are less, then we will spend less money on those discretionary pieces. But we take a long-term view of the business, so a short-term market change, we will look at things tactically. If we believe that this was very strategically longer term, then we'd be taking a longer and deeper look. Thank you very much. So that's what I'm saying. We'll update that over the next quarter's call. Okay, great.

Thank you. Our next question is from Brian Bedell from Deutsche Bank. Brian, please go ahead.

Great. Thanks very much. And thanks. I appreciate you going through all of this stuff. Hello, Roger. Maybe just a couple questions. I'll try to keep it on the quicker side. Just back on the conversations with distribution partners, I mean, your intermediary sales did hold up really well in Q1. So just trying to get a sense of is sort of there a risk to that sales number as we move into Q2 ahead of when Ali comes on board? And maybe what are those conversations, you know, how are those conversations going? Or do you think it might be just maybe, you know, coming into TQ, we may have just a headwind on the growth to value rotation in the market generally?

Yeah, I mean, the conversations with clients are very good. You know, the depth of relationship is very strong, particularly around, you know, our key and larger clients and the sort of focus list of products. So, you know, I don't think there's any – there's no concerns there. As you say, you know, we're pretty pleased. Yeah. This is a large outflow quarter. It's painful. But there are areas where we're relatively pleased. Our fixed income franchise being flat in the first quarter. you know, is pretty strong. You know, Europe has slowed down, but it's gross flows, and that's a market impact. If we can turn around US mid and SMID, then that will be a strong answer going forward. So, you know, I think, you know, the conversations we're having with clients about, you know, about the firm and Ali joining are actually all very positive and gives us opportunity to talk to people. And we're starting to see some conversations which were defensive conversations. You know, you were concerned about losing something and that conversation ends up with more money coming through the door. So, again, that's, you know, I'm picking the positives, obviously, there. As I said, it's been a painful quarter. But, you know, we're... we're continuing talking to our clients, that's the most important thing, and delivering investment performance. So I don't think there's any change, but obviously we are very cognizant of the market environment and investor sentiment, and that obviously has a significant impact on our ability to deliver positive flows.

Okay. That's great, Kelly. Thank you. And then just on maybe just on growth initiatives, you mentioned obviously the active ETF franchises continues to ramp up over $5 billion. Can you talk a little bit about, I know you've also been growing your sustainable products. Maybe just give us an update on the ESG dedicated product lineup and then any other organic growth initiatives. As you said, everything is sort of, you know, continue to the same playbook, obviously, as you to join, but maybe if you could just talk about any other major organic product development growth initiatives as well as sustainable products.

so it is yeah on the second piece first you know we launched a lot of products in 2021 um so as that as that matures um uh if that that's the real growth opportunities for 2020 2022 is things we launched in 21 so we launched you know a suite of of sustainable etfs um you know we launched um things like triple a um and now a triple b clo um that's you know AAA is now a billion one, raised $800 million in the first quarter. BBB launched in March, something like that, in the Q1. You know, it's seeing inflow. So there's some good areas there. We'll continue to look at that product pipeline. There are things we'd like to continue to do in 2022. I think we launched 21 new products in 2021. So we got a lot of things which are starting to mature. On sustainable, we're doing a lot of work there. We've invested pretty heavily in our investment team, the core group around ESG has gone from four people to 15. In terms of product, we've got about 50, but that's still driven by Europe, although we are seeing some, you know, we're seeing regulatory change in ESG is probably the fastest area of change at the moment, and you're working to some uncertain um or moving moving regular uncertain regulatory environments so it's on level two um pieces in europe um uh which will need to be you know need to be embedded by the end of the year you know the actual rules are not going to come out until the end of june um so you know it's there's a lot of work going on um we've launched a number of um Article 8 and Article 9 funds in Europe and expect to launch or convert some more over the remainder of the year. About 55% of our CCAP region in Luxembourg is now either Article 8 or Article 9. Again, we've been pretty cautious on this. As you'd expect from Janice Henderson, we want to do this right. and make sure that we've got the infrastructure and the reporting behind it to make sure that we're really confident that in exactly what we say we're doing, we are doing. And we have seen a couple of people being caught out on that and I think the rules will continue to move and we want to make sure that we're doing the right thing. So we're being cautious, but we're making some pretty significant investment in the teams and in the data and in the systems and reporting to make sure that our sustainable products are there. It's obviously a growth area. We've got a very long-term track record in that. We've got a global sustainable product which celebrated its 30th anniversary last year, but sustainable equity, we launched that as a U.S. fund over the last couple of years and then Australia last year. It's now about $3.8 billion. That's doubled over the last 18 months probably. And we see that obviously is a specific strategy around ESG.

um but but we're looking to make sure that we're doing the right thing across a broader range as well that's great thanks so much for all the detail our final question today comes from john dunn from evercore john please go ahead thanks um maybe uh just a quick check in on the strategy for growing uh alt specifically and you know earlier you talked about maybe some inorganic ways to do it. So maybe just potential areas of interest and maybe how the competitive environment's winning those is currently.

Yeah, there's certainly things that we do. So we're seeing some real success in a couple of areas that call out. So our biotech innovation hedge fund has grown pretty significantly over the last year or so since it was launched. Our multi-strat product is one of those ones which is not going to offset in AUM terms that buy and maintain mandate I told you about. But in revenue terms, it's a very different pricing point. So winning $50 million and $100 million tickets in multi-strat is something that moves the dial on the revenue side. so we've got we've got all capabilities we've got a you know we've got a um you know a long long uh tenured and successful uh absolute return fund range in in europe as well uh that is that is continuing to do what it's supposed to do um uh and again um you know we hope and expect that to to to uh to gather assets over time um so we've got we've got an alts business um But there are areas, yeah, that we continue to look at where we may add to that over time. So nothing specific to talk about here. We're not about to close anything. But, you know, there's always interesting things to look at, particularly probably in the less liquid end of fixed income.

Thanks very much.

okay well thank you all for uh for your time today and for the questions um if there's any follow-ups then then please do let uh me or the ir team know um good to talk to you today uh i very much look forward to doing this call with you uh with ali in three months time thank you concludes today's conference call thank you all very much for joining you may now disconnect