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JNS > SEC Filings for JNS > Form 10-Q on 25-Oct-2012All Recent SEC Filings

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Form 10-Q for JANUS CAPITAL GROUP INC


25-Oct-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

FORWARD-LOOKING STATEMENTS

Certain statements in this Quarterly Report on Form 10-Q contain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties, assumptions and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Statements preceded by, followed by or that otherwise include the words "believes," "expects," "anticipates," "intends," "projects," "estimates," "plans," "may increase," "may fluctuate," "forecast" and similar expressions or future or conditional verbs such as "will," "should," "would," "may" and "could" are generally forward-looking in nature and not historical facts. Any statements that refer to expectations or other characterizations of future events, circumstances or results are forward-looking statements. These statements are based on the beliefs and assumptions of Company management based on information currently available to management.

Various risks, uncertainties, assumptions and factors that could cause future results to differ materially from those expressed by the forward-looking statements included in this Quarterly Report on Form 10-Q include, but are not limited to, risks, uncertainties, assumptions and factors specified in the Company's Annual Report on Form 10-K for the year ended December 31, 2011, and this Quarterly Report on Form 10-Q included under headings such as "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations," and in other filings and furnishings made by the Company with the SEC from time to time. In light of these risks, uncertainties, assumptions and factors, the forward-looking events discussed in this Quarterly Report on Form 10-Q may not occur. Many of these factors are beyond the control of the Company and its management. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date stated, or if no date is stated, as of the date of this Quarterly Report on Form 10-Q. The Company undertakes no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events unless required by applicable law or regulation.

AVAILABLE INFORMATION

Copies of Janus Capital Group Inc.'s (collectively, "JCG" or the "Company") filings with the Securities and Exchange Commission ("SEC") can be obtained from the SEC's Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Information can be obtained about the operation of the Public Reference Room by calling the SEC at (800) SEC-0330. The SEC also maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at http://www.sec.gov.

JCG makes available free of charge its annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K and amendments thereto as soon as reasonably practical after such filing has been made with the SEC. Reports may be obtained through the Investor Relations section of JCG's website (http://ir.janus.com) or by contacting JCG at (888) 834-2536. The contents of JCG's website are not incorporated herein for any purpose.

JCG's Officer Code of Ethics for Principal Executive Officer and Senior Financial Officers (including its chief executive officer, chief financial officer and controller) (the "Officer Code"); Corporate Code of Business Conduct and Ethics for all employees; corporate governance guidelines; and the charters of key committees of the board of directors (including the Audit, Compensation, Nominating, Corporate Governance, and Planning and Strategy committees) are available on its website (http://ir.janus.com/documents.cfm). Any future amendments to or waivers of the Officer Code will be posted to the Investor Relations section of JCG's website.


RESULTS OF OPERATIONS

Overview

JCG provides investment management, administration, distribution and related services to individual and institutional investors through mutual funds, other pooled investment vehicles, separate accounts and subadvised relationships (collectively referred to as "investment products") in both domestic and international markets. Over the last several years, JCG has expanded its business to become a more diversified manager with increased product offerings and distribution capabilities. JCG offers three distinct types of investment advisory services, including fundamental equity (includes growth and core equity, global and international equity, and value investment disciplines), fixed income and mathematical equity, through its primary subsidiaries, Janus Capital Management LLC ("Janus"), INTECH Investment Management LLC ("INTECH") and Perkins Investment Management LLC ("Perkins"). Each of JCG's three primary subsidiaries specializes in specific investment styles and disciplines. JCG's investment products are distributed through three channels: retail intermediary, institutional and international. Each distribution channel focuses on specific investor groups and the unique requirements of each group.

Revenues are generally based upon a percentage of the market value of assets under management and are calculated as a percentage of the daily average asset balance in accordance with contractual agreements. Certain investment products are also subject to performance fees, which vary based on a product's relative performance as compared to a benchmark index and the level of assets subject to such fees. Assets under management primarily consist of domestic and international equity and debt securities. Accordingly, fluctuations in domestic and international financial markets, relative investment performance, sales and redemptions of investment products, and changes in the composition of assets under management are all factors that have a direct effect on JCG's operating results.

Third Quarter 2012 Summary

Average assets under management for the third quarter 2012 of $155.5 billion increased $0.5 billion, or 0.3%, over the second quarter 2012 as a result of favorable market conditions, offset by long-term net outflows. Third quarter 2012 revenues of $209.0 million increased $3.0 million, or 1.5%, from the second quarter 2012 due to increased management fees from higher average assets under management and increased performance fees from separate accounts. Negative mutual fund performance fees remained unchanged from the second quarter 2012 to the third quarter 2012. The Company achieved an operating margin of 22.9% and net income of $0.14 per diluted share in the third quarter 2012.

Investment and Strategic Cooperation Agreement with The Dai-ichi Life Insurance Company, Limited

On August 10, 2012, JCG entered into an Investment and Strategic Cooperation Agreement (the "Agreement") with The Dai-ichi Life Insurance Company, Limited ("Dai-ichi"). Pursuant to the terms of the Agreement, Dai-ichi will acquire at least 15% and no more than 20% of JCG's issued and outstanding common stock no later than the first anniversary of the Agreement.

Dai-ichi's acquisitions will be made through open market transactions and potentially through the exercise of options issued by JCG in conjunction with the Agreement. The options allow Dai-ichi to purchase up to 14.0 million shares of JCG's common stock for a purchase price of $10.25 per share. The options are exercisable only after Dai-ichi owns at least 8% of JCG's issued and outstanding common stock and expire on the first anniversary of the Agreement. The options were sold to Dai-ichi at agreed upon fair value for cash consideration of $4.9 million.

In accordance with the terms of the Agreement, Dai-ichi committed to invest a minimum of $2.0 billion in investment products managed by JCG's subsidiaries. The initial investment of $302.5 million was made in early October 2012. The remaining balance will be invested within approximately one year following the date on which Dai-ichi achieves a 15% ownership interest in JCG's issued and outstanding common stock (the "Effective Date"). Additionally, Dai-ichi will have the right to appoint a representative to the JCG Board of Directors following the Effective Date.

As of October 19, 2012, Dai-ichi owned approximately 9% of JCG's issued and outstanding common stock. Also, as of October 19, 2012, Dai-ichi had not exercised any of its options.


Investment Performance

Investment products are generally evaluated based on their investment performance relative to other investment products with similar disciplines and strategies or benchmark indices. The following is a summary of investment performance as of September 30, 2012:

                                                            Percentage of Mutual Fund Assets
                                                       Outperforming Majority of Lipper Peers (1)
                                               1-Year                      3-Year                    5-Year
Complex-wide mutual fund assets                            41 %                        32 %                   56 %
Fundamental equity mutual fund assets                      38 %                        26 %                   49 %
Fixed income mutual fund assets                            54 %                        75 %                  100 %

                                           Percentage of Strategies Outperformaing Respective Benchmarks (2)
                                               1-Year                      3-Year                    5-Year
Mathematical equity strategies                             82 %                        93 %                   75 %



(1) References Lipper relative performance on a weighted basis.

(2) References relative performance, net of fees.

Assets Under Management and Flows

Valuation

The value of assets under management is derived from the cash and investment securities held by JCG's investment products. Investment security values are determined using unadjusted or adjusted quoted market prices and independent third-party price quotes in active markets. For debt securities with maturities of 60 days or less, the amortized cost method is used to determine the value. Securities for which market prices are not readily available or are considered unreliable are internally valued using appropriate methodologies for each security type or by engaging third-party specialists. The value of the majority of the equity and derivative securities underlying JCG's investment products is derived from readily available and reliable market price quotations while the value of a majority of the fixed income securities is derived from evaluated pricing from independent third-party providers.

The pricing policies for mutual funds advised by JCG's subsidiaries (the "Funds") are established by the Funds' Independent Board of Trustees and are designed to test and validate fair value measurements. Responsibility for pricing securities held within separate and subadvised accounts may be delegated by separate or subadvised clients to JCG or another party.

Assets Under Management and Flows

Total Company assets under management of $158.2 billion at September 30, 2012, increased $17.2 billion, or 12.2%, from September 30, 2011, as a result of net market appreciation of $29.7 billion, offset by long-term net outflows of $12.5 billion. Long-term net flows represent total Company net sales and redemptions, excluding money market assets.

Fundamental equity long-term net outflows were $3.3 billion in the third quarter 2012 compared with long-term net outflows of $3.8 billion in the third quarter 2011. The decrease in net outflows was primarily driven by lower redemptions.

Fixed income long-term net flows were positive for the 15th consecutive quarter, with $1.0 billion in the third quarter 2012 compared with $2.1 billion in the third quarter 2011.

Mathematical equity long-term net inflows were $0.3 billion in the third quarter 2012 compared with $0.7 billion of long-term net outflows in the third quarter 2011.


The following tables present the components of JCG's assets under management (in billions):

                                        Three months ended September 30,           Nine months ended September 30,
                                           2012                  2011                 2012                 2011

Beginning of period assets           $           152.4     $           169.8    $          148.2     $          169.5
Long-term sales:
Fundamental equity                                 4.0                   4.9                13.4                 17.4
Fixed income                                       2.8                   3.8                 9.0                  7.8
Mathematical equity (1)                            2.6                   1.0                 3.7                  3.8
Long-term redemptions:
Fundamental equity                                (7.3 )                (8.7 )             (21.1 )              (26.3 )
Fixed income                                      (1.8 )                (1.7 )              (5.7 )               (4.3 )
Mathematical equity (1)                           (2.3 )                (1.7 )              (7.7 )               (6.6 )
Long-term net flows: (2)
Fundamental equity                                (3.3 )                (3.8 )              (7.7 )               (8.9 )
Fixed income                                       1.0                   2.1                 3.3                  3.5
Mathematical equity                                0.3                  (0.7 )              (4.0 )               (2.8 )
Total long-term net flows                         (2.0 )                (2.4 )              (8.4 )               (8.2 )
Net money market flows                               -                     -                (0.1 )                  -
Market/fund performance                            7.8                 (26.4 )              18.5                (20.3 )
End of period assets                 $           158.2     $           141.0    $          158.2     $          141.0



(1) Gross sales and redemptions for the nine months ended September 30, 2011, exclude the transfer of $1.1 billion within mathematical equity strategies.

(2) Excludes money market flows. Sales and redemptions of money market funds are presented net on a separate line due to the short-term nature of the investments.

                                        Three months ended September 30,           Nine months ended September 30,
                                           2012                  2011                 2012                 2011
Average assets under management
Fundamental equity                   $            89.0     $            94.6    $           91.2     $          104.9
Fixed income                                      24.8                  17.9                23.2                 16.8
Mathematical equity                               40.3                  41.9                40.7                 43.5
Money market                                       1.4                   1.5                 1.4                  1.5
Total                                $           155.5     $           155.9    $          156.5     $          166.7


Assets and Flows by Investment Discipline

JCG, through its primary subsidiaries, offers investment products based on a diversified set of investment disciplines. Janus offers growth and core equity, global and international equity as well as balanced, fixed income and retail money market investment products. INTECH offers mathematical-based investment products and Perkins offers value-disciplined investment products. Assets and flows by investment discipline are as follows (in billions):

                                         Three Months Ended September 30,          Nine Months Ended September 30,
                                             2012                 2011                2012                 2011
Growth/Core (1)
Beginning of period assets             $           52.7     $           58.5    $           49.7     $           60.9
Sales                                               2.3                  2.9                 7.5                  9.1
Redemptions                                        (3.9 )               (4.7 )             (11.3 )              (15.3 )
Net redemptions                                    (1.6 )               (1.8 )              (3.8 )               (6.2 )
Market/fund performance                             3.1                 (9.4 )               8.3                 (7.4 )
End of period assets                   $           54.2     $           47.3    $           54.2     $           47.3

Global/International
Beginning of period assets             $           17.6     $           26.1    $           18.4     $           27.9
Sales                                               0.7                  0.8                 2.7                  3.9
Redemptions                                        (1.5 )               (2.2 )              (4.7 )               (6.1 )
Net redemptions                                    (0.8 )               (1.4 )              (2.0 )               (2.2 )
Market/fund performance                             0.7                 (6.1 )               1.1                 (7.1 )
End of period assets                   $           17.5     $           18.6    $           17.5     $           18.6

Mathematical Equity (2)
Beginning of period assets             $           39.2     $           45.5    $           39.9     $           44.1
Sales                                               2.6                  1.0                 3.7                  3.8
Redemptions                                        (2.3 )               (1.7 )              (7.7 )               (6.6 )
Net sales (redemptions)                             0.3                 (0.7 )              (4.0 )               (2.8 )
Market/fund performance                             2.4                 (6.8 )               6.0                 (3.3 )
End of period assets                   $           41.9     $           38.0    $           41.9     $           38.0

Fixed Income (1)
Beginning of period assets             $           23.8     $           17.2    $           20.6     $           15.3
Sales                                               2.8                  3.8                 9.0                  7.8
Redemptions                                        (1.8 )               (1.7 )              (5.7 )               (4.3 )
Net sales                                           1.0                  2.1                 3.3                  3.5
Market/fund performance                             0.8                 (0.7 )               1.7                 (0.2 )
End of period assets                   $           25.6     $           18.6    $           25.6     $           18.6

Value
Beginning of period assets             $           17.7     $           21.0    $           18.1     $           19.8
Sales                                               1.0                  1.2                 3.2                  4.4
Redemptions                                        (1.9 )               (1.8 )              (5.1 )               (4.9 )
Net redemptions                                    (0.9 )               (0.6 )              (1.9 )               (0.5 )
Market/fund performance                             0.8                 (3.4 )               1.4                 (2.3 )
End of period assets                   $           17.6     $           17.0    $           17.6     $           17.0

Money Market
Beginning of period assets             $            1.4     $            1.5    $            1.5     $            1.5
Sales                                               0.2                  0.3                 0.5                  0.8
Redemptions                                        (0.2 )               (0.3 )              (0.6 )               (0.8 )
Net redemptions                                       -                    -                (0.1 )                  -
Market/fund performance                               -                    -                   -                    -
End of period assets                   $            1.4     $            1.5    $            1.4     $            1.5



(1) Growth/core and fixed income assets reflect a 50%/50% split of the Janus Balanced Fund between the two categories.

(2) Gross sales and redemptions for the nine months ended September 30, 2011, exclude the transfer of $1.1 billion within mathematical equity strategies.


Results of Operations

Three Months Ended September 30, 2012, Compared with Three Months Ended September 30, 2011

Revenues

Investment management fees

Investment management fees decreased $8.1 million, or 4.0%, primarily as a result of the 0.3% decrease in average assets under management predominantly driven by long-term net outflows. Revenue decreased at a higher rate than average assets primarily due to a product mix shift toward lower yielding products.

Performance fees

Performance fee revenue is derived from certain mutual funds and separate accounts. Negative performance fees increased $17.8 million primarily due to additional mutual funds becoming subject to performance fees and underperformance of mutual fund assets against the benchmarks of their respective funds, offset slightly by positive performance fees on separate account assets. Mutual fund performance fees represent up to a positive or negative 15 basis point adjustment to the base management fee.

At September 30, 2012 and 2011, $55.1 billion and $32.9 billion of mutual fund assets were subject to performance fees, respectively. As approved by mutual fund shareholders in 2010, six additional mutual funds became subject to performance fees in 2011, with the first fee adjustment for the impacted funds calculated at various points during 2011. The first quarter 2012 represented the first quarter in which all mutual fund assets subject to performance fees were subject to such fees for an entire quarter.

Expenses

Long-term incentive compensation

Long-term incentive compensation decreased $0.2 million, or 1.2%, due to a decrease of $3.6 million in Perkins senior profits interests awards expense. The Perkins senior profits interests awards have a formula-driven terminal value based on revenue and relative investment performance of products subadvised by Perkins. Additionally, long-term incentive compensation decreased $1.6 million from the vesting of awards granted in previous years and $1.1 million as a result of JCG revising its estimate for forfeitures during the third quarter 2011. These decreases were partially offset by $3.3 million of expense from new awards granted during 2012 and a $2.8 million mark-to-market adjustment for changes in fair value of mutual fund share awards.

Long-term incentive awards granted during 2012 totaled $56.0 million and will generally be recognized ratably over a four-year period.

Depreciation and amortization

Depreciation and amortization increased $1.8 million, or 22.2%, primarily due to a $2.5 million intangible asset impairment charge from the loss of a JCG subadvised relationship. Janus recognizes an impairment charge equal to the unamortized value of the associated intangible asset when formal notification of termination is received. The assets were redeemed in full during the third quarter 2012.

Interest expense

Interest expense declined $1.9 million, or 14.6%, primarily as a result of the retirement of the $92.2 million principal amount of outstanding debt in the third quarter 2011, and the first quarter 2012 debt tender in which $59.4 million aggregate principal amount of the Company's outstanding 2014 and 2017 Senior Notes were repurchased with cash on hand.

Investment gains (losses), net

Net investment gains totaling $7.6 million for the third quarter 2012 primarily include $8.9 million of mark-to-market gains on seed capital classified as trading securities and $3.3 million of mark-to-market gains on the mutual fund share award economic hedge. The investment gains on seed capital were partially offset by $5.0 million of losses generated by the Company's economic hedging strategy. The hedging strategy utilizes futures contracts to mitigate a portion of the volatility created by the mark-to-market accounting of seed capital investments. JCG may modify or discontinue this hedging strategy at any time.

Income tax provision

JCG's income tax provision for the three months ended September 30, 2012, includes tax expense of $1.2 million related to expiration and vesting of certain equity-based compensation awards.


Noncontrolling interests

Noncontrolling interests in net income increased from $(0.1) million in the third quarter 2011 to $2.6 million in the third quarter 2012 primarily due to $3.5 million of gains associated with the noncontrolling interests in consolidated investment products, offset by a decline of $0.8 million in the noncontrolling interest share of Perkins earnings.

Nine Months Ended September 30, 2012, Compared with Nine Months Ended September 30, 2011

Revenues

Investment management fees

Investment management fees decreased $64.9 million, or 9.9%, primarily as a result of the 6.1% decrease in average assets under management driven by long-term net outflows, partially offset by favorable market conditions. Revenue decreased at a higher rate than average assets primarily due to a product mix shift toward lower yielding products.

Performance fees

Negative performance fees increased $59.3 million primarily due to additional mutual funds becoming subject to performance fees and underperformance of mutual fund assets against the benchmarks of their respective funds, offset slightly by positive performance fees on separate account assets. Negative mutual fund performance fees totaled $65.5 million for the nine months ended September 30, 2012.

Expenses

Employee compensation and benefits

Employee compensation and benefits decreased $23.4 million, or 10.1%, principally due to lower investment team incentive compensation as a result of lower profits. The investment team incentive compensation plan is designed to link variable compensation to operating income.

Long-term incentive compensation

Long-term incentive compensation decreased $1.3 million, or 2.5%, due to a decrease of $10.0 million in Perkins senior profits interests awards expense and . . .

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