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JNS > SEC Filings for JNS > Form 10-Q on 24-Oct-2013All Recent SEC Filings

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Form 10-Q for JANUS CAPITAL GROUP INC


24-Oct-2013

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 JCG 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 JCG's Annual Report on Form 10-K for the year ended December 31, 2012, 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 JCG 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 JCG 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. JCG 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 Chief Executive Officer and Senior Financial Officers (including its Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer) (the "Officer Code"); Corporate Code of Business Conduct 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/govdocs.aspx?iid=4050265). 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 financial advisors, individuals and institutional clients 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 investment product offerings and distribution capabilities. JCG provides investment management competencies across a range of disciplines, including fundamental U.S. and global equities (growth and value), mathematical equities, fixed income and alternatives through its subsidiaries, Janus Capital Management LLC ("Janus"), INTECH Investment Management LLC ("INTECH") and Perkins Investment Management LLC ("Perkins"). Each of JCG's subsidiaries specializes in specific investment styles and has its own unique and independent perspective. JCG's investment products are distributed through three primary 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 fixed income 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 2013 Summary

Average assets under management for the third quarter 2013 of $165.2 billion increased $1.0 billion, or 0.6%, over the second quarter 2013 as a result of favorable market conditions, partially offset by long-term net outflows. Third quarter 2013 revenues of $217.7 million increased $1.9 million, or 0.9%, from the second quarter 2013 due to increased investment management fee revenue driven by higher average assets under management. JCG achieved an operating margin of 27.1% and net income attributable to JCG of $0.17 per diluted share in the third quarter 2013.

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 table is a summary of investment performance as of September 30, 2013:

                                                   Percentage of Mutual Fund Assets
                                           Outperforming Majority of Morningstar Peers (1)
                                             1-year             3-year             5-year

Complex-wide mutual fund assets                      48 %               41 %               47 %
Fundamental equity mutual fund assets                41 %               32 %               39 %
Fixed income mutual fund assets                      98 %              100 %              100 %

Percentage of Strategies Outperforming Respective Benchmarks (2) 1-year 3-year 5-year

Mathematical equity strategies 29 % 64 % 42 %



(1) References Morningstar relative performance on an asset-weighted basis.

(2) References relative performance, net of fees.

Assets Under Management and Flows

Valuation

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 the separate or subadvised clients to JCG or another party. JCG validates pricing received from third-party providers by comparing pricing between primary and secondary vendors. Any


discrepancies are identified and resolved. All pricing vendors are subject to an annual on-site due diligence review that includes a detailed discussion about the methodologies used, particularly for evaluated prices, and any changes to the methodologies.

The value of assets under management is derived from the cash and investment securities underlying JCG's investment products. The value of the majority of the equity 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.

When market quotations are not readily available or deemed unreliable, or events or circumstances that may affect the value of portfolio securities are identified between the closing of their principal markets and the time the net asset value is determined, securities may be valued under procedures established and supervised by the Funds' Independent Board of Trustees. Circumstances in which fair value pricing may be utilized include, but are not limited to: (i) a significant event that may affect the securities of a single issuer, such as a merger or bankruptcy; (ii) an event that may affect an entire market, such as a natural disaster; and (iii) pricing of a non-valued security or a restricted or non-public security. Systematic fair valuation models provided by independent third-parties may be used to value international equity securities in order to adjust for stale pricing, which may occur between the close of certain foreign exchanges and the close of the New York Stock Exchange.

Assets Under Management and Flows

Total Company assets under management of $166.7 billion at September 30, 2013, increased $8.5 billion, or 5.4%, from September 30, 2012, as a result of net market appreciation of $25.6 billion, offset by long-term net outflows of $17.1 billion. Long-term net flows represent total Company net sales and redemptions, excluding money market assets.

Fundamental equity long-term net outflows were $4.9 billion in the third quarter 2013 compared with long-term net outflows of $3.3 billion in the third quarter 2012.

Fixed income long-term net flows were flat in the third quarter 2013 compared with long-term net inflows of $1.0 billion in the third quarter 2012.

Mathematical equity long-term net inflows were $0.7 billion in the third quarter 2013 compared with long-term net inflows of $0.3 billion in the third quarter 2012.


The following tables present the components of JCG's assets under management for the three and nine months ended September 30, 2013 and 2012 (in billions):

                               Three months ended       Nine months ended
                                 September 30,            September 30,
                                2013         2012        2013        2012
Beginning of period assets   $    160.6    $  152.4   $    156.8    $ 148.2
Long-term sales:
Fundamental equity                  3.8         4.0         13.2       13.4
Fixed income                        2.5         2.8          9.0        9.0
Mathematical equity                 2.7         2.6          4.3        3.7
Long-term redemptions:
Fundamental equity                 (8.7 )      (7.3 )      (24.2 )    (21.1 )
Fixed income                       (2.5 )      (1.8 )       (8.6 )     (5.7 )
Mathematical equity                (2.0 )      (2.3 )       (7.2 )     (7.7 )
Long-term net flows: (1)
Fundamental equity                 (4.9 )      (3.3 )      (11.0 )     (7.7 )
Fixed income                          -         1.0          0.4        3.3
Mathematical equity                 0.7         0.3         (2.9 )     (4.0 )
Total long-term net flows          (4.2 )      (2.0 )      (13.5 )     (8.4 )
Net money market flows                -           -         (0.1 )     (0.1 )
Market/fund performance            10.3         7.8         23.5       18.5
End of period assets         $    166.7    $  158.2   $    166.7    $ 158.2



(1) 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       Nine months ended
                                      September 30,            September 30,
                                     2013         2012        2013        2012
Average assets under management
Fundamental equity                $     92.8    $   89.0   $     92.6    $  91.2
Fixed income                            27.6        24.8         27.4       23.2
Mathematical equity                     43.3        40.3         42.3       40.7
Money market                             1.5         1.4          1.4        1.4
Total                             $    165.2    $  155.5   $    163.7    $ 156.5


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        Nine months ended
                                  September 30,             September 30,
                                2013          2012         2013        2012
Growth/Core (1)
Beginning of period assets   $     57.1    $     52.7   $     53.8    $  49.7
Sales                               2.0           2.3          8.0        7.5
Redemptions                        (5.4 )        (3.9 )      (13.4 )    (11.3 )
Net redemptions                    (3.4 )        (1.6 )       (5.4 )     (3.8 )
Market/fund performance             4.9           3.1         10.2        8.3
End of period assets         $     58.6    $     54.2   $     58.6    $  54.2

Global/International
Beginning of period assets   $     16.8    $     17.6   $     17.9    $  18.4
Sales                               1.1           0.7          2.5        2.7
Redemptions                        (1.1 )        (1.5 )       (4.3 )     (4.7 )
Net redemptions                       -          (0.8 )       (1.8 )     (2.0 )
Market/fund performance             1.5           0.7          2.2        1.1
End of period assets         $     18.3    $     17.5   $     18.3    $  17.5

Mathematical Equity
Beginning of period assets   $     41.3    $     39.2   $     40.2    $  39.9
Sales                               2.7           2.6          4.3        3.7
Redemptions                        (2.0 )        (2.3 )       (7.2 )     (7.7 )
Net sales (redemptions)             0.7           0.3         (2.9 )     (4.0 )
Market/fund performance             2.7           2.4          7.4        6.0
End of period assets         $     44.7    $     41.9   $     44.7    $  41.9

Fixed Income (1)
Beginning of period assets   $     27.3    $     23.8   $     26.4    $  20.6
Sales                               2.5           2.8          9.0        9.0
Redemptions                        (2.5 )        (1.8 )       (8.6 )     (5.7 )
Net sales                             -           1.0          0.4        3.3
Market/fund performance             0.5           0.8          1.0        1.7
End of period assets         $     27.8    $     25.6   $     27.8    $  25.6

Value
Beginning of period assets   $     16.7    $     17.7   $     17.0    $  18.1
Sales                               0.7           1.0          2.7        3.2
Redemptions                        (2.2 )        (1.9 )       (6.5 )     (5.1 )
Net redemptions                    (1.5 )        (0.9 )       (3.8 )     (1.9 )
Market/fund performance             0.7           0.8          2.7        1.4
End of period assets         $     15.9    $     17.6   $     15.9    $  17.6

Money Market
Beginning of period assets   $      1.4    $      1.4   $      1.5    $   1.5
Sales                               0.2           0.2          0.6        0.5
Redemptions                        (0.2 )        (0.2 )       (0.7 )     (0.6 )
Net redemptions                       -             -         (0.1 )     (0.1 )
Market/fund performance               -             -            -          -
End of period assets         $      1.4    $      1.4   $      1.4    $   1.4



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


Results of Operations

Three Months Ended September 30, 2013, Compared with Three Months Ended September 30, 2012

Revenues

Investment Management Fees

Investment management fees increased $9.9 million, or 5.1%, primarily as a result of the 6.2% increase in average assets under management driven by market appreciation. Revenue increased at a lower rate than average assets primarily due to a product mix shift toward lower yielding products.

Performance Fees

Negative performance fees increased $1.1 million, or 5.3%, due to underperformance of certain mutual funds against their respective benchmarks. The following is a summary of mutual fund and private account assets subject to performance fees as of September 30, 2013 and 2012 (in billions):

                           September 30,
                           2013      2012
Mutual fund assets       $   52.2   $ 55.1
Private account assets   $   13.3   $ 11.0

Operating Expenses

Employee Compensation and Benefits

Employee compensation and benefits increased $2.5 million, or 3.5%, principally due to higher investment team incentive compensation as a result of higher operating income. The investment team incentive compensation plan is designed to link variable compensation to operating income.

Depreciation and Amortization

Depreciation and amortization expense decreased $2.8 million, or 28.3%, primarily due to a $2.5 million intangible asset impairment charge from the loss of a subadvised relationship recognized in the third quarter 2012.

Non-Operating Activities

Investment Gains, Net

Net investment gains totaling $7.9 million for the third quarter 2013 include gains of $21.1 million from the mark-to-market and sale of trading securities, $14.4 million of losses generated by JCG's economic hedging of seed capital and $1.2 million of gains from the sale of available-for-sale securities. The economic hedge program uses derivative instruments to hedge against market volatility of seed investments.

Loss on Early Extinguishment of Debt

During the third quarter 2013, JCG recognized a $0.9 million loss on the open market repurchase of $8.0 million aggregate principal amount of the Company's outstanding 6.70% Senior Notes due 2017 ("2017 Notes") for $8.9 million in cash.

Income Tax Provision

JCG's effective tax rate was 37.8% and 38.0% for the three months ended September 30, 2013 and 2012, respectively. The effective tax rate and JCG's income tax provision for the same periods include $1.7 million and $1.3 million, respectively, related to the reversal of unrealized deferred tax assets upon the expiration and vesting of certain equity-based compensation awards.


Nine Months Ended September 30, 2013, Compared with Nine Months Ended September 30, 2012

Revenues

Investment Management Fees

Investment management fees increased $16.5 million, or 2.8%, primarily as a result of the 4.6% increase in average assets under management driven by market appreciation. Revenue increased at a lower rate than average assets primarily due to a product mix shift toward lower yielding products.

Operating Expenses

Employee Compensation and Benefits

Employee compensation and benefits increased $12.6 million, or 6.0%, principally due to higher investment team incentive compensation as a result of higher operating income.

Long-Term Incentive Compensation

Long-term incentive compensation decreased $5.7 million, or 11.2%, due to a decrease of $13.3 million from the vesting of awards granted in previous years and a decrease of $4.0 million as a result of JCG revising its forfeiture estimates. These decreases were partially offset by an increase of $8.6 million of expense from new awards granted during 2013 and an increase of $2.3 million in Perkins senior profits interests awards expense.

Depreciation and Amortization

Depreciation and amortization expense decreased $4.1 million, or 15.8%, due to $2.7 million of intangible asset impairment charges that occurred during the nine months ended September 30, 2012, and $1.7 million due to certain assets becoming fully depreciated in 2012.

Non-Operating Activities

Investment Gains, Net

Net investment gains totaling $6.4 million for the nine months ended September 30, 2013, include gains of $27.6 million from the mark-to-market and sale of trading securities, $22.6 million of losses generated by JCG's economic hedging of seed capital and $1.4 million of gains related to sales of available-for-sale securities.

Loss on Early Extinguishment of Debt

During the second quarter 2013, JCG recognized a $12.6 million loss on early extinguishment of debt related to the exchange of $110.0 million aggregate principal amount of JCG's outstanding 3.25% Convertible Senior Notes due 2014 ("2014 Notes"). Additionally, JCG recognized a $0.9 million loss on the open market repurchase of $8.0 million aggregate principal amount of the Company's 2017 Notes during the third quarter 2013.

JCG recognized a $7.2 million loss on early extinguishment of debt in the first quarter 2012 related to the repurchase of $59.4 million aggregate principal amount of JCG's outstanding 6.119% Senior Notes due 2014 and 2017 Notes.

Income Tax Provision

JCG's effective tax rate was 39.2% and 36.5% for the nine months ended September 30, 2013 and 2012, respectively. The effective tax rate and JCG's income tax provision for the same periods include $5.7 million and $3.9 million, respectively, related to the reversal of unrealized deferred tax assets upon the expiration and vesting of certain equity-based compensation awards.

Noncontrolling Interests

Noncontrolling interests in net income decreased $2.3 million, or 28.8%, due to a decline of $1.4 million in the noncontrolling interest share of Perkins earnings, a decline of $1.3 million in the noncontrolling interest share of INTECH earnings and $0.4 million of gains associated with the noncontrolling interest in consolidated investment products.


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