Janus Henderson Group plc (NYSE:JHG) Q3 2022 Earnings Conference Call October 27, 2022 8:00 AM ET
Company Participants
Ali Dibadj – Chief Executive Officer
Roger Thompson – Chief Financial Officer
Conference Call Participants
Dan Fannon – Jefferies
Patrick Davitt – Autonomous Research
Ken Worthington – JPMorgan
Elizabeth Miliatis – Jarden
Ed Henning – CLSA
Bill Katz – Credit Suisse
Ryan Bailey – Goldman Sachs
Brian Bedell – Deutsche Bank
John Dunn – Evercore
Operator
Good morning. My name is Elliot, and I will be your conference facilitator today. Thank you for standing by, and welcome to the Janus Henderson Group Third Quarter 2022 Results Briefing. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. In the interest of time questions, questions will limited to one initial and one follow-up question.
In today’s conference call, certain matters discussed may constitute forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements, due to a number of factors including but not limited to those described in the forward-looking statements and Risk Factors sections of the company’s most recent Form 10-K and other more recent filings made with the SEC. Janus Henderson assumes no obligation to update any forward-looking statements made during the call. Thank you.
Now, it’s my pleasure to introduce Ali Dibadj, Chief Executive Officer of Janus Henderson. Mr. Dibadj, you may begin your conference.
Ali Dibadj
Welcome everyone, and thank you for joining us today on Janus Henderson’s Third Quarter 2022 Earnings Call. I’m Ali Dibadj, I’m joined by our CFO, Roger Thompson. In today’s call, I’ll start with some thoughts on the quarter, before handing it over to Roger to run through the details. After Roger’s comments, I’ll share an update on the work that’s been done regarding our strategic path forward since last quarter’s call. Then, we’ll take your questions following those prepared remarks.
Turning to slide 2. As everyone knows, market conditions remain difficult in the third quarter, tightening monetary policy from central banks, inflation, geopolitical tension, lower consumer confidence and liquidity concerns, all continue to affect markets, investor sentiments, and our results.
The market decline, dollar appreciation and $5.8 billion of net outflows reduced our AUM by 8% to $275 million. Long-term investment performance remained solid with 64% of assets ahead of benchmark on a three-year basis, which is up compared to the prior quarter.
Short-term investment performance is uneven amidst extreme market volatility. The investing environment remains challenging, with high correlation among and between asset classes, outweighing fundamentals and valuation.
Our investment teams are remaining true to their identities and investment processes that have delivered long-term strong results and are focused on protecting clients against risk, while looking for opportunities that have attractive valuations over time.
During these times of market uncertainty that our clients and our clients’ clients need us the most. These are the times, we as Janus Henderson and we as an asset management industry need to deliver for people all over the world, who are saving for retirement, looking for a better life and thinking of their financial future.
In this environment, it’s critical that we increase client outreach, share our market insights and partner with our clients. Inside Janus Henderson, we continue to control what we can control and are looking keenly at expenses as we weather the storing markets, while creating fuel for growth.
I’ll now turn the call over to Roger to run you through the details of the third quarter financial results.
Roger Thompson
Thank you, Ali, and thank you again to everyone for joining us on the call today. Starting on slide 3, and I look at investment performance. Performance results versus benchmark are very similar to the prior quarter. Market conditions continue to generate considerable volatility. As Ali mentioned, our investment professionals remain disciplined in their approach, and are focused on managing risk for clients and identifying opportunities that will deliver positive long-term outcomes for our clients.
Long-term investment performance as of the 30th of September remains solid with 64%, 67% and 75% of assets beating their respective benchmarks over the 3, 5, and 10 year time periods. Investment performance compared to peers continues to be competitively strong with over half of all AUM in the top two Morningstar quartiles over all time periods.
Slide 4 shows company flows. For the quarter, net outflows were $5.8 billion compared to $7.8 billion last quarter. As you can see on the page, gross sales and redemptions are down significantly this quarter as global retail investors increasingly sat on the sidelines due to continued market volatility.
Turning to slide 5 for a breakdown of the flows by client type. Net outflows for the intermediary channel were $2.5 billion compared to $5.7 billion in the second quarter. The improvement is attributed to lower net outflows in the US and EMEA.
In the US, the improvement came from equities and was spread across several strategies led by mid-cap value, overseas and Triton. In EMEA, the positive change was primarily from European equities and also from the one-off $1.3 billion liquidation of the UK property fund that occurred in the second quarter.
Although, net outflows were better gross sales numbers are low as intermediary clients across the globe are choosing to monitor current events and are not putting money in motion. Institutional outflows were $2.6 billion, which were primarily driven by the EMEA region and include $900 million from the previously announced redemption in the Sterling buyer maintained credit strategy from a long-standing European insurance client.
There is approximately $2.6 billion remaining in the mandate which is expected to be redeemed in the fourth quarter. Pleasingly, the APAC region had $800 million in positive net inflows, including $500 million from an Asian client into our global adaptive tail risk hedge strategy.
Finally, Net outflows for the self-directed channel which includes direct and supermarket investors was $700 million. Similar to the intermediary channel, gross sales and redemptions are down considerably over the last year as retail clients remain on the sidelines.
Slide 6 shows the flows in the quarter by capability. Equity net outflows in the third quarter were $4.1 billion compared to $5.8 billion in the second quarter. The outflows were driven by global technology strategies UK Enhanced Index, US Mid-Cap Growth and Global Life Sciences.
Third quarter net outflows for fixed income were $1.2 billion reflecting the $900 million maintain institutional redemption that I’ve just mentioned. Total net outflows from multi-asset were $200 million driven by the balanced strategy within our retail channels. Whilst the net outflow is in part due to short-term performance the medium and long-term performance of balance remains very strong. And the net outflows in balance were partially offset by the $500 million institutional funding I mentioned earlier.
Before moving on I do want to call out a redemption that will impact the fourth quarter. The European institutional clients has made the decision to bring the management of their equity assets in-house.
This decision was not specific to Janus Henderson and impacts equity mandates across multiple asset managers. For Janus Henderson the equity AUM to be redeemed as approximately $4 billion and will occur in the fourth quarter of 2022. The AUM had performance fee potential, but had relatively low base fees representing approximately $5 million in annual management fees.
Moving on to the financials. Slide 7 is the US GAAP statement of income. And on Slide 8 we explain the adjusted financial results. Adjusted revenue decreased 8% compared to the prior quarter primarily due to lower average AUM. Net management fee margin for the third quarter was 49.5 basis points, compared to 49.2 basis points in the prior quarter. The increase is primarily due to accounting adjustments made during this quarter which will not repeat.
Third quarter performance fees of negative $13 million, including negative $17 million from US mutual funds. All else equal, Underperformance will continue to impact performance fees in the fourth quarter and into 2023. Based on current investment performance, we estimate aggregate performance fees for full year ’22 and will range from negative $38 million to negative $42 million. We expect this will include roughly negative $64 million from US mutual fund performance fees.
Continuing on to expenses. Adjusted operating expenses in the third quarter were $269 million, down 3% from the prior quarter. Adjusted employee compensation, which includes fixed and variable costs was down 2%, compared to the prior quarter, primarily due to favorable FX and lower variable costs, given lower pre-bonus profit, which was partially offset by a true-up in the cash LTI split.
Adjusted LTI was up 4% compared to the prior quarter. And in the appendix we’ve provided the usual table on expected future amortization of existing grants, we used to use in your models. Adjusted comp to revenue ratio was 46%, which was up compared to the second quarter and in line with expectations, given the decrease in adjusted revenue. Adjusted non-comp operating expenses decreased 9% compared to the prior quarter, primarily due to favorable FX and lower discretionary expenses.
Adjusted operating income in the third quarter of $125 million was down 16% over the prior quarter, driven principally by lower average assets, partially offset by our cost discipline. Third quarter adjusted operating margin was 31.8%. And finally, adjusted diluted EPS was $0.61.
I’d like to quickly touch on expectations for the fourth quarter and full year ’22. Average AUM in the third quarter was 11% higher than closing AUM. All things equal, you should therefore expect management fees to be lower by this amount in the fourth quarter. And as closing AUM is significantly lower than year-to-date average AUM, all else equal, you’d anticipate ’23 revenues to reflect this lower AUM.
In terms of ’22 guidance, we still anticipate a compensation ratio in the range of 44% to 45%. For non-compensation, we continue to proactively manage our discretionary expense base and we anticipate the ’22 non-comp expense growth to be in the low single digits. Finally, our recurring effective tax rate for the third quarter was 21%. The lower effective rate in the quarter resulted from various state tax items. For the full year, the firm’s statutory rate is still expected to be in the range of 23% to 25%.
Skipping through slide nine to slide 10 for an update on cost efficiencies. Our philosophy has always been to maintain strong financial discipline and invest in the business where it strategically makes sense, whilst looking to operate more efficiently to provide the fuel for growth. During the third quarter, our Executive Committee reviewed the business, seeking ways to drive efficiencies without compromising client delivery or regulatory requirements.
As part of this extensive review, we’ve identified $40 million to $45 million in gross run rate cost efficiencies, which will be equally split between compensation and non-compensation expenses. We expect to realize approximately one-third of the gross run rate savings by the end of this year with the remaining two-thirds to be realized by the end of 2023. The implementation of these reductions will result in estimated nonrecurring charges of $30 million to $35 million.
Our intent is to reinvest most or perhaps all of these savings back into the business to fuel growth, which Ali will talk about later in the presentation. It’s important to note that we expect a mismatch in timing between the gross cost savings and the reinvestment in the business.
Moving to slide 11 and a look at our liquidity. Cash and cash equivalents were approximately $1 billion as of 30th of September, an increase of $170 million resulting primarily from the continued strong cash flow generation, partially offset by the return of $65 million to shareholders via the quarterly dividend.
Given current market volatility, we’ve been conservative and purposeful in our approach to capital management and have elected not to buy back stock this quarter. We have a strong liquidity position and we’ll continue to balance the capital needs and the investment opportunities of the business with shareholder interests. Along these lines, the Board has declared a $0.39 per share dividend to be paid on the 23rd of November to shareholders of record as of the 7th of November.
With that, I’d like to turn it back over to Ali to give you an update on our strategy.
Ali Dibadj
Thanks Roger. Moving to slide 13. I wanted to remind you of where we left things on last quarter’s earnings call, three things. First, there’s a lot to like about Janus Henderson. The engine is strong from investment acumen to client service to strong cash flow generation, and a robust balance sheet and there is much work to do. Second, we introduced our initial strategic framework of protect and grow Janus Henderson’s core businesses, amplify our strength that are not fully leveraged yet, and diversify the firm where clients give us the right to win. That framework persists you’ll hear more about it in a minute. And third, although we’re starting from the good foundation, we are in a transition period that is going to last at least through most of 2023.
With that baseline and the progress made on the strategic path over the last three months, I’m convinced now more than ever that there is an enormous amount of potential at the firm to deliver long-term success for all stakeholders, clients, shareholders, employees, communities and others not overnight but over time.
Now let me turn it to slide 14 to offer some more detail on the work that’s been undertaken since our last update. This summer we assembled a group of senior employees from all major departments of the firm and all geographies as an important step in getting the best thinking and buy in for our strategic direction. We not only sought internal views, but sought external views also importantly including our clients and sifted through a broad set of strategic opportunities that included both organic and inorganic options. The initial list of approximately 200 ideas went through an extensive filtering process designed to capture those opportunities that provide the best possible outcomes for our clients and will lead to organic growth and attractive operating margins over time. That initial list of 200 ideas there will be less than 10 that are actioned. That portfolio of activity will also deliberately have laddered delivery periods over horizon of time.
Slide 15 lays out an illustrative example of how the opportunities were aligned quite purposely to the client voice. It’s absolutely imperative that the clients be at the heart of everything we do in order for us to win. With that mindset, we brought the client completely forward in the process seeking their input upfront, so that their voice would be woven into our strategic evolution from the start. Thank you to those clients with whom we’ve spoken so far. We’ll continue to gather client input let the strategy evolves as our client understanding evolves. From the client feedback to date, we identified five essential beliefs against which each opportunity was measured.
From there we continue to further prioritize and calibrate the opportunities as illustrate showed on Slide 16. Our strategic leadership team evaluated the initiatives along two dimensions. Janus Henderson’s right to win and how the opportunity measures against future client and industry importance. The opportunities need to be relevant for our clients and the industry in general in places where we have or can have via buying building or partnering the right to win.
Another element we wanted to be sure to address is broadening the universe of AUM in which we participate as it was illustrated on Slide 17. Janus Henderson is a global firm with presence in the largest markets. In fact, we estimate that based on our product set and distribution footprint, Janus Henderson’s current addressable market is about $40 trillion. That is a big puddle to swim in. We need to do a better job becoming a bigger fish where we already have a presence. You have heard us talk about that in our last earnings call.
In addition to improving market share, we also want to think bigger and turn the puddle into an ocean. Our strategy intentionally and carefully increases the denominator for us meaning it increases the addressable AUM for us to target. Based on the initiatives identified through our process and future initiatives that will come as our strategy evolves, we believe our addressable target market can double over time.
Slide 18 looks at how all this fits into our strategic framework. The process undertaken at the beginning of the summer allowed us to build out the early strategic framework. Well this summer and into the fall, we then identified opportunities that fit within this framework. Over the next few slides, you’ll start to see just a sample of initiatives that will be a part of our focus for us to deliver our strategy.
On Slide 19, a business we must protect and grow is our US intermediary business. Our US intermediary business is our largest client segment representing about one-third of our assets. It has attractive net management fee rates and contribution margins, while it is an extremely competitive market, it’s also one of the fastest growing. We know this space well and have established well-connected pipes through which we distribute traditional mutual funds, sub-advised assets, ETFs, SMAs, CITs and VITs among others. We believe our investment strategies which are underpinned by deep fundamental research, strong risk management and therapies to clients are critical components in investor portfolios. However, we’ve been losing market share in this strategically important market. We think having a more focused and thoughtful approach around our best strategies and products will strengthen our relationships with clients and improve sales.
In order to reenergize the channel, support the team further and capture market share, we’ll invest in areas including five places. Repositioning ourselves to target faster-growing segments of the market, expanding product offerings and vehicles that meet the demands of clients, improving branding to better align with the market and our strategy, leveraging our data better to action business development and improving execution by enhancing the organizational structure properly aligning incentives and defining KPIs to increase accountability and measure success.
Moving to Amplify on Slide 20. New product adjacencies are an opportunity for Janus Henderson to leverage strength of our product development and investment teams. Our product development track record has proven that we can deliver on clients’ needs as you can see on the slide. We paused for a while several years ago, but we have the muscle memory and capabilities still here. More recently, we have many new product launches in the pipeline that are developing three-year track record a key milestone for client adoption.
Some of the products will be successful and I believe some will not. We’ll amplify the products with a successful performance track record coupled with strong client demand, we see real potential here. Growth areas of focus will start in asset classes such as multi-asset solutions and liquid alternatives, where we’ve seen recent client lead momentum and ESG, along with differentiated equity and fixed income products. These spaces bring higher fee and higher value add and offer significant total addressable market. Again, this won’t happen immediately but the runway is there and should continue to build.
Turning to Slide 21 and diversifying. For Janus Henderson, bolt-on acquisitions and team lift-outs have played a key role in capability development. We haven’t been perfect but certainly have some successes as you can see on the chart. You can also see on the page that Q2, we slowed down activity. However, as you know that machinery is ramping back up, as evinced by the recent addition of our emerging market debt team.
My team and I have a track record of successfully identifying, executing and delivering value from M&A and we’re actively looking at targeted areas to fill gaps and expand into areas, in which clients are asking to work with us including places we’ve mentioned before, like private credit and insurance, gaps we have in traditional investments and regions of the world we would like to bolster further.
Of course, we will be disciplined in identifying where to buy build or partner. We are looking for people who want to partner with us to grow, we want to leverage our global distribution footprint, research skill set and product development tools and who can provide Janus Henderson capabilities that fill gaps and importantly – we want people who are like-minded in terms of culture and client service.
Flipping to Slide 22. As we continue to work on the strategic path forward, we know it will take time for the initiatives to bear fruit. While that transition is ongoing it’s important to note that in the short term we do have energy building internally and externally given some early wins and positive client activity. There are several examples.
The E&D team, which started Janus Henderson in September, has hit the ground running and we anticipate that the group will have $500 million in AUM by year-end after starting with zero last month, zero to 500 and in just a few months is a testament to what we can do when we put our minds to it.
Elsewhere, we are having a greater number of higher quality interactions with clients in this challenging market backdrop, when as I said at the outset, clients need our insights client service and investment acumen the most. In our US intermediary space, we’ve seen client touches increase over 25% compared to the third quarter of last year, positive institutional consultant activity which is vital for our success is improving with consultant meetings increasing by 33% compared to 2021 and annualized consultant advised inflows on pace to be two times higher than last year.
Our ETF franchise continues to do well, ranking second and domestic fixed income active ETFs inflows on a year-to-date basis. Our recently announced board changes bring new energy and world-class and varied expertise.
And finally, our identified cost savings which included delayering, removal of duplication and surgical performance moves will provide the Fuel for Growth or FFG to allow us to be more dynamic and faster moving, enhance accountability and most importantly invest in areas such as research, new products and distribution.
It’s these investments that will improve the core value proposition to our clients. As Roger mentioned earlier in this section, it is important to remember that there will be timing mismatch with the realized gross cost efficiencies and investments in the business. And we’ll continue to update you on our FFG progress going forward.
Now wrapping up on slide 23, as I said before and I believe now more than ever, there’s a lot to like about our firm, and there’s much work to do. We’ve identified opportunities that we believe will return us to a path of organic growth in the future.
We’re still in the early days, and that path will be a market-dependent one whether we like it or not. Success will not happen overnight and progress will definitely not be linear, but I am convinced now four months on the job it will happen overtime.
In the short-term, there’s energy building around the strategy and early wins are emerging. I look forward to providing updates on our progress on the future calls and delivering desired outcomes for our clients’, shareholders, employees and our other stakeholders.
Let me turn the call back over to the operator, for your questions.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] Our first question comes from Elizabeth Milliatis from Jarden. Your line is open. Please go ahead. Elizabeth, your line is now open. We move on to Dan Fannon from Jefferies. Your line is open.
Dan Fannon
Thanks. Good morning. I wanted to follow-up on the expense initiatives. You talked about gross savings. And obviously I think you also commented that you’re not going to see a lot of — you’re going to reinvest that.
I was hoping you could talk about the areas that you’re reducing, just in terms of whether they are client-facing and how there might be some repercussions associated with that?
And then, also, just kind of looking forward, I know it’s early and you’re doing a lot on the expense side. But should we think about kind of trying to maintain kind of the expense base from here in prioritizing investments versus obviously efficiencies and other things.
Ali Dibadj
Okay. Hey Dan, so maybe let me start and Roger can chime in. So as you’ve heard we’re talking about, $40 million to $45 million of gross savings. To your question it was fairly broad-based — about half of it was FTE or fixed comp in nature and the other half was non-comp in nature. And we hope to get roughly a third this this year.
We’ll obviously continue to look at expenses, and continue to make sure our expense base is appropriate, as we actually have done for quite some time at the firm but this is obviously a program in and of itself. We will continue to invest in the business where the ROI suggests we should where we can deliver better results for our clients, we will do that.
And — in fact the directive as we went through, and found areas to reduce costs was to not disrupt clients, and not disrupt any of our regulatory obligations. That was the directive and I think we followed through.
What we did look for were areas where we could simplify our structure where we could integrate where perhaps we haven’t integrated as much as we should have before where we had too many layers where our decision making was slow. And very importantly sometimes as gets forgotten in these types of situations, very importantly create blue sky for our very high performers in the organization to have room to grow and develop and deliver client results better than we could have before.
In terms of big areas to invest in it’s the classic areas. It’s the people upgrading and incentivizing, it’s the processes that we have to do better internally and facing off with clients and it’s certainly the technology, which you’ve heard us talk about before and we’ll continue to invest in whether it be data to serve our clients or whether it be just data internally to function as examples.
Roger Thompson
I think that just about covers everything Ali. The only other piece, sorry, Dan it’s Roger. The only other pieces that I guess we should comment on and Ali commented on in as part of the examples of where we’d be looking to invest and fill out is both filling out, continuing to fill out. We’ve got some great geographical reach but there’s some areas we can do more in. And there are some gaps in our capabilities that we think we should fill in over time. And emerging market debt was a great first step, but there are some other areas we’ve talked about private debt in the past that you should expect us to continue to look at.
Dan Fannon
Great. That’s helpful. Thank you. And then on the protect and growth side of the strategy, you talked about the US intermediary channel where you guys have historically been quite strong. You said it’s growing, I guess on the active mutual fund side. I’m just curious if you say if you would agree if that’s where you think it’s growing. And then the capabilities that you’re looking to either amplify or grow. I’m curious about the SMAs, CITs and VITs, how much AUM do you have in that — to those buckets today roughly? And do you have the capabilities to scale in those product vehicles going forward currently?
Ali Dibadj
Yeah. So maybe let me start with that one and work backwards. The short answer is not enough. But the longer answer is, yes, we do have the capabilities. We offer many of our key investment strategies that have delivered performance to our investors, to our clients for a very long time and performed quite well in that form and we want to continue to do that. And we do have the capabilities to do that at this point. I would argue we didn’t, not so long ago, but today we do and we have the interest to do that whether it be on SMAs or CITs or VITs or other places. And, of course, you know about the successes we’ve had in the ETF world.
So our view is that we are packaging or vehicle agnostic. We want to deliver in a manner that is client need focused and we have the investment capabilities to do so. So that’s the second part of your question.
For the first part of your question, look, as I said before we said in our last call as well, we are losing market share even where we play and have significant scale. And that is something that I think is driven by a lot of the things that you’ll see on page 19 at the bottom where we have to make sure we’re focused not only on the fastest vehicles that are growing, yes, absolutely. We have to make sure we’re focused on the right advisers and the right support that we can provide to our clients in making sure that they grow with us and not away from us.
We do think that we have to do a better job in terms of organizational structure of the US intermediary in this example of Protect & Grow, as well as make sure the incentives are aligned with the right set of KPIs. I think about these things as target the right clients, make sure we deliver for them, make sure the org structure is right and then make sure we have the right KPIs to have measurements around. And then, pave people on that. And it sounds simple, Dan. It doesn’t always happen. That’s certainly a path that we’re on, which does require to your earlier question a little bit of investment as well.
Dan Fannon
Great, thank you.
Operator
Our next question comes from Patrick Davitt from Autonomous Research. Your line is open.
Patrick Davitt
Hey. Good morning, everyone. Could you remind us how much of the cash balance is kind of locked up for regulatory reasons or anything? And then, more broadly on that point, maybe frame your willingness and balance sheet flexibility to take on bigger M&A opportunities as that’s a part of the strategy now?
Roger Thompson
Hey Patrick, it’s Roger. Yes. I mean, as you can see, we’ve got a very strong balance sheet several billion of cash and cash equivalents. It’s about the — the UK regulatory environment is tighter than elsewhere. And there is a relatively sizable amount of capital that is tied up in that regime. It’s about $250 million of capital that is required from a UK — from a European group perspective. So that’s the largest part. We’ve obviously also got — we’ve got debt that comes through in a couple of years, but that’s the largest amount.
Ali Dibadj
And maybe let me tackle the second part of the question. You look at our balance sheet Patrick, and you certainly, either compare it to others or just look at what where we are from a net cash perspective. And it’s obvious that we have plenty of room, right? We have plenty of room on the balance sheet for M&A for sure, but we are going to be disciplined, right? We’re going to be disciplined we’re going to be client led in the way we think about M&A. I’m happy to elaborate on our thought process on M&A. But from a pure balance sheet perspective, we do have capacity to do things that will deliver better results for our clients in size.
Patrick Davitt
Thanks. And then, could you update us on the UK domiciled AUM, and within that, how much of it is in UK pensions? And then more broadly, are you seeing any impact positively or negatively as pension funds have been seeking liquidity there or might even move away from LDI now?
Ali Dibadj
Yes. We have a relatively small LDI book, specifically to your question, Patrick. About $500 million of the outflows that we saw in Q3 is related to clients requiring collateral or requiring cash to satisfy collateral calls in the third quarter. So again we’re not directly managing LDI, but there, obviously, was that significant demand in the UK market. That’s not a big business for us. But like I say, it’s about $500 million of the outflow in the third quarter that related to LDI.
Patrick Davitt
But could you give the AUM exposed to pensions more broadly in the UK? Like not just LDI?
Ali Dibadj
Probably in total about $10 billion.
Patrick Davitt
Thank you.
Ali Dibadj
I’ll follow up either specifically with an answer Patrick.
Operator
Our next question comes from Ken Worthington from JPMorgan. Your line is open.
Ken Worthington
Hi, thanks for taking my question. In terms of strategy, I know we only discussed this for a few minutes, but if I summarize what I heard it seems like the strategy was about doing many of the things that Janus has done in the past, but doing them better. So, comments you made like improving execution, leveraging existing data, better alignment, enhancing organizational structures, filling in gaps sort of lead me to that sort of conclusion.
How meaningful are the changes that you’re really proposing here? And maybe why do you think they’re substantial enough to change the outcome for clients and shareholders when since the merger with Henderson the strategy seems to have underperformed pretty substantially?
Ali Dibadj
Ken thanks very much for the question. Look on the surface so far what we’ve discussed without a doubt is more evolution than revolution. I think that’s a fair observation of what we’ve discussed publicly so far. And of course, as you know in this industry there are no silver bullets.
And strategy is based on — our strategy is based on improving from a strong foundation that we have which has to be what we start with to earn the right to then develop other perhaps more revolutionary things. But evolution relative to revolution to me is actually just fine. It’s just fine because we do have so much potential as you pointed out from our history to really improve, to improve our client service, to improve our financials. You’ve seen what we did so far with costs.
And all the — and to do that while making sure, we do look opportunistically for opportunities out there that are to diversify ourselves and make sure we deliver even better for clients. If you take a step back and you think about strategies that you’ve seen, we’ve seen perhaps we’ve participated in that don’t work well. They don’t work for a few reasons, right? They don’t work for one reason being that the target market isn’t identified appropriately or the denominator problem, I call it.
The size of the pond or the puddle or the ocean isn’t clear and people play either too narrowly or too broadly. For Janus Henderson it’s very clear how to define it. It’s defined as where our clients want to do business with us and that’s why we brought the client view forward, where we have a skill set to deliver for our clients. That is very clear and our denominator we believe is the appropriate one.
So we don’t think that that is a place where we’ll have struggle in terms of executing on our strategy. Sometimes strategies fail because they’re top-down only. It’s just a rule of law go do this. you miss ideas you’re too rigid. There’s no buy-in. Hopefully what we’ve tried to do from a process perspective, spending a little bit of time on our process.
A late fears perhaps of that failure place in terms of strategy, that’s why we spent some time on process because you need the buy-in, strategy as you and I know is just as good as the paper it’s written on unless you have buying across the board. And then a lot of times strategy is built because it’s around a lack of analysis or a lack of data. And I can assure you that there’s a lot of data and there’s a lot of analysis that we put in place to make sure we’re looking at the right pockets of assets that are growing well that are aligned with where clients want to work with us on.
And of course all of this comes together with execution. Execution is the key part of it. And that as we’ve talked before, and exactly to what you said today, just a moment ago, it is around accountability. It is around scorecards, to support that. It is around urgency.
We’ve talked about a lot of these things. It’s about both the pushes and the pulls, the vision the vision of supporting our clients and our clients’ clients. That’s a compelling vision, for us at Janus Henderson. I sure hope it’s a compelling vision, for the asset management industry to support and allow our clients’ clients the people walking down the street by our office, to have a better life.
And look, you can’t focus on too many things that are a small sample size, but we’re already seeing some of the quicker wins, some of the early wins of really trying to get this motion going whether it be the emerging market debt platform that we’ve just talked about, whether it be fixed income being the second inflows in terms of fixed income across the organization, or across the industry, whether it be actually something we haven’t talked about, yet, which is Australia. I’m going there next week, with Roger.
It’s done extraordinarily well, and put kind of the best practices that are out there and then it’s growing in institutional and intermediary. The activity levels are much higher. Again, these things don’t say everything is fixed. I don’t want to leave you with that impression Ken, but it certainly want to leave the impression, that we thought through our strategy, they’re the foundation we have that we’re working from. And we will get to the point, where we will deliver better results for our clients, our shareholders and our broader stakeholder base.
Ken Worthington
Okay. I very much appreciate your comments. And maybe a quick one for, Roger. Talk about how you hedge FX, how much of the FX risk that you hedge and maybe, how the hedges flow through the P&L and what the impact may be for 4Q?
Roger Thompson
Yes, Ken. The P&L is relatively naturally hedged. We have — we’re actually slightly short non-US dollar around the world. So our costs, i.e. our costs in currencies non-dollar are slightly higher than our revenues, but relatively evenly balanced. So, we don’t hedge the P&L. We do hedge our balance sheet, and we can talk you through that and we obviously hedge what we can in our seed capital.
But I think the important thing from a P&L perspective is, that natural hedge that exists between revenues and expenses and like I say, it’s relatively even if anything was slightly short as currency. So you get a headline, we’ve got a headline effect of lower assets and lower revenue of those lower assets in US dollar terms, but you’re starting to see some of that come through in lower expenses.
Ken Worthington
Perfect. Thank you so much.
Operator
Our next question comes from Elizabeth Miliatis from Jarden. Your line is open.
Elizabeth Miliatis
Hi, Can you hear me?
Ali Dibadj
Yes.
Roger Thompson
Yes.
Elizabeth Miliatis
Okay. Great. Sorry, I don’t know what happened earlier. My first question, is just in relation to the marketing spend and the general and admin spend. Apologies, if you’ve already covered it but I sort of have to toll in a couple of times to get back on. It was materially lower this quarter than where we were expecting for both the big pockets. And relative to the last couple of quarters. Is that really just some of the cost control measures, that you guys are starting to implement, or was there anything else nuance there?
Ali Dibadj
It’s a number of things Elizabeth. Part of it is the FX, we just talked about from Ken’s question. There is definitely – there is definitely the cost efficiency that we’ve talked about today is going forward, but we’ve obviously been looking at our cost base through the year. If you noticed my commentary on our expectations of non-comp over the year has gone from – I think we originally talked in the teens for the year, and we’re now talking about low single-digit growth. So you’re seeing that come through. But – and specifically, within marketing, yeah, we’re being careful with what we do. We want to do the right things, where we see opportunity.
But again, as we’ve talked about in terms of flows at the moment, a lot of investors are sitting on the sidelines. So we probably have slowed some of the things down, because there’s less opportunity. But that we will push hard, when we see the opportunity to do so.
Elizabeth Miliatis
Okay. Thank you. And in terms of – I know, you obviously haven’t got guidance out beyond FY 2023. But how should we be thinking around potentially the cost-to-income ratio or even the comp ratio the non-comp growth rates. Obviously, there’s a lot of moving parts with all the things you guys are doing as well as the cost out opportunity as well. So, yeah, how should we think about it in the sort of more medium-term basis?
Ali Dibadj
Well, it will obviously be impacted by revenue more than anything else. And it will go – it will be so – and again, I think, I made the comment in my prepared remarks earlier that the average assets for the quarter were 11% higher than the ending assets. So that will flow through and all things being equal that’s going to flow through into 2023, and that will mean higher cost to income. There will also be some volatility that will come through as we talked about in terms of the investments that we’re making and the cost saves that we’re making, when those come through over different time periods.
But we will continue to be disciplined around the cost base for the organization. We’ll invest where we see real opportunity where we’ve assessed the ROI, and where we believe that we can really deliver for clients and ultimately for shareholders as well. But I think, yeah, it’s obviously very important to understand that headline AUM figure is our starting point and our cost base obviously has some variability in it, in terms of variable comp and some of our third-party costs, which are a little bit more variable. But obviously there is a fixed cost element, it’s part of the reason why we looked hard at our cost base and we have made some of the changes that we announced last week.
Elizabeth Miliatis
Okay. Thank you.
Operator
Our next question comes from Ed Henning from CLSA. Your line is open.
Ed Henning
Thank you. Thank you for taking my questions. Two for me. First one, if you just go to slide 17, can you just give us a little bit of a breakdown of the increase in TAM? What comes from new vehicles versus what comes from new capacity or new capabilities you’re going to put on?
Ali Dibadj
Sure, Ed. So I can’t give you the exact breakdown of it, but let me give it a go here. The left-hand side, obviously, is exactly where we are today, right? So current vehicles, current states, current geographies, current everything. If you go over to the right that expands the list of areas that we think we have the right to play and the right to win in that is client-led. So things like ESG are in there where we have some presence, but not a lot things like multi-asset and solutions, things like alternatives, some of the differentiated equity and fixed income opportunities that we think there’s room there.
There’s some elements of privates in their private credit in particular. That will give you a sense of it. I would say that the vast, vast majority of going from that little pea-sized Janus Henderson on the left with a slightly larger one on the right is organic in nature the way it’s laid out here. Could that be bigger with inorganic move, it certainly could be but most of it the vast majority is through organic means going into new vehicles and new asset classes that we have the right to play in.
Ed Henning
And it sounds like from what you said there, while it’s both new vehicles it sounds like it’s more new capabilities that you’re not in now while they’re still organic?
Ali Dibadj
New capabilities that we have a base to work from. So a lot in the amplified bucket. We’ve mentioned for example things that we seeded in the past that were quite successful. Think about the $18 billion number of newly seeded things that have come out since 2016.
We have a covered not everything in the cover will be good. Some will be past the expiration date or not performing quite well but we feel very comfortable with some of the areas in there which do include multi-asset which we have a capability in we just haven’t amplified it do include things like sustainability or ESG, do include putting things in new vehicles like SMAs that we have that is a big fast-growing area for the industry and for us. So I’d say it’s a combination of all but most of it organic that’s correct.
Ed Henning
Okay. No, that’s great. And then just a second question, if you could just give us some more detail a little bit more short-term on flows. You talked today about having lots of conversations with clients and increasing there. If you just think about the intermediary channel, obviously, you’ve seen a slowdown in sales there. Is there anything starting to happen there, or is it just the uncertainty still weighing on people and the conversations you’re having and then in the institutional channel is it still people uncertain there and investors not moving around money. If you could give us any more color on what you’re seeing from your conversations at the moment would be very helpful.
Ali Dibadj
Yes. So it’s a great question. The short answer Roger gave you a little bit of sense from in his prepared remarks and answered earlier question. Look think about Q4 we’ve already told you about something like $7 billion of outflows in the institutional channel that we’ll have to deal with. That is not helpful right as in and of itself. It’s tough to predict where you’ll start seeing the positive flows. We’re certainly getting a lot of client interest. And we think that’s real sustainable interest, but to your point there’s not a ton of money in motion unless it’s because of things where we don’t participate like LDI or other places. They don’t necessarily participate that in a very big way.
I don’t get a sense that there’s a lot of desire to move money today, today. But again, we are controlling what we can control. We’re having increased client outreach where cutting costs to reinvest back in the business. We’re putting the right people in the right seats. We have good performance. We’re ready. And we’re sort of, priming the pump for when we do have an opportunity to get some of that flow trajectory. I wouldn’t expect it to happen overnight, but I would expect organic growth to happen over time for us.
Ed Henning
That’s great. Thank you for the color.
Operator
We now turn to Bill Katz from Credit Suisse. Your line is open.
Bill Katz
Okay. Thank you, very much for taking the questions this morning, this afternoon. So first one for me just around capital. You mentioned you didn’t buy back any stock this quarter. I was wondering, if you could maybe step back a little bit. It sounds like big deals are off the table, but how should we be thinking about capital priorities from here? Within that, I think you had had some commitment to buy back stock through early spring of next year. Has your thinking changed there? And then, just could you review your dividend policy, just given what looks to be a pretty significant step down in earnings power to next year? Thank you.
Roger Thompson
Hi Bill, it’s Roger. Yes, I mean, there’s no change in our capital management philosophy. Given current market volatility and some of those opportunities that we’ve talked about, we have been conservative and purposeful in the approach to capital management including the buying back of stock. The Board will make the decision as to whether to restart the program at some point in the future. You’re right, we do have an approved program in place. But we will continue to look at our capital philosophy in the same way. Hopefully, we’ve been consistent with that over a number of years. We will reinvest in the business, where we see that we’ve got opportunity there, whether that be organically or inorganically and where we don’t have a need or we don’t see the value, then when we will turn cash flow generation to shareholders. But this quarter, as I say, we were conservative and purposeful and did not buy back stock.
In terms of the dividend, the dividend is well covered. It is a relatively high yield. Hopefully, that provides some interest for the stocking, whilst we look for those long-term flows that we’ve been talking about. But as I say, you see from the earnings, I think our payout over the last 12 months is just over 50%. As earnings have fallen over the last couple of quarters, that is obviously increasing as a payout, but the dividend is still well covered.
Bill Katz
Okay. That’s helpful. And then just one follow-up, just coming back to the expenses a little bit, maybe a couple in the question I apologize for trying to cheat here a little bit. Will you break out just sort of where you’re spending versus where you’re saving, so we can sort of track the pacing of the sort of the gross synergies? And then, just maybe more of a conceptual question, if we would use the third quarter as a sort of a start point on expenses, all else being equal, is there any inflationary pressure on that expense base, or do we end this time next year at the same place net of all the savings and reinvestment?
Ali Dibadj
Maybe let me start with the first one. And Robert can chime in on the second one and correct my mistake. On the — it’s hard to do because some of them are in the same places. So, think of an area where you want to upgrade the talent, you are removing a cost and then spending it back or if you’re shifting talent around within distribution as an example you want to invest in one area where you see it’s growing and take away from another region, those things will offset. And that’s why to Roger’s point, as part of the investments in people processes and technology, I just gave you the people example, there are areas where you’ll see us cut and spend back. And then Roger said that, almost all of this should be spent back to drive growth and I think that’s accurate.
The thing to keep in mind is, we are spending, right? We are spending and upgrading perhaps ahead, as I said, last quarter, perhaps ahead of where our savings are coming in. I can’t really predict. We don’t really know where the ups and downs are going to be.
It depends on when technology becomes available to put in place; it depends on when we think the right time to pull a trigger on our processes. It depends on when we have the right people to bring in, in certain areas of the world and of the organization.
So it’s tough to tell where that kind of volatility will be, but we are currently spending. And we’d like to do that as soon as possible, so we can get you better returns and better growth sooner rather than later. Roger, I’m happy to —
Roger Thompson
Yes, I’d add a little bit to that, Bill. The one thing I can assure you is the control and discipline we’ve got around that cost efficiency program is pretty water tight. We’ll look at and track what we proposed, what we’ve decided upon, what we’ve implemented on and what we’ve actually realized, and we’ll track that by person on the comp side and by department and line item on the other side and actually the specific things where we’re initially proposing and then finalizing those sales.
So we have — whilst Ali — as Ali says, we may be reinvesting some of that back in the same place. We’ve got a pretty tight program to ensure that we do take out what we did. And I hope if you look back over the merger, five or six years ago, we did exactly what we said we were going to do. So, hopefully, that gives you some comfort that, when we take some cost out we will do exactly that. And then to Ali’s point, reinvest it in areas where we can see bigger growth.
On the inflation point, yes, like everyone, we’re seeing inflation and wage inflation. We’re no different to others there. We will continue to try and manage that. And we’re also obviously affected by — currently by lower markets that affect revenue. So that’s a tough balance, but we’ll continue to be disciplined around our cost base. But, no, we’re not immune to inflation.
Bill Katz
Thank you.
Operator
Our next question comes from Ryan Bailey from Goldman Sachs. Your line is open.
Ryan Bailey
Good morning, everyone. So I also wanted to ask a couple of questions on the cost efficiency, and Ali, I apologize in advance for a multi-parter. So I think you said that the review was extensive. I was wondering, will there be any more flex on expenses if the markets remain challenging. So part one.
I’m sorry I’m a little confused on the mismatch in terms of timing of the expense reductions versus the reinvestments. Is that going to be a favorable mismatch or unfavorable mismatch?
And then, in terms of the $30 million to $35 million of expense implementation, how much of that is cash-based versus accounting? And final part, I mean, out of your PP, I’m sorry. Are any of the — is any of the expense reduction coming from investment professionals, or is it all going to be sort of back in mid-office? Thank you.
Ali Dibadj
Sure. We’ll try to stay honest on those, Ryan, the questions. It was extensive. It was very broad-based. We will obviously continue to be disciplined on our cost on behalf of shareholders and clients. We don’t have, if you’re asking the question, kind of a ripcord situation if the market goes down. That’s not how we operate. We are, however, going to continue to be disciplined on our cost on behalf of shareholders and clients. We don’t have if you’re asking the question kind of a ripcord situation if the market goes down. That’s not how we operate. We are however going to continue to be disciplined on our cost structure obviously. But the $40 million to $45 million is what we’ve identified and are executing on.
In terms of the balance of the positives or the negatives, without stepping into giving guidance, what I would say is some cost savings one has to invest in first. If you want to hire somebody and they’re available, you may hire them before you get the cost savings out. So the volatility will be there. You’ll probably have to invest a little bit before you get those cost savings out initially would be the way I would think about modeling it for what it’s worth. But again, it will be clearer as time goes on with the volatility is. So I would think unfavorable I guess is a short answer. Let me go to a number Roger go ahead.
Roger Thompson
Sorry. And then on the — around the cost of implementation the onetime costs then the majority of that is cash. There’ll be some accounting acceleration of LTI. We’ll obviously be looking at our real estate footprint. There may be some lease write-offs, but I think that would be relatively small. So the majority will be cash.
Ali Dibadj
And then your last question specifically, as we said at the outset goes back to your first question, we were very broad-based. And the instructions were as I mentioned earlier, to make sure that we deliver for clients and then we have no issues on the regulatory side of things. And we support our responsibilities on the regulatory side. So in that first context of client focus we have to look at all aspects of the business. So yes, we look to PM as well. And if it was in the best interest of the client to change. We certainly did that.
Operator
Our next question comes from Brian Bedell from Deutsche Bank. Your line is open.
Brian Bedell
Great. Thanks. Good morning, folks. Thanks for taking my question. I’ll bundle two into one and it’s all around your presentation on the strategic improvement plan Ali. And it’s sort of a two-parter within that. But one is on the US intermediary channel and thanks for outlining all of the different areas that you’ll invest in there. But maybe on the sales force side of it, is it — do you think you’re either sort of underweight in your size versus peers in that major channel, or is it more about sort of reengineering what the sales force is doing and adding and trimming. And are you more focused on wirehouses or really other areas like RIAs for example — and then longer-term slides 14 through 16 I think they were. Just your confidence on eventually turning to positive organic growth, even if we continue to have say secular headwinds on active to passive?
Ali Dibadj
Yeah. Okay. So on the First one I don’t think we’re undersized from a number of people perspective. There may be some selective things one could do. But really it’s around leveraging the right set of data to make sure we’re applying those resources in the areas that can deliver the best results for our clients and deliver growth. So it’s an alignment question more than it is kind of we’re underserved, right? We don’t have enough coverage of things. That’s part of the good news, right? The good news is we actually have a really strong vibrant team in the US intermediary business. It is an excellent distribution pipe so to speak and great relationships with clients. We can do a better job on activities and resourcing and making sure everybody understands what the KPIs are and aligning incentives, et cetera, along the way. So it’s more on that side of things than it is, gosh we got to go out and hire 200 people. That’s not the case. We actually have really good foundation to work from there.
On the second question around kind of predicting I guess organic growth or not. Look that is our intention, absolutely. Our intention is if we pick the right pockets to target from not just a new intermediary I mentioned a second ago but more broadly as a firm, right pockets in the industry there is growth. There is growth and we should be aligned to those bigger pockets that are growing better.
And again there too the good news is we have a foundation of capabilities to allow us to do that for the most part to one of the earlier questions. We may have to do things organically – sorry inorganically, the emerging market debt team was an example of that. But I’m fine doing things bigger as well than that if it delivers capabilities that our clients want from us and where we have the right to win – where in their eyes we have the right to win. So yes, the intent is to get to organic growth, one has to recognize that things are going to be market dependent, whether one likes it or not. But in a “more normalized environment” that is the intention and that is what we’re all heading towards to deliver for our clients which will deliver organic growth and thus for our shareholders as well.
Operator
Our final question comes from John Dunn from Evercore. Your line is open.
John Dunn
Thank you. Kind of a continuation on that. Maybe on the third piece, particularly the lift-outs, given the market moves we had in the second half, could you give us a sense of where kind of people’s temperatures are and how quickly they could kind of warm up and look at maybe joining you guys?
Ali Dibadj
Yes. So it’s a pretty vibrant market out there from a M&A perspective. I think what’s happened over the past year maybe two, certainly a year has gotten a lot of folks to be realistic about being part of a broader, very strong foundation of a platform, being part of a bigger organization.
As Roger mentioned a couple of times, and it’s probably worth underlying again, just look at our balance sheet, right? It is an extraordinarily strong balance sheet which weather storms like this. And you can imagine there are folks who want to be part of that.
Importantly, there are folks who want to be part of — to some of the earlier questions, a really great distribution platform. And see the flexibility of them building their own broader global distribution platform is something that may not be as attractive as a smaller company as opposed to as a larger company.
And so, I think the temperature is just right, so to speak. I wouldn’t expect that everybody is buying stuff tomorrow. People are kind of feeling things out. But I would anticipate over the next 12 months there will be more M&A activity in this industry than what you’ve seen over the past six to nine months.
John Dunn
Got you. And then …
Ali Dibadj
John, we lost you.
Operator
This concludes our Q&A. I’ll now hand over to Ali Dibadj, CEO for final remarks.
End of Q&A
Ali Dibadj
Great. Thanks Elliott. Thank you all for joining. I hope you have a little bit of a better sense of the work that needs to be done, what we’ve hopefully start to deliver so far and the excellent foundation that we have at Janus Henderson. And we look forward to updating you further on future earnings calls. Thanks all for joining.
Operator
Today’s call has now concluded. We’d like to thank you for your participation. You may now disconnect your lines.
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