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Janus Henderson Group plc  (NYSE:JHG)
Q3 2018 Earnings Conference Call
Nov. 01, 2018, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. My name is Nicole and I will be your conference facilitator today. Thank you for standing by, and welcome to the Janus Henderson Third Quarter 2018 Results Briefing. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. In the interest of time, questions will be 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 section 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. It is now my pleasure to introduce Dick Weil, Chief Executive Officer of Janus Henderson, Mr. Weil you may begin your conference.

Richard Weil -- Chief Executive Officer

Welcome everyone to the third quarter 2018 earnings call for Janus Henderson Group. I'm Dick Weil, and I'm joined today by Roger Thompson, our CFO. Today, Roger will be taking you through the results for the quarter, and then after his prepared remarks, we will be happy to take your questions.

As you know, we take a long-term view of our business versus the short-term view that is inherent in quarterly reporting. To that extend, and similar to our first quarter call, Roger will be providing you with updates on the quarterly flow, performance and financial results.

We will use the second and fourth quarter calls to address these same items along with a more robust discussion of our business and strategy. We believe this setup will help better align our calls with the way we manage our business.

With that said, let me turn it over to our CFO, Roger Thompson to walk you through the third quarter results.

Roger Thompson -- Chief Financial Officer

Thank you, Dick, and thank you everyone for joining us. Diving straight into the results; investment performance remained solid, with 60% of firmwide assets beating their speaking their respective benchmarks over the three year time period as at the 30th of September.

While we're pleased with this result, there are pockets of short-term underperformance in key areas such as European equities, INTECH, and fixed income that need to improve. These sorts of performance challenges happen in the diversified business such as ours and we are focused on improving the results and the strategies we're experiencing challenges in.

Net outflows declined to $4.3 billion in the quarter as a result of some of the short-term underperformance. While we're disappointed with the results, it does not define our long-term value proposition or derail our plans to deliver organic growth, and there are areas of our business that is doing very well, which I'll touch on a little bit later in the presentation.

Assets under management improved to $378 billion at quarter-end, reflecting market gains, which more than offset the net outflows and slight FX headwinds. Finally, financial performance remained strong with adjusted EPS of $0.69 and adjusted operating margins of 38.5%. Additionally, we returned approximately $135 million of cash to shareholders in the quarter via dividends, share repurchases and the repayment of the remaining convertible notes.

Moving to Slide 3, on our investment performance. Overall investment performance remained solid, and despite a dip in the metrics at the end of September compared to the other periods presented, the majority of AUM is outperforming benchmark over the one, three and five-year periods.

And looking at the capabilities, the quantitative equities capability, which is the INTECH business, experienced the biggest change from the prior period. INTECH's one-year performance of 21% of assets beating benchmark compares with 47% in the second quarter and the three-year performance of 8% of assets beating benchmark compares with 25% in the second quarter. The decline in investment performance at INTECH was driven by two factors. First, strong performance in the US markets during the third quarter was the result of outperformance by megacap growth stocks.

This high concentration in US equity markets was a headwind for INTECH's US strategies which seek diversification. Conversely INTECH's Non-US and Global Strategies benefited during the quarter due to their diversified approach as non-US markets showed less concentration and more breadth in general. Second, specifically impacting the three year results, performance from the third quarter of 2015 represented a particularly strong period of outperformance for the firm and that rolled out to the measurement period in this quarter, impacting the overall results.

Now, turning to total company flows. For the quarter, net outflows were $4.3 billion compared to $2.7 billion last quarter. The quarterly result reflects an increase in institutional fixed income outflows, primarily in North America and Asia Pacific.

Despite this quarterly outcome, the global institutional pipeline is seeing a growing number of opportunities in North America, the Middle East, China and Australia, which we remain very encouraged by. We did see an improvement in intermediary flows during the quarter, and while still negative in total, all regions improved compared to the prior quarter and North America and APAC had positive net flows.

Moving to Slide 5, which shows the breakdown of flows in the quarter by capability. Equity net outflows for the third quarter declined to $3.1 billion, primarily as a result of fewer mandate fundings compared to what we experienced in the second quarter and ongoing outflows in the European equity funds. Flows into fixed income were negative in the quarter at $1.6 billion.

This resulted from the mandate losses in our North America and APAC institutional plans that I mentioned earlier, partially offset by improvements in flows across our intermediary clients in North America and EMEA. Flows at INTECH were breakeven, driven by improved gross sales compared to the prior quarter.

Multi-assets' net inflows was strong at $900 million in the quarter. This result was driven by $1.3 billion of net flows into the balanced fund as a result of the strategy's exceptional investment performance and the global strength of our distribution team. Encouragingly, the funds generated positive flows across all three regions of business including both intermediary and institutional clients, showing the cross-selling benefits of the merger.

The biggest impact in the quarter was seen in North America which had almost $900 million balanced-fund net flows. This result drove notable market share gains during the quarter in the active US mutual fund market, which we were pleased to see. This is a perfect example of the type of results we expect the combined firm to be able to deliver and we hope to have more success stories like this in quarters to come. Finally, alternative net flows were negative $500 million, which is a slight improvement over the second quarter.

Slide 6 is our standard presentation of the US-GAAP statement of income.

Turning to Slide 7, for a look at the few of the financial highlights. Our third quarter adjusted financial results are strong. Average AUM in the third quarter increased 2% over the second quarter, primarily driven by positive markets which were partially offset by outflows and negative currency movements. Higher average assets drove an increase in management fee revenue, which was offset by the expected seasonal decline in performance fees resulting in a 2% decline in total adjusted revenues from the prior quarter.

Adjusted operating income in the third quarter of $181 million was down compared to the second quarter, primarily as a result of the seasonally lower performance fees. Compared to the third quarter of last year, adjusted operating income was up 7%. Third quarter adjusted operating margin was 38.5% compared to 40.1% in the prior quarter and up from 37% a year ago.

Incremental margin in the third quarter relative to the same period last year was 85%; a strong indication of the firm's effectiveness to converting higher revenues in to higher profits. Finally, adjusted EPS were $0.69 for the quarter compared to $0.74 in the second quarter and up from $0.56 a year ago.

On Slide 8, we've outlined the revenue drivers for the quarter. Performance fees were the biggest driver of the quarterly change in adjusted total revenue. Third quarter fees were negative $6 million compared to the positive $14 million in the second quarter and a negative $2 million in the same period last year. As we've discussed on prior calls, the third quarter have significantly less AUM subject to performance fees compared to the second quarter, and therefore in the third quarter, you saw a decline.

In addition, the performance fees on US mutual funds declined quarter-over-quarter, primarily as a result of a decline in the three-year performance at the Forty and Mid Cap Value funds. Management fees increased 1% from the second quarter, directionally, in line with the increase in average AUM. Net management fee margin for the third quarter was 44.1 basis points, down very slightly compared to the prior quarter and the same period a year ago. The decrease was primarily due to mix shift, as we've seen continued outflows from our European equity strategies.

Moving to operating expenses on Slide 9. The third quarter had adjustments associated with integration, as well as non-deal costs. With approximately $19 million of integration costs incurred during the quarter, which includes costs associated with the sole CEO announcement. This brings the total deal and integration costs we have recognized to approximately $235 million. We expect the remaining costs for completing the deal and achieving the merger synergies to be $25 million, making a total spend of $260 million compared to our original estimates of $250 million.

Non-deal costs adjusted other operating expenses in the quarter were roughly $13 million and mostly consisted of intangible amortization of investment management contracts and contingent consideration. Adjusted operating expenses in the third quarter were $288 million compared to the second quarter amount of $286 million, a less than 1% increase quarter-over-quarter. Adjusted employee compensation, which includes fixed and variable costs, increased 4% compared to the prior quarter.

The increase relates primarily to accounting for interest credits associated with the firm's pension in the UK, whereby these credits were previously recognized as offsets against compensation. Going forward, the interest credits will no longer be an offset against compensation, but rather will be booked through the other non-operating income line, and the third quarter includes a year-to-date adjustment for this change.

Adjusted long-term incentive compensation was down 6% from the second quarter, primarily due to the impact of grants rolling off, partially offset by a true up in the mark-to-market adjustments to mutual fund share awards. And as to the prior quarter, in the appendix, we provided further detail on the expected future amortization of existing grants for you to use in your models.

The third quarter adjusted compensation to revenue ratio was 43.2%. When adjusting out the one-time portion of the accounting changes I just mentioned from the pension interest credit and the mutual fund share awards, the ratio was 41.8%, which is in line with the low '40s that we've communicated previously.

Turning to adjusted non-comp operating expenses, collectively, there was a decrease of 1% quarter-over-quarter. The main drivers of the decrease were lower marketing costs, partially offset by higher G&A and investment admin costs. The decrease in marketing was primarily due to seasonality.

Looking forward, for the fourth quarter, we do expect to see a seasonal increase in non-comp spending. However, the full year non-comp spend will be below the guidance we have previously provided, and we now expect to see that's up approximately 8% year-over-year.

Turning to slide 10 and look at our profitability trends. We continue to generate strong operating profits and EPS. Our financial results represent the continued efforts toward cost synergy execution and our commitment to maintain financial discipline. We've achieved $119 million of our committed $125 million of annualized cost synergies at the end of the third quarter and expect to reach our $125 million target by year-end. Remember, this compares to our original target of a $110 million to be achieved by May 2020. So we're very proud of this result and I want to thank all of our employees for their continued efforts.

Whilst there is still efficiencies to unlock in our business, some of which is still to come from the merger, we will not continue to separately report on synergies once we've delivered the committed $125 million, as we want to focus on running our business for the future, rather than measuring on a backward looking metric. You will see these future efficiency saves continue to come through our results and our margin.

Turning to EPS; the third quarter adjusted EPS of $0.69 is down over the second quarter was 23% better than the same period a year ago. There were a few non-operating items impacting EPS this quarter. First, we had investment losses of $8.3 million, which were driven by losses on the feed-book (ph) and other investments; partially offset by the gains recognized on the mutual fund share awards that I discussed earlier.

With these losses, there are also corresponding offsets to non-controlling interests, which totaled $6 million in the quarter. So you should think of these on a net basis. Second, in the other non-operating income line, you see the impact of the change to the treatment for the pension interest credits which made up most of the income in that line this quarter.

Finally, our recurring effective tax rate for the quarter was 23.7% making the year-to-date recurring effective rate 22.5%. This higher quarterly tax rate compared to the previous quarters of 2018 reflects the year-to-date adjustments on estimated tax income from a regional standpoint as more income is being generated in the US. Going forward, we still anticipate statutory rates of 21% to 23% and the effective rate will be impacted by the various differences which arise quarter to quarter.

Slide 11 is a look at the recent capital return initiatives which we've executed. As we sit here, nearly 18 months since the merger is closed, we are delivering the capital return plans we've communicated previously and I wanted to spend a moment reviewing the results and discussing how we think about these efforts going forward.

Currently our business generates roughly $500 million of operating cash flow per year. Over the last 1.5 years we've been focused on working through many of the near-term cash needs we had in our business. These needs included a period of elevated cash spend associated with deal and integration costs and the repayments of the 2018 convertible notes.

With deal and integration costs winding down and the repayment of the convertible notes complete, which resulted in an aggregate cash outlay of more than $390 million in 2017 and 2018, there are fewer ongoing demands of cash going forward. Accordingly, in the third quarter, we initiated a stock buyback program and completed $50 million of the $100 million authorized. This $50 million of repurchase activity reduced our outstanding share count by approximately 1.8 million shares or roughly 1% of shares outstanding.

In relation to this, I think it's important to reiterate that when it comes to granting employee's shares of company stock as part of compensation; as a firm, we've adopted a practice of purchasing shares on market for these annual grants. And therefore, we do not annually dilute shareholders as part of our compensation practices.

What this means is that each share that the firm repurchases under its current buyback authorization is accretive to shareholders. In addition to buybacks, we're paying a fairly healthy dividend which at today's price offers a very attractive yield to shareholders. Looking forward, we're generating excess cash which allows us to continue to follow the capital return philosophy which we've previously laid out for you.

We will evaluate and balance the ongoing investments the business requires with the external opportunities that we see. And when excess cash remains, we will seek to return that capital to shareholders.

So, in conclusion, before we open it up to Q&A. Let me sum up where things stand. Our financial results are strong, reflecting stable management fee margins, disciplined expense management and continued realization of cost synergies and we remain committed to returning capital to shareholders.

The flow result for the quarter is disappointing. However, our long-term outlook for the business has not changed. We're seeing encouraging results in several areas of the business where we are gaining market share and we remain confident in our ability to achieve positive organic growth.

In the short-term, our focus remains on delivering on the promise of our merger, while completing the infrastructure integration and development projects over the next 6 months and effectively and efficiently delivering the full line-up of investment solutions through the full range of our client relationships over the next 12 to 18 months.

As we continue forward, we'll keep our clients at the heart of everything that we do and focus on delivering excellent investment performance and a great client experience.

With that, I'd now like to turn it over to the operator for questions which Dick and I will be happy to answer.

Questions and Answers:

Operator

Thank you. Ladies and gentlemen, at this time, we will conduct the question and answer session. (Operator Instruction) And we'll take our first question from Ken Worthington from J.P. Morgan.

Kenneth Worthington -- J.P. Morgan -- Analyst

Hi, good morning and thank you for taking my question. Maybe first on the fixed income business, you identified outflows that took place this quarter. What I'm really interested in maybe is why the outflows are taking place. You had outflows in each of the quarters of 2018 and aggregate outflows in 2017. But the performance of the products, at least in aggregate appears to be not just strong but particularly strong. So what's the connection here, why the kind of ongoing outflows in your fixed income operation?

Roger Thompson -- Chief Financial Officer

Hey Ken, it's Roger. I think the performance against benchmark is pretty good, as you say. When you look across -- across the board, the overall percentages are pretty good. When you look more at a comparison -- comparative basis, so looking at the mutual funds, as an example, we can the numbers are; they're OK, but they're not spectacular.

So our overall performance has been good but probably not as good as we'd like it to be. And that's where Jim Cielinski, who joined us about a year ago now, has been really looking at the process, where are we taking risk and looking to obviously continue to improve that overall performance.

So yeah I think the -- that is one of the cases we're looking at. Benchmark only tells a part of the story. So our numbers are safe but performance numbers, they're OK, but we'd like it to continue to be better. In terms of the short-term numbers, the outflows in the third quarter were probably a little bit more tactical than that. There were some more cash and short-term -- short-duration money that was taken off the table by clients in the third quarter.

Kenneth Worthington -- J.P. Morgan -- Analyst

Okay. Okay, great, thank you. And then maybe talk about Dai-ichi, to what extent are we seeing Dai-ichi investment in Henderson products? And maybe, if you can talk about the outlook for any strengthening of this cross selling relationship between Dai-ichi and Henderson and maybe you'd to see Janus as we look forward to 2019?

Richard Weil -- Chief Executive Officer

Sure, Ken. It's Dick. Thanks for the question. So the Dai-ichi relationship continues to be as strong as it's ever been. And we remain very optimistic about the opportunities that it brings for us. They have $2.8 billion of their general account assets invested with us. I'm not sure how much more it fits in their general account investment strategy to invest with us. That's probably not the biggest area of opportunity, but we're -- we're very grateful for that support and we'll see how that develops.

Then they have an Affiliate Group, which includes Asset Management One, on the ground in Tokyo. They've helped to distribute over $6 billion of assets to third parties over time and we continue to be really optimistic about our partnership with them and grateful for their help. The truth is, they've also been going through a merger of their own on the ground in Tokyo. And I can't promise that I have perfect insight into what's going on inside of Asset Management One, but I think that likely affected the size of the opportunities we've had with them lately.

The next piece of the puzzle with Dai-ichi support is they're fully owned subsidiaries and the business we can do with them. We manage roughly $2 billion of fixed-income assets for TAL down in Australia. And they also have some other subsidiaries around the world and we're optimistic that in the future, we might have the opportunity to earn some more business across that set of affiliates. And so, it's not going to be every quarter that we report a big step forward with those folks, but it wasn't too long ago that we reported the TAL investment with us and we're optimistic that in each one of these buckets in the future, we continue to have good upside.

Operator

Thank you. And we'll take our next question from Michael Carrier from Bank of America.

Michael Carrier -- BofA Merrill Lynch -- Analyst

Thanks for taking the question. Maybe first one, just on the flows. So Roger, I think you mentioned the fixed income in European equities. You kind of win on the flow trends. You mentioned multi-asset, but any other areas of strength? And I guess just on the European equity side, what's the -- when we look at the performance, what's dragging it down or what -- whether it's environment where you could start to see that turnaround?

Roger Thompson -- Chief Financial Officer

Yes, hi, Mike. Let's take it in pieces. Yes, European equity, we've -- we've obviously had some poor performance in over -- over the last --the last 18 months. Actually in terms of -- it's almost the opposite of the comment I just made on fixed income. Our quartile performance is actually improving quite dramatically, but we're still behind benchmark. So some of the bigger funds there are behind benchmark are approaching top quartile at least year-to-date.

There is certainly some -- there has certainly been some -- there is more of a value bias in a number of those portfolios. And as we've obviously seen, a very significant growth, and particularly moments bias in portfolios or in returns, which hasn't -- which hasn't benefited. And in addition, there has certainly been some individual stocks which haven't gone our way.

So there is a number of things in there. The teams are strong. These are fund managers with incredibly strong track records. We've added several to the teams and -- but they're very stable and very long term teams. So it is what it is. We continue -- we had outflows, we're still seeing outflows and that is off the back of -- that is off the back of weaker performance. On the plus side, yeah balanced is -- balanced is the shining star of the quarter, as they say selling in the intermediary and institutional markets in all three -- in all three markets -- in all three regions in the US, in Europe and LatAm and in Asia.

So that's a perfect example of the sort of -- we've described before, of green shoots for the merger. Again I will reiterate what we said, you know 18 months ago, which is that revenue synergies will take three to five years to be fully vetted in, but that's an example of something that's going very well. What else is selling well? Some of the -- some of the -- the US equity portfolios, the Triton Enterprise, couple of emerging markets and then on the fixed -- sorry that's -- So that's really the big success stories in Equity

Michael Carrier -- BofA Merrill Lynch -- Analyst

Okay, thanks. And then, maybe just one on the expense side, so as you think about -- once you realize the synergies and you look at kind of the investments that you're making to maybe ongoing efficiencies. Do you have some sense of what like the core kind of expense growth should be ahead? And then two small things that you just mentioned; the long-term incentive comp plan, I know you guys have that table in the back. Any sense on like the $19,000, on like, that how that will impact it? And then on the UK pension costs, if you could just run through those numbers again, and more importantly, just how it impacts the forward?

Roger Thompson -- Chief Financial Officer

Yes. So taking the last bit first, that's just an accounting change between what's in a net reduction -- which is a reduction in the comp line and is now effectively a number that's grossed up between compensation and other income. The net -- the net change there is, again, I guess give the -- it's about in total across the two things we've adjusted in the quarter.

You can -- we've given you the ratio, but you can work it out. It's a sort of $6 million or $7 million adjustment that we put through in the quarter. Going into going into 2019, we're just in the early days of our budget process for 2019 at this stage, Mike. So it's a bit early to say. But yeah, that's a combination of synergies that are still coming out of the business, short-term things that you have to do and things we have to feed in our business and strategic investments that we want to make to continue to grow -- to continue to see the success and growth of the business. But, I think probably best to pick that one up with full year earnings.

Operator

And we'll take our next question from Kieren Chidgey from UBS.

Kieren Chidgey -- UBS -- Analyst

Hi, guys, two questions. First one on INTECH flows, just wondering what the client response and discussions have been like following the sort of more volatile performance over the past two quarters, particularly so soon after the weaker performance at the end of '16. Has that's thrown up more question around the process there and sort of -- what sort of discussions have you been seeing?

Richard Weil -- Chief Executive Officer

Yeah, I think it's too early to give you -- this is Dick Weil, sorry. I think, Kieren, it's too early to give you a direct answer to that question. I think that's all just unfolding as we speak. We obviously anticipate a lot of questioning from clients on this basis. INTECH, I think is well prepared to address those things. But you're right, we're uncomfortably close to the second half of 2016 and we expect there will be a lot of questions, but I think it's a bit too early to answer that intelligently yet.

Kieren Chidgey -- UBS -- Analyst

But the -- I mean surely the work you've done in terms of what's driven that weaker performance, I mean is it consistent? Are you still comfortable with the process and sort of how that's working?

Richard Weil -- Chief Executive Officer

Yeah, I think one of the and let's just say, one of the biggest drivers going through Q3 on the US portfolios was the strength in those megacap stocks and the incredibly concentrated nature of those and what they represent in the US market. And the INTECH process, which is a more diversified process would, by definition, have been significantly underweight those stocks. So yeah, the under performance in Q3 makes sense and it's very explainable. Obviously, some of those stocks have taken a bit of a tumble over the last month. So yeah, I would just say, that's too early to say what's going on next. But yeah, we totally understand where we are as of the third quarter and it makes total sense.

Operator

And we'll take our next question.

Roger Thompson -- Chief Financial Officer

And I guess the last -- sorry operator, and I guess the last bit and that is, yeah I thing clients will also think that makes total sense. But as Dick said, there will be conversations, plenty of conversations going on. Sorry, operator. Thank you.

Operator

And we'll take our next question from Dan Fannon with Jeffries.

Daniel Fannon -- Jeffries -- Analyst

Thanks, good morning. I guess, just a follow-up on that, can you just talk about, obviously backlog INTECH mostly institutional, kind of a gross sales, kind of dynamic anything you may know as of now. And then also October, I know it's very short term, but it was obviously a very volatile month. Can you characterize how the INTECH strategies kind of did in that kind of short period of time as well?

Roger Thompson -- Chief Financial Officer

Yes, Dan I mean we -- as I think most of you know I don't like doing quarterly earnings let alone and we don't like talking about quarterly flows or monthly flows or monthly performance. So -- and that is way too short a time period to draw any conclusions from. So, let's look at it on a long-term basis, please.

Daniel Fannon -- Jeffries -- Analyst

Okay. But I guess then, just your long -- the backlog which would be focused on the one, three and five year numbers that we know, your clients, in terms of now, is there much you can say. And maybe talk broadly about the institutional maybe beyond INTECH?

Roger Thompson -- Chief Financial Officer

Okay, yeah, well, it's two things. So taken INTECH first, I guess we were particularly -- yes, we're very pleased with a flat number in the quarter. And as you -- as I said on the call, we actually saw some growth inflows these which were higher in the third quarter than the second quarter. So, and I -- this business being one that business continues to develop. But again, as we've talked about before, the sort of -- the jewels of possibility are quite large. There are some very large lumpy institutional mandates and INTECH will hopefully continue to win some large lumpy institutional mandates.

But we are very aware -- and the management team, very, very aware that with poor performance comes risk of lumpy outflows as well. So I think where we are at the moment, the quarter looks good from a flow point of view. It didn't look great when it's -- from a performance point of view, as we talked about and that creates some risk for the future. There is nothing that you should -- that we're not hiding anything from you about massive outflows, which we're seeing now. But it will be what it will be going forward.

Institutional, more broadly, there is some -- there is definitely some continued growth in our relationships there as we've grown the -- as we've grown the institutional footprint around the world post the merger. We're optimistic about a number of product areas, whether it'd be multi-asset around adaptive allocation, diversified risk premium, our emerging markets franchise continues to win business. So we've got plenty of products which are interesting in the institutional space and we've got geographies where we're currently very underpenetrated.

And we've got better, more established teams, on the ground. Again, that takes time. But we've got more discussions going on in the US. I think I told you on the prior quarter or it might have been the one before. I think it was the second quarter about our first win in the Middle East for a long time. There is good potential there for one or two more.

We've obviously got a good business in Australia, where we've been winning institutional business. So the institutional opportunity set is something that we are positive on -- in looking forward. Institutional will be more lumpy than intermediary. So -- and we've got to be patient.

Operator

Thank you. We'll take our next question from Craig Siegenthaler from Credit Suisse.

Craig Siegenthaler -- Credit Suisse -- Analyst

Thanks, good morning. So enterprise is your largest fund, Triton is your fourth and they both have soft closes in place. So can you talk about your ability to grow these two funds organically despite being close, because we've noticed from the third-party retail data that they're both still in-flowing on a net basis?

Roger Thompson -- Chief Financial Officer

Yeah, they're closed to new clients but they're open to existing clients. So that's what a soft close. It's there to protect the existing clients and ensure that the managers are able to do their job efficiently. As you can see from the performance, managers are doing their jobs very efficiently. But while they're soft closed, they are continuing -- they can continue to take money from existing clients and pleasingly there are doing that.

At some point, yeah, you would have to consider whether they are moving toward to a position of a hard close where you have to say no, no additional money at all. That's something that we manage very carefully and look very long way down -- look a long way down the track. So, we're in a good position with those funds.

The managers are happy where they are with them being close to new business, but existing to -- but are opened to existing clients. I think you might have said the balance was closed there. If you did, that's wrong, it's not closed.

Craig Siegenthaler -- Credit Suisse -- Analyst

No.

Roger Thompson -- Chief Financial Officer

Okay, good. That has a lot of capacity.

Craig Siegenthaler -- Credit Suisse -- Analyst

Yeah, not balanced, but -- so an enterprise being $19 billion and Triton being $12 billion. How far are each of them from the hard close?

Roger Thompson -- Chief Financial Officer

That's not a number we've publicly disclosed, but we are in regular communication with the portfolio managers and will -- as those numbers become appropriate, we'll disclose them. But, at this point, we don't have anything to announce and that managers are quite happy with where they sit today.

Operator

And we'll take our next question from Alex Blostein with Goldman Sachs.

Alexander Blostein -- Goldman Sachs -- Analyst

Thanks guys, good morning. So the first question just around Brexit. How, I guess, is Janus positioned now they're further in this process? Operationally, any changes that you guys envision that you might have to make if things don't go smoothly and when it comes to the client experience, any pull back you're seeing in terms of gross sales, specifically related to Brexit concerns and I guess your expectations of a continue to being bit on the limbo here, could that continue?

Roger Thompson -- Chief Financial Officer

Yeah, nothing has changed from what we previously told you. We're at a very good position in terms of having a very established European business that is based in Europe. So we have actually two Luxembourg ranges at a Dublin range. As I talked about before, we are adding a little bit of resource into that. That is all agreed with the regulator and we probably half the way through recruiting it. To be brutally clear, it's adding 12 people in Luxembourg some of those roles are moves of roles from London, so it's probably a net add of six or seven people; and again, as we've always said, in operations, operational risk compliance type roles.

So we're very well positioned there. There is a little bit of work we have to do in terms of restructuring entities, but again, we're well progressed there. Like you say, the client impact is something that we take very seriously to try and ensure that we're not -- we're not causing clients undue hassle. There is a little bit of repapering we'll have to do. We're obviously trying to keep that to a minimum. But net-net, we're in a very good place.

The sort of nuclear option that we talked about before is delegation. We have to make -- we're make it. So we're prepared for hard Brexit I guess is the summary for the first part. If there was no delegation of investment management to the UK on 29th of March 29 next year, that would be a problem, but that is a consistent problem across the industry.

The regulators in all jurisdictions have been very, very clear that that is not something we should be planning for and that will get sorted. But I'm sure it will take a little bit longer to get those bilateral agreements between Lux and Dublin and in the UK sorted. But that will probably be my tail risk but I'm being told very clearly by European, Lux, Irish and UK regulators and government not -- that that is, that will get sorted.

Alexander Blostein -- Goldman Sachs -- Analyst

Got it, thanks. And then, my second question just around performance fees. Obviously you guys have a lot of transparency on the US side. But as we think about CCAs (ph) and really just the non-US part of the business, how should we think about the watermarks -- high watermarks, how we should think about kind of the prospects for those performance fees over the next 12 months, given the non-US performance has been quite challenged.

Roger Thompson -- Chief Financial Officer

Yes. So I guess there is two pieces. There is like a -- we've laid out the timeline of when we've got -- when we've got accounts with performance fees on them, and as you know this is significantly less in the third quarter. So this quarter shouldn't surprise you. And the fourth quarter is a seasonally strong quarter. So we've got a number of -- a number of portfolios with performance fees -- performance fee window open, if you like, in the fourth quarter.

In addition, we've got the quarterly performance fees on the UK absolute return fund, so sort of $8 billion or $9 billion fund. That fund is slightly behind its benchmark at the moment, so it's obviously going to make that back before we'd start to add anything in the fourth quarter. And on the annual performance fees on the long-only funds, yeah, it's an incredibly diversified portfolio. Performance is probably, I guess, when you look at overall performance, it's a bit weaker than it was a year ago.

So, yeah, it is a real mix. It will be where it will be on the 31st of December. I guess when you look at -- I could say, when you look at overall performance, it's a bit weaker than where it was in Q4 last year. So on average, you probably expected slightly less -- a slightly lower number on that than last year. But like I say, it is portfolio by portfolio. So I guess I've only just given a guess as to what it might be and we'll see what it is at the end of the year.

Operator

We will take our next question from Patrick Davitt with Autonomous Research.

Patrick Davitt -- Autonomous Research -- Analyst

Hey, good morning. Thank you. On the other side of Alex's question about Brexit, I guess there's some news today that it's perhaps going in a more constructive direction, although I think people are skeptical. Any sense of if it does go in a more constructive direction, if there's a pool of kind of relief flows on the sidelines that could come back in to the system and to your franchise, if there is a much more positive resolution than, I guess, the people were originally thinking?

Richard Weil -- Chief Executive Officer

I don't think we have a great sense of that answer. You know the nature of this Brexit process is, people will teeter up to the edge of the cliff, they'll look over, they'll take a few steps back, then they'll get feisty again and get up right next to the edge of the cliff, and frankly we try not to overreact to the daily news one way or the other. There's a lot of it and you never know which is really indicative of the future and which is just noise.

So I wouldn't react too much to it. In terms of a pent-up good news story of flows from Europe, we can hope for it, but I don't know any way that we have to scientifically really estimate it or feel it coming. So sort of logically speaking, what I expect something probably is gut like -- is into intuition. Yeah, I probably would, but as a real -- sitting here with any facts to back that up, I don't really have any. So it's just a guess.

Roger Thompson -- Chief Financial Officer

Probably more markets with FX?

Richard Weil -- Chief Executive Officer

Yeah, what's going on in the overall global markets at the same time where the people are de-risking in the face of fear in equity markets; that will have a lot to do with behavior beyond just the Brexit piece. So it's going to be a complicated menu of things that set people's appetite and it's pretty hard to predict at this point.

Patrick Davitt -- Autonomous Research -- Analyst

Okay, fair enough. And then, last quarter you noted -- you noted some risk to AUM from the management changes with CEO & distribution. Any pieces related to that in the outflows this quarter and any update on client conversations around those changes now that we're a few more months in.

Richard Weil -- Chief Executive Officer

Yeah. No, the client conversations are fine and none of that -- to our knowledge, look we don't always have perfect knowledge of all the different factors that drive people's decision. But as far as we're aware, none of the flows were really affected by the CEO change, leadership change at all. So there's none of that in there and we're not looking for that to be a big influence on flows going forward. We don't understand that to be driving anybody's behavior at this point.

Operator

Thank you. We'll take our next question from Brian Bedell with Deutsche Bank.

Brian Bedell -- Deutsche Bank -- Analyst

Great. Thanks, good morning folks. Maybe just a quick one on, look into the fourth quarter given the backdrop against -- one question would be or one, I think, that maybe we can and you can begin to observe is, the fee rates obviously went down in the third quarter due to mix and as we think about how performance beta trends have been playing out, say for October, would you expect that fee rate decline to continue just in the way averaging works in the fourth quarter?

And then, related to that, how should we think about how the operating margin might play out, given we're going to get the rest of the cost saves coming through and the performance fee challenges that you mentioned?

Roger Thompson -- Chief Financial Officer

Sure, hi, Brian. Yes, on that -- without a doubt the -- with the equity markets rallying over the last few years, that has masked the fee pressure. And as I said before, I'm a bit of a stock record on fee pressure. We do see it like everyone and we estimate it to be about a basis point a year, but if you look at our fee rates, it really hasn't come down by much. It was 45 basis points in '16, it was 44.7 basis points I think in '17 and we're at 44.1 basis points in this quarter.

So we -- but -- so that equity market rise has masked some of the fee pressure and should markets full that would get unmasked. You would start to see that fee pressure of that basis points in the year coming through and there is no change in story on fee pressure, it's still there. And we still turn away a lot of business because we're protective of the margin and we're very cognizant to the earlier question around capacity. So, yeah, it's easy to win business, it's hell of a lot easier to win good business -- hell of a lot more difficult to win good business.

So I'd expect fee margins to continue to move around and you will see more of a decline in a falling equity market than in a rising equity market. In terms of our overall -- pay phase will be variable as they are every quarter in terms of our overall margin, nothing has changed from the very high-level guidance that we've said before that we hope and expect to run a business in markets like this, where the margin that's around 40%.

Brian Bedell -- Deutsche Bank -- Analyst

And then just on the -- just one quick one on the European equity funds, the flow outlook that you mentioned, Roger, I think obviously the value tilt there. So October theoretically might be better. I know you like -- don't like to talk about one month, but I guess there has been talk that that might be turn around and what's the level of AUM that you would sort of still classify as in that condition?

Richard Weil -- Chief Executive Officer

Let me take that. This is Dick. Let me take the first part of your question and Roger can take the second. Yeah, obviously a value managers should be doing well or conservative manager should be doing well in some of the market upset that we're seeing and hopefully the portfolios that we would expect to do well in that environment are doing well.

I think at a high level, I'm seeing a lot of results that accord with that, when I look at the public mutual fund results on an ongoing basis. And so I think that's happening, but the really special thing that's more important to us that's happening is there are an awful lot of good companies for sale at attractive prices now and when we buy good companies, they could still fall further in this kind of a market environment. It's not a short-term thing, but the decisions that our folks make today will drive our success over the next few years, because in difficult markets if you can pick the right good companies that are for sale at attractive prices, that can be the engine that really drives your returns on a forward look.

And so, we have a lot of managers here who think they bought really good companies at really attractive prices, and then the next day they wake up and the price has gone down even further and they sort of scratch their head and say wait a minute, cash on the balance sheet, cash flows, these things make a ton of sense and they still like them. But we're going to have to have patience to be rewarded for having made those right choices.

So our mindset is take advantage of these opportunities and buy great companies at great prices and then the future will take care of itself so long as we're patient and that's the real opportunity in this market set for us, not just in value portfolios but across all of our portfolios, and that's the thing that our leadership is stressing with our investment teams and it's a major push for us right now to make sure we're focused on those opportunities rather than distracted by a lot of the market noise.

In terms of the amount of value assets we have, I don't know Roger.

Roger Thompson -- Chief Financial Officer

Well, I guess in the funds that we've seen the largest outflows from would probably -- that was right in front of me, but probably $5 billion or $6 billion?

Richard Weil -- Chief Executive Officer

I don't know the aggregate amount of value assets that we have. I don't have that number at my fingertips. I apologize.

Operator

Thank you. We'll take our next question from Chris Harris with Wells Fargo.

Christopher Harris -- Wells Fargo -- Analyst

Thanks guys. Hey Roger, appreciate your comments on the potential for more efficiencies as we get into next year. Is it possible for you to guide us with respect to the potential size and timing of those efficiencies?

Roger Thompson -- Chief Financial Officer

I guess the longer the timeline, the longer the -- yes, we're constantly looking to run our business in a more efficient fashion. And that's -- but like I said, that's a future looking thing and we're no different than any other business in any other industry that we look to do what we're doing now more efficiently going forward and that will be -- that's the offset to additional costs in other areas, whether they'd be regulatory or fee pressure. So that's a constant -- that's a constant piece and we will -- we will look to continually run the business more efficiently.

That's how we'll try and continue to have a strong overall margin going forward. We're starting with a margin of 40% with total free cash flow of about $500 million. So we start at good position, and the more efficiencies we can find to allow us to either maintain that and/or invest in the business for new areas, that's what we want to do.

Christopher Harris -- Wells Fargo -- Analyst

Okay, thank you.

Operator

And we'll take question from Robert Lee with KBW.

Robert Lee -- KBW -- Analyst

Great. Good morning. Thank you for taking my questions. I guess, I mean looking forward, I'd be -- I think I'd be helpful maybe try and get a little bit more granular sense of where you're maybe investing for growth. I mean certainly you come out the back end of the merger distraction, I'll call and start kind of pivoting toward growth or investing for growth. Can you may be prioritize three or four places, areas that you -- that you're trying to emphasize, whether it's US distribution, product structures whatever it may be. Just trying to get a sense of what your focus is?

Richard Weil -- Chief Executive Officer

Sure. So, the first focus is taking the best possible care of our existing clients. That job has to be job number one, and if we don't do that well, then we don't have permission to do a lot of the new stuff we want to do. Underneath that, we have to take a look at alpha generation, risk control, and building the right client relationships, brand et cetera and make sure that we have the right things going on in each of those areas in terms of technology and people and efforts.

And so, that's all part of that job number one. That is the most important thing. Once you feel like you've done what you can do in that, then you take whatever flexibility you have left and you start to apply it to the discretionary or sort of developmental projects. We've been clear that we want to develop more in multi-asset and alternatives and that's clearly a focus. We've been clear that we have some geographic areas, where we think we are under-penetrated and we have more opportunity.

Particularly in the Institutional channel, I think there's opportunities to raise our game in wealth management, in DC, and these are areas that we're focused on. There are legal vehicles, particularly ETFs, not just in the US but around the world, we have opportunities to take a look at different legal vehicles and potentially pushing those things forward.

And so, we're in a constant process of trying to prune some of the stuff that we're doing back to make sure that we're focused and efficient and as simple as we can be and then take the limited discretion we have to do new things and apply it effectively to get in front of faster growing client demand. And that's the strategy process and the budget process that's ongoing right now here but hopefully some of those things that I called out give you a sense of the priorities around here.

Robert Lee -- KBW -- Analyst

Okay, thanks. And maybe as a follow-up, I mean, you called out intermediary in the US being a relative bright spot. And I mean that encompasses so many different sub channels, I guess and I know historically you've had pretty strength in the kind of schwab-type platforms. But maybe give us sense of -- in the US at least, where you're seeing the -- which intermediary channels are been particularly strong and how you kind of think about your positioning in the -- some of the others and maybe specifically to the RIA channel and then also the kind of regional wirehouse channels?

Richard Weil -- Chief Executive Officer

Yeah, I can't give you that breakdown in quite that detail. I can tell you that our advisory business as opposed to the platform business that you talked about, you know, work with the financial advisors is really been a strong spot for us. That said, there is an opportunity to make it even better. We're surveying those advisors. We're asking their opinions about what we're doing well and where we need to improve and we're seeing -- we're getting feedback. You learn the most from people who are critical of you.

We're getting some feedback that includes areas that we can improve. And so, that is a bright spot for us and a strength of the firm, but it's also a place where we think we can continue to raise our game and we see things that we can do better. So, we're optimistic about that. I can't give you -- I don't know, Roger, If you have anything to say on RIA, but I can't give you a better breakdown on sub channels at this moment. I just don't have that data right in front of me.

Roger Thompson -- Chief Financial Officer

I guess, the only thing I'd say is, the third quarter with a strong quarter in the US intermediary business. In the market that isn't growing, we are obviously taking market share for same positive net flows. So yeah, as Dick said, there is things we definitely want to improve. We're definitely listening to our clients. We want to see more, but it was pleasing to see a black number in US intermediary.

Operator

And we have time for one more question from Nigel Pittaway with Citigroup.

Nigel Pittaway -- Citigroup -- Analyst

Hi guys. I just wanted to delve just a little bit further into that explanation for the management fee margin decline in the quarter. And I think you said it was due to the outflows in European equities, but I'll just note that average equities sum was up 4% against average sum of 2%. So are we actually saying that margins on European equities are higher than the average for equities overall or is there just further explanation there?

Richard Weil -- Chief Executive Officer

They are Nigel. Yes, they are a little higher. That's a -- I'm sort of giving you one answer of a piece that we saw a fall in the third quarter. But that is -- as I said, it's a pretty small fall compared to when you look over a -- particularly over a longer period and there is a bit of noise in the quarterly numbers sometimes. So -- but yes, European equity is higher fee.

Nigel Pittaway -- Citigroup -- Analyst

Right, thank you very much. Thank you for staying up

Richard Weil -- Chief Executive Officer

Yes. We're back to being 11 hour time difference to London.

Operator

And that does conclude today's Q&A session. I would like to turn the conference back over to Dick Weil for any concluding remarks.

Richard Weil -- Chief Executive Officer

Okay. So thank you everybody. Thanks very much for joining us today. In conclusion, look, our third quarter financial results were pretty strong with year-over-year revenue growth and margin expansion that I think demonstrate our effectiveness in converting higher revenues into higher profits and the discipline that we're exercising on behalf of our owners.

We're on track to achieve our targeted cost synergies of $125 million by the end of 2018, nearly a year and a half ahead of schedule, which is a testament to the hard work of so many dedicated employees and seriously, thank you to all those employees for your effort.

Net flows and recent investment performance are not where we need them to be, but it's true that we're also seeing in, a lot of important areas, very good results. And so it's a mixed bag. We are encouraged by the good results and we're working hard on those things that need to get better.

Going forward, we remain committed to our goal of growing market share profitably in each of our key markets and delivering an exceptional client experience to all of our global clients. And so, with that, thank you very much for joining us today. We look forward to speaking with you again in February.

Operator

And once again, that does conclude today's conference. We appreciate your participation today.

Duration: 61 minutes

Call participants:

Richard Weil -- Chief Executive Officer

Roger Thompson -- Chief Financial Officer

Kenneth Worthington -- J.P. Morgan -- Analyst

Michael Carrier -- BofA Merrill Lynch -- Analyst

Kieren Chidgey -- UBS -- Analyst

Daniel Fannon -- Jeffries -- Analyst

Craig Siegenthaler -- Credit Suisse -- Analyst

Alexander Blostein -- Goldman Sachs -- Analyst

Patrick Davitt -- Autonomous Research -- Analyst

Brian Bedell -- Deutsche Bank -- Analyst

Christopher Harris -- Wells Fargo -- Analyst

Robert Lee -- KBW -- Analyst

Nigel Pittaway -- Citigroup -- Analyst

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