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JNS > SEC Filings for JNS > Form 10-Q on 24-Apr-2014All Recent SEC Filings

Show all filings for JANUS CAPITAL GROUP INC

Form 10-Q for JANUS CAPITAL GROUP INC


24-Apr-2014

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, 2013, 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 Chief Accounting Officer) (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 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.

First Quarter 2014 Summary

Average assets under management for the first quarter 2014 of $173.0 billion increased $2.7 billion, or 1.6%, over the fourth quarter 2013 as a result of favorable market conditions, partially offset by long-term net outflows. First quarter 2014 revenues of $230.2 million increased $4.0 million, or 1.8%, from the fourth quarter 2013 primarily due to decreased negative performance fees on mutual funds from the fourth quarter 2013 to the first quarter 2014. The Company achieved an operating margin of 29.1% and net income of $0.16 per diluted share in the first quarter 2014.

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 March 31, 2014:

                                          Percentage of mutual fund assets
                                  outperforming majority of Morningstar peers (1)
                                    1-Year             3-Year             5-Year

Complex-wide mutual fund
assets                               52%                64%                36%
Fundamental equity mutual
fund assets                          44%                59%                32%
Fixed income mutual fund
assets                               100%               100%               54%

Percentage of relative return strategies outperforming respective benchmarks (2) 1-Year 3-Year 5-Year Mathematical equity strategies 53% 71% 58%

Percentage of complex-wide mutual funds with 4- or 5-star overall Morningstar ratingTM Complex-wide mutual funds 53%



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

(2) References performance of relative return strategies, net of fees.


Assets Under Management

Assets Under Management and Flows

Total Company assets under management of $174.1 billion at March 31, 2014, increased $10.3 billion, or 6.3%, from March 31, 2013, as a result of net market appreciation of $27.6 billion, offset by long-term net outflows of $17.3 billion. Long-term net flows represent total Company net sales and redemptions, excluding money market assets.

Fundamental equity long-term net outflows were $2.3 billion in the first quarter 2014, compared with long-term net outflows of $1.8 billion in the first quarter 2013.

Fixed income long-term net inflows were $1.0 billion in the first quarter 2014 compared with long-term net inflows of $0.3 billion in the first quarter 2013.

Mathematical equity long-term net outflows were $0.2 billion in the first quarter 2014 compared with $2.4 billion of long-term net outflows in the first quarter 2013.

The following tables present the components of JCG's assets under management for the three months ended March 31, 2014 and 2013 (in billions):

                               Three months ended
                                   March 31,
                                2014         2013
Beginning of period assets   $    173.9    $  156.8
Long-term sales(1)
Fundamental equity                  4.6         5.3
Fixed income(2)                     2.8         3.5
Mathematical equity                 1.6         0.8
Long-term redemptions(1)
Fundamental equity                 (6.9 )      (7.1 )
Fixed income                       (1.8 )      (3.2 )
Mathematical equity                (1.8 )      (3.2 )
Long-term net flows(1)
Fundamental equity                 (2.3 )      (1.8 )
Fixed income                        1.0         0.3
Mathematical equity                (0.2 )      (2.4 )
Total long-term net flows          (1.5 )      (3.9 )
Net money market flows                -        (0.1 )
Market/fund performance(2)          1.7        11.0
End of period assets         $    174.1    $  163.8



(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.

(2) Fixed income sales and market/fund performance reflect a correction from the figures presented in earnings release materials filed on Form 8-K on April 22, 2014. Sales of $0.2 billion were incorrectly classified as market/fund performance. The correction has no impact on end of period assets or average assets under management.

                                     Three months ended
                                         March 31,
                                      2014         2013
Average assets under management:
Fundamental equity                 $     94.7    $   92.1
Fixed income                             29.5        27.0
Mathematical equity                      47.4        41.3
Money market                              1.4         1.4
Total                              $    173.0    $  161.8


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

                                Three months ended
                                    March 31,
                                2014          2013
Growth/Core (1)
Beginning of period assets   $     60.8    $     53.8
Sales                               2.6           3.5
Redemptions                        (3.2 )        (3.4 )
Net (redemptions) sales            (0.6 )         0.1
Market/fund performance               -           3.9
End of period assets         $     60.2    $     57.8

Global/International
Beginning of period assets   $     19.3    $     17.9
Sales                               1.4           0.9
Redemptions                        (1.3 )        (1.6 )
Net sales (redemptions)             0.1          (0.7 )
Market/fund performance               -           0.7
End of period assets         $     19.4    $     17.9

Mathematical Equity
Beginning of period assets   $     47.6    $     40.2
Sales                               1.6           0.8
Redemptions                        (1.8 )        (3.2 )
Net redemptions                    (0.2 )        (2.4 )
Market/fund performance             0.8           3.9
End of period assets         $     48.2    $     41.7

Fixed Income (1)
Beginning of period assets   $     28.9    $     26.4
Sales(2)                            2.8           3.5
Redemptions                        (1.8 )        (3.2 )
Net sales                           1.0           0.3
Market/fund performance(2)          0.6           0.7
End of period assets         $     30.5    $     27.4

Value
Beginning of period assets   $     15.9    $     17.0
Sales                               0.6           0.9
Redemptions                        (2.4 )        (2.1 )
Net redemptions                    (1.8 )        (1.2 )
Market/fund performance             0.3           1.8
End of period assets         $     14.4    $     17.6

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

(2) Fixed income sales and market/fund performance reflect a correction from the figures presented in earnings release materials filed on Form 8-K on April 22, 2014. Sales of $0.2 billion were incorrectly classified as market/fund performance. The correction has no impact on end of period assets or average assets under management.


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 New York Stock Exchange ("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.

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 are sent to the pricing agent for resolution.


Results of Operations

Three Months Ended March 31, 2014, Compared with Three Months Ended March 31, 2013

Revenues

Investment Management Fees

Investment management fees increased $10.0 million, or 5.0%, primarily as a result of the 6.9% 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 and channels.

Performance Fees

Performance fee revenue is derived from certain mutual funds and separate accounts. Negative performance fees were driven by underperformance of certain mutual funds against their respective benchmarks. Performance fee revenue improved $3.6 million, or 18%, primarily as a result of the roll-off of historical underperformance of certain mutual funds against their respective benchmarks. A summary of mutual fund and private account assets subject to performance fees as of March 31, 2014 and 2013, is as follows (in billions):

                             March 31,
                           2014     2013
Mutual fund assets        $ 51.6   $ 55.2
Separate account assets   $ 15.1   $ 11.6

Operating Expenses

Employee Compensation and Benefits

Employee compensation and benefits increased $6.2 million, or 8.3%, principally due to higher incentive compensation as a result of higher operating income. The company-wide incentive compensation plan is designed to link variable compensation to operating income.

Long-Term Incentive Compensation

Long-term incentive compensation decreased $3.8 million, or 24.1%, primarily due to a decrease of $3.7 million from the vesting of awards granted in previous years, a decrease of $2.4 million due to lower mark-to-market adjustments for changes in fair value of mutual fund share awards and investments related to deferred compensation plans, a decrease of $2.0 million in Perkins senior profits interests awards expense and a decrease of $0.9 million related to forfeiture rate estimate adjustments. These decreases were partially offset by an increase of $5.3 million of expense from new awards granted during 2014. Long-term incentive awards granted during 2014 totaled $53.9 million and will generally be recognized ratably over a four-year period. 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. Long-term incentive compensation for the year ended December 31, 2014 is currently expected to be approximately $60 million.

Non-Operating Income and Expenses

Investment (Losses) Gains, Net

Net investment losses totaling $1.1 million for the first quarter 2014 included $1.4 million of mark-to-market losses generated by JCG's economic hedging of seed capital and gains of $0.3 million from the mark-to-market and sale of seed capital investment securities. The seed capital hedging strategy utilizes derivative instruments to mitigate a portion of the earnings volatility created by the mark-to-market accounting of the seed capital investments.

Investment (losses) gains, net decreased $5.7 million primarily due to the mark-to-market of seed capital trading securities and the associated performance of the seed capital hedge derivative instruments.


Income Tax Provision

JCG's effective tax rate was 45.4% and 40.5% for the three months ended March 31, 2014 and 2013, respectively. The effective tax rate and JCG's income tax provision for the same periods included $4.8 million and $2.5 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 from $1.7 million in the first quarter 2013 to $0.6 million in the first quarter 2014 primarily due to the purchase of noncontrolling ownership units in Perkins.

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