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JNS > SEC Filings for JNS > Form 10-K on 25-Feb-2014All Recent SEC Filings

Show all filings for JANUS CAPITAL GROUP INC

Form 10-K for JANUS CAPITAL GROUP INC


25-Feb-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

2013 SUMMARY

JCG finished 2013 with assets under management of $173.9 billion, an increase of 11% from the end of 2012, as a result of market appreciation partially offset by long-term net outflows. Long-term net outflows of $19.7 billion in 2013 were driven by redemptions in JCG's fundamental and mathematical equity strategies and reflect underperformance in several of our largest fundamental equity strategies coupled with the effects of portfolio manager changes.

Total revenue for JCG in 2013 of $873.9 million increased $23.9 million, or 2.8%, from 2012 as a result of higher assets under management, partially offset by the continuation of negative mutual fund performance fees and lower management fee yield.

The Company remains focused on operating efficiently as operating expenses remained relatively flat over the past two years and totaled $634.8 million and $635.5 million in 2013 and 2012, respectively, with operating margins of 27.4% and 25.2% for those same years.

Net income attributable to JCG common shareholders for 2013 totaled $114.7 million, or $0.62 per diluted share, compared with net income of $102.3 million, or $0.55 per diluted share, for 2012. Increased assets under management was the main contributor to the increase in net income attributable to JCG common shareholders.

Despite total company net outflows and underperformance in several of the firm's largest fundamental equity strategies, JCG made significant progress on a number of strategic priorities in 2013, including:

º •
º Continued expansion of its non-U.S. business with $23.8 billion in assets under management at December 31, 2013, an increase of 43% from $16.7 billion of assets under management in 2012. Net non-U.S. flows of $3 billion in 2013 compared favorably to $1 billion in flows for 2012.

º •
º Further diversification of the business through continued growth of the fixed income business, with $28.9 billion of fixed income assets under management at the end of 2013 compared to $26.4 billion at the end of 2012. Net flows for fixed income strategies were positive for 2013 at $1 billion, compared to $4 billion in 2012.

º •
º Improving fundamental equity performance by strengthening the investment process and leadership.

º •
º Building on the Company's strategic alliance with The Dai-ichi Life Insurance Company ("Dai-ichi Life") and expanding JCG's product distribution in the Japanese market.

JCG's focus for 2014 is to deliver strong investment performance and control expenses while continuing to invest in the business for long-term growth as the Company seeks to become more diversified and increase its global presence.


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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 December 31,
2013:

                                            Percentage of mutual fund assets
                                     outperforming majority of Morningstar peers (1)
                                      1-Year              3-Year             5-Year
Complex-wide mutual fund assets               46 %                46 %               53 %
Fundamental equity mutual fund
assets                                        38 %                39 %               54 %
Fixed income mutual fund assets              100 %               100 %               53 %

Percentage of strategies outperforming respective benchmarks (2) 1-Year 3-Year 5-Year Mathematical equity strategies 59 % 79 % 42 %

Percentage of complex-wide mutual funds with 4- or 5-star overall Morningstar rating™ Complex-wide mutual funds 56 %

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

º (2)
º References relative performance, net of fees.

ASSETS UNDER MANAGEMENT

Assets Under Management and Flows

Total Company assets under management increased $17.1 billion, or 11%, from 2012, as a result of net market appreciation of $36.9 billion offset by long-term net outflows of $19.7 billion. Long-term net flows represent total Company net sales and redemptions, excluding money market assets. Money market net outflows were $0.1 billion in 2013.

Fundamental equity long-term net outflows were $15.9 billion in 2013 compared with $10.4 billion in 2012. The increase in net outflows was primarily driven by underperformance and portfolio manager changes.

JCG continued to grow its fixed income business, with positive long-term net inflows of $0.9 billion in 2013 compared to $4.0 billion in 2012. While both 2013 and 2012 had positive long-term net inflows, the year-over-year decrease was driven by an increase in redemptions in 2013.

Mathematical equity long-term net outflows were $4.7 billion in 2013 compared with $5.6 billion in 2012. The decrease in net outflows was primarily driven by a decrease in redemptions in 2013.


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

                                              Year ended December 31,
                                             2013        2012      2011
               Beginning of year assets     $  156.8    $ 148.2   $ 169.5
               Long-term sales (1)
               Fundamental equity               17.2       17.5      20.8
               Fixed income                     12.6       11.6      10.7
               Mathematical equity (2)           5.2        4.9       4.5
               Long-term redemptions (1)
               Fundamental equity              (33.1 )    (27.9 )   (32.9 )
               Fixed income                    (11.7 )     (7.6 )    (5.8 )
               Mathematical equity (2)          (9.9 )    (10.5 )    (9.5 )


               Long-term net flows (1)
               Fundamental equity              (15.9 )    (10.4 )   (12.1 )
               Fixed income                      0.9        4.0       4.9
               Mathematical equity              (4.7 )     (5.6 )    (5.0 )


               Total long-term net flows       (19.7 )    (12.0 )   (12.2 )
               Net money market flows           (0.1 )        -         -
               Market/fund performance          36.9       20.6      (9.1 )


               End of year assets           $  173.9    $ 156.8   $ 148.2

º (1)
º 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.

º (2)
º 2011 gross sales and redemptions exclude the transfer of $1.1 billion within mathematical equity strategies in the first quarter 2011.

                                                 Year ended December 31,
                                                2013        2012      2011
            Average assets under management
            Fundamental equity                 $   93.0    $  90.4   $ 100.6
            Fixed income                           27.7       23.9      17.6
            Mathematical equity                    43.3       40.6      42.6
            Money market                            1.4        1.4       1.5


            Total                              $  165.4    $ 156.3   $ 162.3

Assets and Flows by Investment Discipline

JCG, through its 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


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investment products and Perkins offers value-disciplined investment products. Assets and flows by investment discipline are as follows (in billions):

                                             Year ended December 31,
                                            2013        2012      2011
               Growth/Core (1)
               Beginning of year assets    $   53.8    $  49.7   $  60.9
               Sales                           10.5        9.9      10.7
               Redemptions                    (19.2 )    (14.8 )   (18.7 )


               Net redemptions                 (8.7 )     (4.9 )    (8.0 )
               Market/fund performance         15.7        9.0      (3.2 )


               End of year assets          $   60.8    $  53.8   $  49.7




               Global/International
               Beginning of year assets    $   17.9    $  18.4   $  27.9
               Sales                            3.3        3.6       4.8
               Redemptions                     (5.6 )     (6.4 )    (7.7 )


               Net redemptions                 (2.3 )     (2.8 )    (2.9 )
               Market/fund performance          3.7        2.3      (6.6 )


               End of year assets          $   19.3    $  17.9   $  18.4




               Mathematical Equity (2)
               Beginning of year assets    $   40.2    $  39.9   $  44.1
               Sales                            5.2        4.9       4.5
               Redemptions                     (9.9 )    (10.5 )    (9.5 )


               Net redemptions                 (4.7 )     (5.6 )    (5.0 )
               Market/fund performance         12.1        5.9       0.8


               End of year assets          $   47.6    $  40.2   $  39.9




               Fixed Income (1)
               Beginning of year assets    $   26.4    $  20.6   $  15.3
               Sales                           12.6       11.6      10.7
               Redemptions                    (11.7 )     (7.6 )    (5.8 )


               Net sales                        0.9        4.0       4.9
               Market/fund performance          1.6        1.8       0.4


               End of year assets          $   28.9    $  26.4   $  20.6




               Value
               Beginning of year assets    $   17.0    $  18.1   $  19.8
               Sales                            3.4        4.0       5.3
               Redemptions                     (8.3 )     (6.7 )    (6.5 )


               Net redemptions                 (4.9 )     (2.7 )    (1.2 )
               Market/fund performance          3.8        1.6      (0.5 )


               End of year assets          $   15.9    $  17.0   $  18.1


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                                              Year ended December 31,
                                            2013         2012       2011
               Money Market
               Beginning of year assets    $    1.5     $    1.5   $  1.5
               Sales                            0.6          0.8      1.0
               Redemptions                     (0.7 )       (0.8 )   (1.0 )


               Net redemptions                 (0.1 )          -        -
               Market/fund performance            -            -        -


               End of year assets          $    1.4     $    1.5   $  1.5

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

º (2)
º 2011 gross sales and redemptions exclude the transfer of $1.1 billion within mathematical equity strategies in the first quarter 2011.

Valuation

The value of assets under management is derived from the cash and investment securities underlying 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. JCG uses adjusted market prices to value certain international equity securities in its domestic and non-domestic mutual funds in order to adjust for stale pricing that may occur between the close of certain foreign exchanges and the NYSE. Security prices are adjusted based upon historical impacts for similar post-close activity. For fixed income 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 vast 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.

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.

JCG performs a number of procedures to validate the pricing received from third-party providers. For actively traded equity securities, prices are received daily from both a primary and secondary vendor. For fixed income securities, prices are received daily from a primary vendor and weekly from a secondary vendor. Prices from the primary and secondary vendors are compared to identify any discrepancies. In the event of a discrepancy, a price challenge may be issued to both vendors. Securities with significant price changes require additional research, which may include a review of all news pertaining to the issue and issuer and any corporate actions. All fixed income prices are reviewed by JCG's fixed income trading desk in order to incorporate market activity information available to JCG's traders. In the event the traders have received price indications from market makers for a particular issue, this information is transmitted to the pricing vendors.

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.


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JCG is generally not the pricing agent for securities held within separate and subadvised accounts. However, JCG does perform a daily reconciliation between the pricing performed by the pricing agent and the pricing applied based on JCG's procedures. Any pricing discrepancies noted are sent to the pricing agent for resolution.

Revenues

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 mutual funds and separate accounts are also subject to performance fees, which vary based on a product's relative performance as compared to an established benchmark index over a specified period of time 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. The following graph depicts the direct relationship between average assets under management and investment management revenues:

[[Image Removed: GRAPHIC]]


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RESULTS OF OPERATIONS

2013 Compared to 2012

Revenues

Investment Management Fees

Investment management fees increased $30.7 million, or 3.9%, primarily as a result of a 5.8% increase in average assets under management driven by net market appreciation partially offset by long-term net outflows. Revenue increased at a lower rate than average assets primarily due to a shift toward lower-yielding products and channels.

Performance Fees

Performance fee revenue is derived from certain mutual funds and separate accounts. Negative performance fees increased $6.8 million, primarily from a decrease in positive performance fees on separate account assets. The decrease in positive performance fees on separate account assets is due to an annual $6.7 million non-recurring fee from an existing client that switched from a performance-based fee to a fixed fee in December 2012.

The following is a summary of mutual fund and separate account assets subject to performance fees as of December 31, 2013 and 2012 (in billions):

                                                 December 31,
                                                2013      2012
                     Mutual fund assets         $ 54.3   $ 54.0
                     Separate account assets    $ 14.1   $  9.9

Operating Expenses

Employee Compensation and Benefits

Employee compensation and benefits increased $18.2 million, or 6.6%, primarily due to higher incentive compensation as a result of higher profits. The company-wide incentive compensation plan is designed to link variable compensation to operating income.

Long-Term Incentive Compensation

Long-term incentive compensation decreased $3.6 million, or 5.4%, primarily due to a $5.0 million decrease related to forfeiture rate estimate adjustments and a net $4.0 million decrease from the vesting of awards in previous years partially offset by awards granted in 2013. These decreases were partially offset by a $2.4 million increase due to mark-to-market adjustments for changes in fair value of mutual fund share awards and investments related to deferred compensation plans and a $2.3 million increase in Perkins senior profits interests awards expense. The Perkins senior profits interests awards receive 5% of Perkins' annual taxable income and have a terminal value based on Perkins revenue and relative investment performance of products managed by Perkins.

On November 18, 2013, Perkins granted additional senior profits interests awards which fully vest on December 31, 2018. These senior profits interests awards receive 10% of Perkins' annual taxable income and have a terminal value based on Perkins revenue and relative investment performance of products managed by Perkins.

Long-term incentive awards granted during 2013 totaled $74.1 million and will generally be recognized ratably over a four-year period. Future long-term incentive award amortization will also be


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impacted by the 2014 annual grant totaling $53.7 million, which will also generally be recognized ratably over a four-year period.

Marketing and Advertising

Marketing and advertising decreased $3.4 million, or 14.4%, as JCG continued to maintain focused marketing and advertising strategies in 2013.

Depreciation and Amortization

Depreciation and amortization decreased $9.8 million, or 25.5%, primarily due to $7.7 million of intangible asset impairment charges in 2012 from the loss of JCG subadvised relationships. JCG recognizes an impairment charge equal to the unamortized value of the associated intangible asset when notification of termination is received.

Non-Operating Expenses

Interest Expense and Loss on Early Extinguishment of Debt

Interest expense declined $3.9 million, or 8.7%, primarily as a result of the exchange of $110.0 million aggregate principal amount of JCG's existing, 3.25% Convertible Senior Notes due 2014 ("2014 Convertible Notes") for $116.6 million aggregate principal amount of newly-issued, 0.75% Convertible Senior Notes due 2018 ("2018 Convertible Notes") in June 2013. JCG recognized a loss of $12.6 million related to the exchange of notes. In August 2013, JCG also repurchased on the open market $8.0 million aggregate principal amount of the Company's outstanding 6.70% Senior Notes due 2017 ("2017 Senior Notes") for $8.9 million in cash. JCG recognized a loss of $0.9 million on the repurchase.

Investment Gains, Net

The components of investment gains (losses), net for the years ended
December 31, 2013 and 2012, are as follows (in millions):

                                                                December 31,
                                                               2013      2012
      Seeded investment products                              $  28.9   $  17.8
      Noncontrolling interest on seeded investment products       3.4       2.0
      Investments in advised mutual funds                         8.5       8.6
      Index swaps and futures contracts                         (37.4 )   (12.5 )
      Economic hedge for deferred compensation plans              3.0       1.3
      Put spread option contracts                                   -      (6.1 )
      Other                                                       0.1         -


      Investment gains (losses), net                          $   6.5   $  11.1

Investment gains declined $4.6 million, or 41%, primarily due to losses on the Company's seed capital economic hedging strategy partially offset by gains on seeded investment products. The year ended December 31, 2012, also included a $6.1 million loss generated by put spread option contracts. The put spread option contracts were purchased to mitigate potential negative impacts on 2012 profitability in the event of a market downturn.

The seed capital hedging strategy utilizes index swaps and futures contracts to mitigate a portion of the earnings volatility created by the mark-to-market accounting of seed capital investments. JCG may modify or discontinue this hedging strategy at any time.


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Effective January 2013, JCG discontinued the practice of economically hedging mutual fund share awards. JCG no longer makes corresponding investments in advised mutual funds.

Income Tax Provision

JCG's income tax provision for 2013 includes the reversal of $1.3 million of income tax contingency reserves as a result of the expiration of statutes of limitations and audit settlements, creating a net tax benefit of $0.8 million. The 2013 income tax provision also includes tax expense of $5.0 million related to expiration and vesting of certain equity-based compensation awards.

The effective tax rate for the year ended December 31, 2013 was 37.5%. The effective tax rate for 2014 is expected to increase as a result of previously issued stock options that will expire out-of-the-money. Although the overall rate increase is dependent upon a variety of factors, the tax rate is expected to increase in the first quarter of 2014 to the mid-40 percent range.

2012 Compared to 2011

Revenues

Investment Management Fees

Investment management fees decreased $62.0 million, or 7.3%, primarily as a result of a 3.7% decrease in average assets under management driven by long-term net outflows, partially offset by net market appreciation. Revenue decreased at a higher rate than average assets primarily due to a product mix shift toward lower yielding fixed income products.

Performance Fees

Negative performance fees increased $63.7 million primarily due to the timing of additional mutual funds becoming subject to performance fees and underperformance of mutual fund assets against their benchmarks. Negative mutual fund performance fees were partially offset by positive performance fees on separate account assets.

Operating Expenses

Employee Compensation and Benefits

Employee compensation and benefits decreased $20.4 million, or 6.9%, primarily due to lower investment team incentive compensation as a result of lower profits.

Long-Term Incentive Compensation

Long-term incentive compensation increased $3.7 million, or 5.9%, primarily due to $13.6 million of expense from new awards granted during 2012 and a $3.2 million mark-to-market adjustment for changes in fair value of mutual fund share awards. These increases were partially offset by a decrease of $6.9 million in Perkins senior profits interests awards expense. Additionally, long-term incentive compensation decreased $6.5 million from the vesting of awards granted in previous years.

Marketing and Advertising

Marketing and advertising declined $4.4 million, or 15.7%, primarily due to lower brand positioning and advertising expenses.


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Distribution

Distribution expense declined $14.9 million, or 10.5%, as a result of a similar decrease in assets under management subject to third-party concessions. Distribution fees are calculated based on a contractual percentage of the market value of assets under management distributed through third-party intermediaries.

Depreciation and Amortization

Depreciation and amortization increased $5.2 million, or 15.6%, primarily due to $7.7 million of intangible asset impairment charges from the loss of JCG subadvised relationships.

Non-Operating Expenses

Interest Expense

Interest expense declined $6.0 million, or 11.8%, primarily as a result of the retirement of the $92.2 million 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 6.119% Senior Notes due 2014 ("2014 Senior Notes") and 2017 Senior Notes were repurchased with cash on hand. JCG recognized a $7.2 million loss on early extinguishment of debt related to the repurchase of these notes.

Investment Gains (Losses), Net

The components of investment gains (losses), net for the years ended
December 31, 2012 and 2011, are as follows (in millions):

                                                                December 31,
                                                               2012      2011
      Seeded investment products                              $  17.8   $ (10.0 )
      Noncontrolling interest on seeded investment products       2.0      (1.4 )
. . .
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