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Janus Henderson Group plc  (NYSE:JHG)
Q4 2018 Earnings Conference Call
Feb. 05, 2019, 8:00 a.m. ET

Contents:

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 Group Fourth Quarter and Full-Year 2018 Earnings Conference Call. 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. And now it is 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 fourth quarter and full-year 2018 earnings call for Janus Henderson Group. I'm Dick Weil, and I'm joined by our CFO, Roger Thompson.

In today's presentation, I'll first touch on what was accomplished during 2018, and then I'll provide an update on our focus for 2019 as we move out of merger integration and into business execution mode. After which I'll turn it over to Roger to review the results in some more detail, and following our prepared remarks, Roger and I will be happy to take your questions.

Turning to slide two, take a look at some of the key accomplishments from 2018. Despite a challenging market backdrop and disappointing net flows, there were many encouraging achievements in the year. First, looking at investment performance. Despite mixed results across capabilities, the majority of AUM outperformed benchmarks over one, three and five-year periods. More specifically, eight of the 10 largest US managed equity and multi-asset portfolios beat their benchmarks over one year, net of fees. So some really strong results were had in those large strategies and most importantly, this performance is gaining market attention from our clients.

Over 60% of our mutual fund AUM is in the top two Morningstar quartiles over one, three and five years as at 31, December 2018. And finally, 55% of our US mutual funds have a four or five star overall Morningstar rating.

Second, as we continue to seek to expand our distribution efforts to better serve our clients, I want to call out some highlights around client relationships. First, we are gaining market share in US equity category in the US retail market, which is a great result. This is the largest market in which we do business today, and our result in 2018 is very encouraging. Second, in institutional space, we're winning new business across all three global regions and this success is coming across the diversified list of strategies, including equities, fixed income, multi-asset and our quantitative strategy from Intech, reinforcing the strength and breadth of our investment capabilities.

Third, in our multi-asset capability, we're seeing outpaced organic growth with 6% organic growth during the year, driven by strong net inflows in our balanced fund. Lastly, we are seeing early wins in new product areas, including adaptive allocation, multi-sector bond fund, and absolute return income, which are all very encouraging.

Finally, a few comments on integration, capital management and culture. I'm very pleased that during 2018 we were able to substantially complete our integration efforts. This delivery was nearly 18 months ahead of the original timeline we set out to achieve and was made possible by the very hard work and commitment of our many employees. During the year, we generated more than $550 million of cash. We returned $375 million to shareholders via dividends and share buybacks. And in addition, we repaid $95 million of convertible notes to further strengthen our balance sheet.

Finally, I'm pleased that we have been able to attract some very strong new leaders over the last year to further strengthen our existing team. These hires positioned the firm well for the future and enhance our progress around building a common culture. While the path ahead will not be linear, we know that our long-term success will be determined by our ability to deliver exceptional service to our clients to profitably grow assets under management, to increase our market share across our existing businesses, and as well as to develop our growth drivers into the future. We're committed to these ambitions. These list of achievements underlines the progress we are making in our efforts to continuously improve our firm.

Let's turn to slide three, which is a look at our priorities for 2019. With our integration nearly complete, I want to lay out our priorities so that you can understand how we will manage the business and prioritize our resource and investments going forward. First, our number one priority is producing excellent and dependable investment outcomes for our clients. We do this through a combination of attracting and retaining the best talent, consistently delivering on our client promises, and investing in technology that enhances our ability to deliver alpha, while also facilitating strong risk management. Second, we must drive consistent and continuous improvement in client experience. This helps to build stronger long-term relationships with our clients and leads to deeper engagement with our clients across a broader cross-section of the strategies we offer.

Third, we need to seek to enhance our processes to become increasingly efficient in all that we do. There is a grinding pressure on our industry from changing fee rates, regulatory pressure and other factors, competitive pressures as well, and this requires us to respond by over the short, medium and long-term taking steps to become more efficient in all that we. Fourth, we must demand reliability, scalability and simplicity across our global infrastructure. Therefore, we must seek to continuously refine to improve and to further develop our proactive risk and control environment.

Finally, we need to develop our new growth initiatives to build the businesses of tomorrow. For us, this comes in many different areas, and is in addition to the execution around our existing core business. Over the near-term we'll be particularly focused on further building out of our multi-asset and alternatives capabilities, our Asian business ex-Japan, and we also have some new developments in ETFs. We believe that by delivering excellence across these five areas, we will be winning for our clients and we will be gaining market share in our business. As we progress through the year, we will seek to provide you with updates on how we are executing across these initiatives.

Now, please, let's turn to slide four. In addition to our priorities, I also want to review our vision for our business, which guides us in our efforts. Naturally there is quite a bit of overlap between these two things. At Janus Henderson, we are aspiring to be a firm that clients want to loyalty invest with for many years and that shareholders seek to invest in for the long-term. Our vision to fulfill this aspiration is built on three key pillars. First, delivering excellent, dependable investment results that outperform both the active and passive competition. Second, ensuring industry-leading client experience. And third, enhancing an infrastructure built on a foundation of market-leading technology and operational efficiency. This combination of vision and our priorities for 2019 will guide us as we manage our business ahead.

Before turning it over to Roger, let me last provide you with some comments on the outlook for Janus Henderson as I see it. In our industry, there are always many factors that we can't control; markets, client behavior, industry trends. But one important thing is that we continue to make progress on the areas that we do control. As we look forward, we do not expect the competitive pressures to ease, rather, we expect them to become stronger. We also do not see a slowdown in regulatory change in our industry and we see no reversal in the increased volatility that the markets have demonstrated.

In this environment, our most important challenge as a Company will be managing our business effectively with a strong and stable team, process, philosophy, while maintaining a sound focus on financial discipline. If we do this, we will be successful in delivering on the aspirations of what we hope to be as a firm and we will deliver market-leading returns to our shareholders. Overall, I am optimistic about the outlook for our business.

I believe in our potential in the progress we're making and most of all, in our people. We are taking the right steps as a firm to deliver on our promises to our clients, to our shareholders and to our employees. I'm confident that if we continue to successfully execute on our initiatives, we'll become a stronger and more globally diverse firm that delivers for you, our shareholders.

With that, let me turn it over to Roger to walk you through the results in more detail.

Roger Thompson -- Chief Financial Officer

Thanks, Dick, and thank you, everyone, for joining us. 2018 was a year that reflected continued transformation for the firm and ongoing challenges across the competitive landscape and market environment, and our full year results reflect these factors. From a market perspective, 2018 saw a reduction of nearly $12 trillion of world market capitalization, 90% of which or $11 trillion occurred in the fourth quarter. Against this backdrop, full-year total adjusted revenues held up well, and were 1% higher than the pro forma prior year, as stronger management fees offset lower performance fees.

Adjusted operating margin for the year continues to be very healthy at 39%, virtually flat year-over-year.

AUM did end the year 11% down from the prior year, driven by the negative impact of markets in the fourth quarter and full year outflows of $18 billion. That said, given that we've seen a meaningful improvement in the market since the end of December, we thought it would be helpful to provide a sense of where AUM sits today. This isn't an update we'll provide on a regular basis. However, following the drawdown of assets in December and the rise in January, we thought it would be helpful. As we sit here today, AUM is up roughly 5% from the end of the year, which reflects the combination of market appreciation and some notable improvements in net flows, particularly in the US retail business.

Finally, on the capital management front, during the year, we increased the dividends paid to shareholders by 17%. We completed a $100 million of share buybacks, and I am pleased that today we're announcing that the Board has authorized a $200 million share buyback, which we expect to complete over 12 months. I'll go into capital management a bit later in the presentation, but this result reflects the execution of the plans we'd be communicating with you since the mergers close.

Moving on to a summary of the quarterly results, which you can find on slide seven. Investment performance over the three-year time period remained solid and consistent with the third quarter level with 61% of firmwide assets beating their respective benchmarks as at December 31.

Net outflows increased $8.4 billion in the quarter as a result of an increase in redemptions among retail clients and a slowdown in gross sales, which the entire industry experienced in the quarter. We're also disappointed with the net flow results, we don't want that to take away some of the accomplishments in 2018 that Dick mentioned.

Assets under management declined to $329 billion at quarter end.

Adjusted EPS of $0.59, reflects lower revenue due to the market declines, as well as a higher tax rate, which was largely driven by a true-up in the quarter for the mix shift in regional profitability.

Finally, we returned approximately $119 million of cash to shareholders during the quarter via dividends and share repurchases.

Before getting into more detail around the fourth quarter results, I wanted to take a minute to recognize the great works that's been done by our employees on the firm's integration efforts. As Dick mentioned earlier, we're very pleased that during 2018 we were able to substantially complete our integration and realize the $125 million of cost synergies as at the end of December. This level of savings is greater than we originally forecast and it came nearly 18 months ahead of the timeline we set out to achieve it. This achievement was made possible by the hard work and commitment of our employees. So thank you to all of you who worked on these efforts.

As I said previously, while it 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 as we want to focus on running our business for the future, rather than measuring on a backward-looking metric. You'll see future efficiency saves continue to come through in our results and our margin.

Moving to slide eight on our investment performance. Overall investment performance for the quarter was mixed across our capabilities. While we saw continued strength in the performance in our equity and multi-asset capabilities across the one, three and five-year time periods, we did see weakness in the one-year results at several of our largest fixed income and alternative strategies along with ongoing weakness in Intech.

In our fixed income capability we had some modest underperformance in the Core Plus Bond strategy and in the alternative capability, the UK absolute return fund finished behind its benchmark for the year.

With respect to Intech, during the quarter, we saw a recent underperformance impacting the five-year results. And as you'll see on the page, the results across time periods are quite disappointing. As we've discussed previously with Intech, its 2018 results were negatively impacted by the narrow leadership in equity markets, megacap growth stocks, in particular. As Intech's process seeks efficient diversification and requires broad equity market exposure.

Now, turning to total company flows. For the quarter, net outflows were $8.4 billion compared to $4.3 billion last quarter. This result reflects the very challenging market environments that we saw during the quarter. The outflows in the fourth quarter were driven by lower gross sales, a trend we've seen across the industry during the quarter, as investors did not put money to work in riskier asset classes, due to the significant market volatility. Additionally, we also saw an increase in retentions from our intermediary clients in North America and EMEA. These redemptions were most significant in our international equity, global equity and UK absolute return strategies. Despite the challenges, we did see an improvement in institutional flows during the quarter, driven by inflows from EMEA clients, and as Dick has already mentioned, we continue to see market share gains in US equities among US retail clients, which we are very encouraged by.

Moving to slide 10, which shows the breakout of flows in the quarter by capability. Equity net outflows in the fourth quarter declines to $4.1 billion. This decline was primarily in our intermediary business and was partially caused by the increased redemptions in the US. This elevated level of outflow looks similar to what the industry as a whole has experienced during the quarter.

Flows into fixed income improved slightly on a negative $1.3 billion for the quarter. The improvement in the quarter was led by positive flows in the absolute return income product. We're excited about the opportunities around the globe for this strategy and in 2019 we'll be launching additional vehicles across regions to meet the needs of clients. This strategy is another emerging example of what we expect to be able to deliver as a combined firm in the future.

Outflows at Intech were $1.1 billion due to lower gross sales during the quarter.

For the fourth consecutive quarter, multi-asset flows remained positive of $300 million this quarter. This result continues to be driven by the balanced fund, reflecting the strategies exceptional investment performance and the global strength of our distribution team.

Finally, alternative net flows declined to a negative $2.2 billion. The decrease was attributable to outflows from our UK absolute return and property strategies.

Slide 11 is our standard presentation of the US GAAP statement of income.

Turning to slide 12 for a look at the summary financial results. First, looking at the full year's results. Average AUM was up 6% over the prior year, which drove higher management fees and led to a 1% increase in adjusted total revenue for the year.

Full-year adjusted operating margin continue to be very healthy at 39%.

And adjusted diluted EPS for the year was $2.73 compared to $2.48 in 2017. The 10% increase in adjusted EPS was driven primarily by a reduction in the full-year tax rate as a result of the tax reform that took place in the US.

Now, looking at the quarter-to-quarter comparison. Our fourth quarter adjusted financial results primarily reflect the weak market conditions during the quarter. Average AUM decreased 8% over the third quarter, driven by negative market outflows and negative currency movements.

Lower average assets drove lower management fee revenue, which was partially offset by the expected seasonality in performance fees, resulting in a 6% decline in total adjusted revenues from the prior quarter.

Adjusted operating income of $165 million was down compared to the third quarter, primarily as a result of lower average assets. Fourth quarter adjusted operating margin was 37.3% compared to 38.5% to the prior quarter.

And adjusted diluted EPS was $0.59 for the quarter compared to $0.69 for the third quarter.

On slide 13, we've outlined the revenue drivers for the quarter and also the full-year. First, looking at the quarterly change in adjusted total revenue. Lower average assets were the biggest driver of the quarterly change, resulting in a 9% decrease in management fees. Net management fee margin for the fourth quarter was 43.4 basis points, down compared to the prior quarter and the same period a year ago. The decrease was primarily due to mix shift, resulting from the negative markets during the fourth quarter. This decrease is consistent with our continued expectations that we will see roughly a 1 basis point fee compression a year.

Over to the full-year, despite the negative markets in the fourth quarter and a meaningful decline in performance fees, total year-over-year adjusted revenue increased 1%.

On slide 14, given the significant change in performance fees year-over-year, we wanted to walk through 2018's results and highlight opportunities for 2019. Performance fees in 2018 was $7.1 million, down from the pro forma $84.7 million in 2017. The biggest factors in the decline were the performance fees earned from the UK absolute return and the European equity strategies. Additionally, as a result of underperformance of Intech, we did see lower performance fees from these strategies in 2018, which you'll see reflected in the year-over-year change in segregated mandate category on this page.

Whilst we can't predict what performance fees will look like in 2019, there are a few items of note, as we begin the year. First, while the 2018 underperformance for the UK absolute return strategy will impact 2019 performance fees as the fund first needs to recapture this underperformance before a performance fee can be earned. We're encourage that during January, this strategy has made up well over 1% of underperformance thus far, so it's off to a good start.

Secondly, on our US mutual fund fulcrum fees. The investment performance in the first quarter of 2016 was particularly weak and this period will roll-out of the calculation this quarter. Based on the formula of calculating these performance fees, there is potential for improvement, and that's dependent on what performance fees for the first quarter of 2019. As at the end of January, relative performance was good on most of these large funds.

Finally, I wanted to point out that despite the decline in performance fees year-on-year, the number of performance fee accounts and hence the opportunity for the firm's (inaudible) performance fees in the future has not significantly changed.

Moving to adjusted operating expenses, and the non-operating line items on slide 15. Adjusted operating expenses in the fourth quarter were $277 million. Adjusted employee compensation, which includes fixed and variable costs were flat compared to the prior quarter. While there was no change in the prior quarter, there were a few moving pieces that offset. During the quarter, both fixed and variable compensation was down. The latter as a result of lower profits, due to the weak financial markets in the quarter. The impact of these two items was offset by year-end adjustments to our cash and non-cash payout mix.

Adjusted LTI was down 36% from the third quarter, primarily due to the impact of the mark-to-market adjustments and the impact of departures during the prior quarter. In the appendix we provided further detail on the expected future amortization of existing grants, along with an estimated range for 2019 grants for you to use in your models.

The fourth quarter adjusted comp-to-revenue ratio was 41.5%. For the full-year, total comp-to-revenue ratio was 41.4%, in line with the guidance we provided throughout the year of the low-40s.

Turning to adjusted non-comp operating expenses, collectively, there was an increase of 9% quarter-over-quarter. The main drivers of the increase were marketing, which saw a seasonable pickup in spend, and slightly higher G&A costs.

Finally, our recurring effective tax rate for the fourth quarter was 28.9%, which is higher than our prior guidance. The higher tax rate during the quarter was primarily driven by year-to-date true-up in the quarter for the mix shift in regional profitability, as a larger portion of the firm's profits were being generated inside the US. For the full-year, the firm's effective tax rate was 24.5%, slightly higher than our guidance, again due to a large portion of the firm's profits is being generated in the US.

The fourth quarter adjusted EPS of $0.59 is down over the third quarter and the same period a year ago.

Looking forward to 2019, I want to take a few minutes to provide some insight into what we anticipate in our expense base. With AUM starting the year down 11%, we know we'll see additional pressure on margins, all other things being equal. As a management team, we're focused on balancing the appropriate amount of investments that's required to grow our business and maximize profits over the medium-term with sound financial discipline and an awareness of margin pressure. But it's important to note that we run the business with an emphasis on the long-term rather than quarter-to-quarter margin results.

With that said, let's walk through a few points for your models. First, looking at compensation. As we've realized the cost synergies of the merger, we've seen fixed comp come down and we will continue to see the variable comp pool flex with the business results. That means, we'd expect an adjusted comp-to-revenue ratio to continue to be in the low-40s.

Second, as we previously disclosed, non-comp expenses in 2018 saw an exceptional amount of increase year-over-year, and looking forward, we do not expect that to continue. In 2019, even excluding the $12 million legal outcome we had in 2018, we'd expect to see non-comp expenses flat year-over-year.

Finally, the firm's statutory tax rate is expected to be 23% to 25%, slightly higher than our prior guidance is the relative strength of our US business. The effective rate will be impacted by various differences, which arise quarter-to-quarter.

Lastly, slide 16 is a look at our capital management since the merger. We remain committed to returning excess cash to our shareholders. And on this slide you can see those results over the last seven quarters, as we've been able to gradually increase the payout while retiring outstanding debt. During the fourth quarter, we purchased approximately 2.2 million shares for $50 million, which completed the inaugural share buyback program, in which we repurchased 4 million shares, reducing the total shares outstanding by 2%.

It's important to reiterate that when it comes to granting employee shares of Company stock as part of compensation, we purchase shares on market and therefore, do not annually dilute shareholders. What this means for Janus Henderson, different from most of our competitors, is that each share the firm repurchases under a buyback authorization is accretive to shareholders. In addition to share buybacks and dividends in 2018, we also retired $95 million of convertible notes. Inclusive of this repayment, we returned $470 million of capital to shareholders, which represented nearly 90% of adjusted net income for the year.

Looking forward, we're generating excess cash, which allows us to continue to follow the capital return philosophy which we've previously laid out to you. We will evaluate and balance the ongoing investments the business requires with external opportunities we see, and when excess cash remains, we seek to return that capital to shareholders. At today's share price, we do not see many opportunities that provide us compelling an option as our own shares do. With this in mind, we are very pleased to announce today that the Board has authorized an additional on market share buyback of up to $200 million over the next 12 months. In addition to buybacks, we're paying a fairly healthy dividend, which offers a very attractive yield to shareholders at the current price.

With that, I now like to turn it back over to Dick for one final comment.

Richard Weil -- Chief Executive Officer

Thank you, Roger. I just now want to turn for a moment to one last thing, the retirement of Bill Gross. As was recently announced, Bill approached us and let us know that he is come to the point where he would like to focus on the work of his very substantial family charitable foundation, focus more on perhaps giving away money than earning it in the last chapters for him. Bill is the bond king, I don't think anybody's ever made more money for their clients in the fixed income industry, he is the best there has been, and it has been an honor for us to work with him and have him on our team here at Janus Henderson. And as he goes off to the next chapter in his life, we wish him well and mostly we say thank you for the time he has shared with us.

So with that, let me turn it over to the operator and take your questions.

Questions and Answers:

Operator

Thank you. Ladies and gentlemen, at this time, we will conduct a question-and-answer session. In the interest of time, questions will be limited to one initial and one follow-up question. (Operator Instructions) And we'll take our first question from Brian Bedell with Deutsche Bank.

Brian Bedell -- Deutsche Bank -- Analyst

Hi, good morning. Maybe just to start off with the fixed income strategy. Just overall, I know the performance has weakened a little bit here in the one-year period. But any overall change to that strategy? And just as you also think about the development of new growth initiative, is there any -- are there -- you mentioned I think (inaudible) and alternatives and ETFs, but anything in the fixed income area that you would focus on as well?

Richard Weil -- Chief Executive Officer

Yeah. Thanks, Brian. First, I guess, I would say that we have a diversity of performance across our fixed income landscape. We have a number of our strategies, which are fairly conservative credit-based management, and through the really hot period of returns and strong credit markets, they struggle to keep up, but have a little bit less than exciting track record right now. And complementing that we have a few areas that are strong bright spots, ones are multi-sector income strategy and another one is our absolute return income strategy, and those are strategies that we think have opportunity to grow in various markets around the world. In particular, I mentioned earlier, the absolute return income strategy where we are opening some new vehicles in Europe and elsewhere to make sure that we have the right legal structure to make those properly available to clients who are interested. So there are some really nice bright spots in our fixed income business, but also some challenge in some of the more conservative credit-based strategies that have shown modest underperformance for a while now.

Brian Bedell -- Deutsche Bank -- Analyst

Okay. Thanks. And then just to follow-up, I'd say, maybe just -- thanks for the commentary on January with the AUM up. Maybe if you can elaborate a little bit more on what you're seeing in flows both on the retail side and then the institutional client behavior? Of course, there is a lot of delayed funding industrywide in the fourth quarter given the environment. Are you seeing that reverse in the first quarter so far and in which areas?

Roger Thompson -- Chief Financial Officer

Hey, Brian, it's Roger. Thanks for the question. I guess, first, I'd say, we would normally -- I would normally answer that question, we don't talk about short-term flows but there has been a very dramatic change in markets going as we went through the fourth quarter and going into Q1. So that's why we updated a little bit in the script and I'm happy to answer the question now.

And the turn down in the fourth quarter, and particularly December in the US was pretty dramatic and the comeback in January has been pretty dramatic. So, again, you'll see these flows publicly shortly, but we are in positive flows in the US in January.

In Europe, outflows have slowed, but there we're still in small outflows.

Institutionally, as you say, it's a lumpy environment and too soon to tell. We got a pipeline of interesting prospects. I guess, I can -- what I can tell you is we are not sitting on any big losses as we sit here today.

Operator

Thank you. And we'll move on to Ken Worthington from J.P. Morgan.

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

Hi, good morning. Thank you, Dick, for taking my questions. You've executed on the promised cost synergies. Can you share the plans for driving revenue synergies from the combination of Janus Henderson in 2019? What I'm really after is, what are you hoping to accomplish from the combination this year from the merger?

Richard Weil -- Chief Executive Officer

Yeah. I think -- well, first, I think we're starting to put away the use of the term synergies because it's backwards looking around two legacy companies that no longer exist, and what we're -- as we're through sort of the bulk of the integration process, at this point, we're really just focused on managing our Company ahead. And so, you'll probably find us not referencing synergies very much anymore, either cost or revenue.

But I do think that the promises we made in the merger around the power of having strong global distribution coupled with well-performing products remains true and there's probably no better example of that than our balanced strategy, which is gaining significant assets in markets around the world through different sales force. We already mentioned ARIs another example of something that I think through different sales teams that are legacy one or the other. There is significant interest there. Previously, we've seen significant interest in the emerging markets sold by legacy teams from both heritage, and I could go on.

So, we've said this before, you're always going to be able to point to bright spots and dark spots in our very diversified book of business and that remains true. But I think we see in the data lots of evidence that where we have well-performing funds, we can deliver more of them across more markets effectively, and that gives us reason to be optimistic and it's why we believe we will prove out the value of the merger with stronger flows in the future.

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

Thank you. Maybe second, we're seeing a step-up of managers expensing the cost of research in the US. What are your thoughts about expanding how you treat the payment of research in Europe under MiFID to the US? So, I believe you're unbundled in the US, but I don't believe you expensed the cost of research. So, what are your thoughts there? And are there any lessons learned in Europe about bringing the cost of research on to your P&L here?

Richard Weil -- Chief Executive Officer

Well, I think there are -- to take your last part first, there are certainly lessons we're learning in Europe, where all the sellers, the providers of research and the consumers of research are trying to define sort of new market patterns and get together effectively and that, as you probably know personally from J.P. Morgan's experience, this is a complicated restructuring of the markets for research. And I would say that's still influx. We did a good job of estimating what that would cost on our P&L in Europe in this past year. Well done Roger and team. And I think we've managed it pretty effectively. But the pricing structures and all that are influx, and I think it's too early to talk about big lessons, but there will be lessons that apply in the US if that market changes structure to match Europe.

And I guess, following on that comment, we don't see that happening yet. It may happen in the future, but we don't have any plans currently to change how we're treating the research in the US. But we are aware that some other competitors have changed their treatment and we know how this happened in Europe over reasonably compressed period of time and we see that could happen in the US. But so far, we're not seeing a lot of the strong demand out of the client side yet. So, for us it's watchful waiting.

Operator

Thank you. We'll take our next question from Nigel Pittaway with Citi.

Nigel Pittaway -- Citigroup -- Analyst

Good morning. Just a couple of questions. First of all, on the employee comp and benefits, I think, Roger, you're going through, you said there were some year-end adjustments relating to cash and non-cash payment. Can you -- presumably that means more cash. So, I mean, was that sort of a one-off adjustment or is that something that we need to factor through moving forward? Because I think, as far as I was aware, there was also some one-offs in third quarter relating to that catch-up of treatment of interest on pension plan. So it was perhaps a bit surprising to find it flat on third quarter.

Roger Thompson -- Chief Financial Officer

Yeah. It's exactly as you said, Nigel. It's a mix between cash, and non-cash, it means that we're paying out a higher -- slightly higher proportion of cash in 2018 and lower as deferred (ph) in 2019. I guess, the good news, being that means it's less that's going to be amortized in future years. That is a true-up to the -- in the fourth quarter. So the full year mix is what you should really look at as you're planning for the future with comp coming down slightly, then the mix slightly changes toward cash over stock.

Nigel Pittaway -- Citigroup -- Analyst

All right. So that actually impacts the long-term incentive plan line rather than the employee comp line, does it? Is that right or is (multiple speakers) employee comp line?

Roger Thompson -- Chief Financial Officer

It will reduce the future amount going through LTI. And you see -- if you remember, we put a table in the...

Nigel Pittaway -- Citigroup -- Analyst

Table at the back. Yeah. So the reason why the employee comp lines flat then given that the -- while (ph) that sort of one-off of catch-up of interest on pension plans going through that line in third quarter, you should have had synergies coming through, obviously, revenue was down, yet flat employee comp, any sort of reasons for that?

Roger Thompson -- Chief Financial Officer

This is exactly as I said on the call. So, comp is down, variable comp is down with profits and that is offset by that cash drop mix.

Nigel Pittaway -- Citigroup -- Analyst

All right. Okay. All right. And then, obviously, you gave guidance for the comp ratio et cetera, but there was no sort of mention of the op margin, is that sort of still high-30s is what we can expect or?

Roger Thompson -- Chief Financial Officer

I think it depends on -- it obviously depends a lot on where markets are, but we're on a -- we've given you guidance of our comp ratio in the low-40s, basically flat, non-staff costs. So, I guess, if you model out, you're in the high-30s.

Operator

Thank you. We'll take our next question from Patrick Davitt with Autonomous Research.

Patrick Davitt -- Autonomous Research LLP -- Analyst

Good morning. Thank you. I just want to go back to the AUM guidance again versus kind of the vague flow guidance you gave. If markets are up kind of 6%, 7%, 8% globally depending on where you look and AUMs only up 5%. How do you get to flows kind of being flattish to positive per your comments earlier? Is there something I'm missing there?

Roger Thompson -- Chief Financial Officer

I guess, the non-equity parts of our portfolio, so about half our book is equity, the rest is pure equity. We've got the -- we got the comp equity book as well but then we got fixed income, multi-asset and all. So it's going to be -- we go up slightly less -- we have slightly less pieces in the pure equity market because of that, Patrick.

Patrick Davitt -- Autonomous Research LLP -- Analyst

Okay. Fair enough. And then you mentioned Intech briefly, just curious how the conversations are evolving there as we think about how flows track? The last time performance came down this much and I believe this is one of the lowest five-year numbers it's ever had. So just curious how those conversations are going and if you have any kind of outlook on AUM risk as that plays out?

Richard Weil -- Chief Executive Officer

Yeah. Obviously, we tried to be transparent that -- this underperformance is significant and we're concerned about its effect. But we've also been transparent that nobody really knows and in AUM space, a few decision makers in Intech's book of big institutional business can move a lot of money. And so, it's a -- we've called it a lumpy business for that reason, and it remains so. So we're not sitting on any big news at the moment, as Roger said earlier. But we're obviously concerned that the underperformance will have destabilized clients and hopefully, they'll stick it through, often in the past Intech's best performance has come on the heels of some difficult periods and Intech's actually put up some more reasonable numbers more recently. And so, we'll hope that the clients stick through some challenging performance. But we don't have a good way to predict it.

All I can tell you is that, we're on sort of high alert and making every extra effort to touch the clients and service the clients and answer their questions and concerns as best we can so that they have the full information as they make their decisions. But so far, we haven't seen big new trends out of their assets. But again, it's a lumpy business and that can change quickly.

Operator

And we'll take our next question from Andrei Stadnik with Morgan Stanley.

Andrei Stadnik -- Morgan Stanley -- Analyst

Good morning. Just want to ask my question around investing in further growth. Can you comment maybe on the number of strategies and maybe the form of strategies that are on the incubation now versus 1.5 to 2 years ago when the merger occurred?

Richard Weil -- Chief Executive Officer

We don't track a number sort of strategies under incubation, we don't actually use the term incubation here. So, I don't quite now to answer your question. We, as part of our effort to be focused, we're going to periodically prune the number of strategies, we have been and we'll continue to do, and that to us is just as important is adding new ones. We have an awful lot of well-performing strategies, our success is more determined by how we bring those to market and how we carry those forward than it is bright new ideas. And so, that's our first priority.

But we have a disciplined around sort of trying to constantly prune our lineup and we follow that. And I don't think that the overall number of strategies is probably changing in a radical way, but it's probably decreasing modestly as we prune. As we said, we are also adding from time to time new ideas. Our ARI strategy has launched a new sort of more concentrated version of that absolute return income on the fixed income side, and we have some new ideas coming forward in ETF space and elsewhere. So, it's a balance of new and old, and our commitment is, we want to do the things we're really good at and that are going to matter to our clients. So as we discover that maybe some of the things we've tried haven't worked so well, we'll be focused on pruning as well as adding.

Andrei Stadnik -- Morgan Stanley -- Analyst

Thank you. And then my second question, can you comment on flows in the December quarter, and flows outlook momentum in Asia-Pac and in Japan, particularly around Asia as well?

Richard Weil -- Chief Executive Officer

Speaking of Japan, we didn't have our biggest year last year in Japan. They had an awful lot of years of good growth and last year wasn't one of them. That said, we have a lot on the boil right now in Japan, and we're hoping that as this current year progresses that we're able to do a lot more. Our very good partners and owners Dai-ichi Life have committed to bring to market in Japan as part of insurance products. Our adaptive asset allocation run by Myron Scholes and Ashwin Alankar, which is a new product we've been building here in recent years. And Roger, I think mentioned that they are starting to see some early wins. And it's exciting that Dai-ichi Life has decided to make that a part -- a core part of some of its insurance products and bring that to market in Japan, as they have publicly announced themselves. And so, that's an opportunity and there are more.

We had a big success with the Dai-ichi Life affiliate TAL down in Australia last year, and we're hopeful that we will find ways to be a good partner for them and serve their needs and continue to grow that relationship. So, we have opportunities to work on.

And lastly, we mentioned that one of our significant growth initiatives has been to retool and focus on Asia ex-Japan and we hired a gentleman name Scott Steele out of PIMCO to help lead that effort reasonably recently, I guess, it was in last year, or maybe the end of the prior year.

Roger Thompson -- Chief Financial Officer

June last year.

Richard Weil -- Chief Executive Officer

June last year. And so, he's been putting together a bit of a revised team and making some hires and we're hopeful that in the one to three years ahead they can start developing a positive momentum there to match the positive momentum we've seen in Japan and Australia.

Roger Thompson -- Chief Financial Officer

I think the other bit to add would be around our intermediary sales in Australia, as well as the TAL mandate, which is obviously a substantial piece of lumpy institutional business. We continue to see strong retail flows from the two strong fixed income businesses we have in Australia, two fantastic businesses. So -- and that's in more in the model portfolio type of retail accounts, so small amount of money coming in every day into tactical income, absolute return income and that will then what the collector -- absolute return income plus, which is that more leverage version that Dick talked about, so some really strong intermediary flows into fixed income in Australia, which is really important for us.

Operator

Thank you. And we'll take our next question from Craig Siegenthaler with Credit Suisse.

Craig Siegenthaler -- Credit Suisse -- Analyst

Thank you. First, just on the multi-asset business. The 5 star rated balanced fund is really performing well here, it's actually up in 2018, but it looks like the big trade with underweight international equities and a little over a fixed income. So I'm just wondering, are there other factors you can attribute the strong performance to. And also, as my follow-up, which segments -- which investor segments generate highest level of inflows to this fund?

Richard Weil -- Chief Executive Officer

Well, the balanced strategy, the investor segments that are most interested in that historically have been more of the retail sector. It's come more in the fund space than in institutional separate accounts, if that's what you're asking.

Roger Thompson -- Chief Financial Officer

But that's now coming from around the world. We're seeing sales -- strong sales of that in Europe, some sales in Latin America, in Asia, as well as some traditionally strong selling of that in the US. So that really is -- when I talked about green shoots before and some of those turning to significant trees, I guess, that's when we're starting to see turn that way. So I think growth -- so net flows of balance last year across the world, we're around $3 billion. And that's the sort of thing we're looking for in the future is to more products like that that we can sell around the world through the distribution we've now got as Janus Henderson.

Richard Weil -- Chief Executive Officer

And, of course, why we're talking about multi-asset, our adaptive asset allocation with Myron and Ashwin that we talked about, perhaps more of an institutional client, I don't know client base going forward for them. So, I think we have opportunities in retail and in institutional to take advantage of that strong global network.

Also, yeah, thank you, Roger. Roger pointed out that we've forgotten to mention one of the key factor, which is, we've hired a new leader for our multi-asset and alts business, we're very excited about. We welcomed recently Michael Ho to the team and Michael is a great talent that I hope some of you get to meet here in the not too distinct future and he really strengthens our leadership lineup in multi-asset and alternatives and we're looking forward to his contributions.

Operator

And we'll take our next question from Simon Fitzgerald from Evans & Partners.

Simon Fitzgerald -- Evans & Partners -- Analyst

Good morning. Thank you for taking my call. Just the first question relates to your comments in regards to US equities in terms of revival there in terms of interest. Just wanting to know a little bit more if you could elaborate that, is that interesting decision in general or these mandates that you've been working on in the background that (inaudible) come together?

Roger Thompson -- Chief Financial Officer

I think what we're talking about here, Simon, is our relative strength in the -- in certain parts -- particular parts in the US market, where we're taking quite significant market share. So if you look at in the small and mid-cap spaces, in a number of other areas, so a tech growth of income, so it got value as well. We're taking between 400 and 900 basis points of market share in those, where we're seeing flat to positive growth, so Triton, which is our small cap growth fund have grown 8%. That's -- the market is up 2%. So, we're taking significant market share in some of these areas.

Simon Fitzgerald -- Evans & Partners -- Analyst

Okay. That sounds very encouraging. And also, just want to get a little bit of guidance, just in terms of distribution expenses, obviously, they came back a fair bit in the fourth quarter 2018 from a $112 million (ph) to $102 million (ph). But I just wanted to get a bit more of a sense about the market sensitivity in the AUM sensitivity in regards to those distribution expenses going forward?

Richard Weil -- Chief Executive Officer

You should think about them in line with AUM, Simon.

Roger Thompson -- Chief Financial Officer

So you're right, they came off in the fourth quarter as management fees came off.

Richard Weil -- Chief Executive Officer

They're in line with gross sales.

Roger Thompson -- Chief Financial Officer

Yeah.

Richard Weil -- Chief Executive Officer

Not AUM, gross sales.

Roger Thompson -- Chief Financial Officer

Sorry, gross sales.

Operator

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

Alexander Blostein -- Goldman Sachs -- Analyst

Thanks. Good morning. First question around is capital use. Can you guys give us a sense on the pace of the buyback that you saw a nice pick up in authorization here? But how should we think about the pace of that being implemented? And, I guess, bigger picture question, it sounded like you don't really see any inorganic opportunities right now, but curious to hear your thoughts on additional M&A down the road, whether smaller kind of bolt-on or more transformational deals?

Roger Thompson -- Chief Financial Officer

Okay, Alex, I'll take the first and I'll let Dick pick up on M&A. Yeah. I mean, we've just executed our over $100 million, you saw how we did that across both markets pretty much in line with the mix of the markets or where our assets -- or our investor base is. We won't try -- we obviously won't buy too much on a particular day, so we are limited in what we buy because of market volume. So, you should probably use that as a guide. We have a -- we'll put a programmatic trade in place and execute in that way. So, I hope that answers that part of the question.

Richard Weil -- Chief Executive Officer

And I'll talk about M&A, Alex. Right now I think what we're very focused on is delivering on the promises we've already made in the merger that we've already, obviously, recently completed and that's the highest priority. Never say never about it, but I think another transaction of really significant size right now would be a real stretch and would be very unlikely. It's not impossible again, so never rule anything entirely out. But would have to be viewed as pretty far out there tail kind of case. We have a lot that we're focused on to do with what we already have.

In the fullness of time, look, we learn, we listen, we watch market developments and we're focused on making sure that we're going to be able to compete and build the right kinds of relationships with our clients going forward. And if we were to determine that we needed to somehow go through a big trend transformational merger to position ourselves to win, we wouldn't be afraid to do that down the road, but I would say in the near- to medium-term it feels pretty darn unlikely.

Operator

And we'll move on to our next question from Mike Carrier with Bank of America.

Michael Carrier -- Bank of America Merrill Lynch -- Analyst

Thanks, guys. Just a question on the European front, you mentioned some improvement, but still outflows for the year-to-date. Can you provide some context on what you view as maybe industry trends versus some performance or product mix issues and any potential like green shoots to potentially shift that trend?

Roger Thompson -- Chief Financial Officer

Europe had a pretty challenging year last year. I think the total industry had almost EUR130 billion of outflows, which is the first (inaudible) outflows. Yeah. But there are bright spots in that. Mixed asset funds were positive. Europe actually was slightly positive by the end of the year. Global was negative. So, we've got offerings in each of those spaces we compete, we've got a great brand in Europe, we got a great sales force in Europe. We've got some great product. So, we will compete in those areas. It's worth defending the franchise and the products we've got in place now.

Operator

And we'll move on to our next question from Dan Fannon with Jefferies.

Daniel Fannon -- Jefferies & Company, Inc. -- Analyst

Thanks. So, Roger, just want to follow up on the non-comp guidance, I think you excluded a legal charge. I just want to get the starting point for the flat. What's the -- as we think about 2019?

Roger Thompson -- Chief Financial Officer

Yeah. So, we will be -- headline numbers, we'll be down $12 million. If we're flat that will look like down $12 million because we had a one-off $12 million hit and a charge in 2018. So I'm saying that we will be roughly flat excluding that.

Daniel Fannon -- Jefferies & Company, Inc. -- Analyst

Got it. And then just a follow-up on Intech. I just wondering if there's anything different about the agreements you have with your clients there, or a reason to think about the stickiness of those assets. Obviously performance is documented and you guys have highlighted has been challenged. And so, wondering if there is just the process for redemptions is different than we might see elsewhere because of the contracts that they -- that clients have or if there is any different -- anything different with how they kind of deal with their clients?

Richard Weil -- Chief Executive Officer

No. I mean, it's a primarily an institutional client base. And so, I think the liquidity, the way the clients transact is a little different than they do in mutual funds, but it's the standard institutional fair in liquid investments. And so, we don't have private equity kind of advance notice and gates and that sort of thing. So, no, there is nothing special we would call your attention to.

Operator

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

Christopher Harris -- Wells Fargo Securities -- Analyst

Thanks, guys. A bigger picture question on your alternatives business. I know you cited it as a growth area going forward. And so, flows aren't clearly where you guys want to see them. What is it going to take to turn that business around? Is it a function of just improved investment performance or is there some other things that could happen that could accelerate growth?

Richard Weil -- Chief Executive Officer

Yeah. So, as I mentioned, we hired Michael Ho to help us work through the answers to that. I think some of it is making sure that we've got the right combination of skills applied for our clients. So, some of that is product positioning or effectively capability positioning and how you explain yourself to clients. Some of it is how you use your various capabilities in combination to solve problems. So drawing the skills from various different teams, liquid alts teams or some of the historic Henderson alternative teams here in London and putting those things together in the right way to serve client needs.

So, I think there are a number of things to do from -- always ensuring that you have the highest quality effort going into generating the alpha and the risk control to positioning and explaining your products properly and connecting them well to the client base. And frankly, I think we're decent at those things, but we can get better, and I think Michael Ho is an important part of getting better, but certainly, there is more to do.

Operator

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

Robert Lee -- Keefe, Bruyette & Woods -- Analyst

Great, thanks. Good morning and thanks for taking my questions. Maybe my first question, just, I mean, as you've talked about and we all know the pressures in the industry, fee pressure and whatnot. When you do your own budgeting and forecasting internally, I mean, how do you think of fee pressures, fee compression, I mean, do you kind of have a base assumption that it's no -- I think you may have talked about this before in the past, Roger, but maybe it's 1 or 2 basis points a year, how do you yourselves kind of factor in that industry trend?

Roger Thompson -- Chief Financial Officer

Yeah. Rob, I mean, it's obviously different in different areas but overall, we do assume that there has been -- there has always been fee pressure in our industry and we expect that to continue. So, yeah, we model in a mild fee compression. I have been pretty consistent and talked about around a basis point of fee compression a year. I've also said that you haven't really seen that in the past because of the equity market strength over the last decade, I guess. But what we -- but yeah, we do build in an expectation of mild fee pressure in our budgeting process as we go through the year.

Robert Lee -- Keefe, Bruyette & Woods -- Analyst

Great. Maybe as a follow-up, if possible, maybe drill down a little bit more into the US retail flows. In addition to kind of the styles that are winning. Is it possible to get a little bit more color on which distribution channels you see and is part of the improvement in sales there due to get being added to maybe some key distributors model portfolios? Just trying to get a sense of how much of kind of the uplift is being driven by distributors and maybe being added to different portfolios of different distributors?

Richard Weil -- Chief Executive Officer

Yeah. There nothing individually that we call to your attention in that zone. We are always being -- it's a very competitive situation, as you know and we're constantly facing the opportunities to be added and subtracted from various different platforms or different parts of platforms. But there's nothing in particular as we sit here that we would know about and call your attention to as special this quarter.

Operator

And we will take our final question from Alex Blostein with Goldman Sachs.

Alexander Blostein -- Goldman Sachs -- Analyst

Hey, guys, just a quick follow-up. I think you talked about the UK absolute performance fund made up about 1 percentage point back from their underperformance. Can you tell us what the hypermarkets (ph) or kind of how much more do they need to make up in order to get back into positive performance fee generating mode?

Roger Thompson -- Chief Financial Officer

Yeah. Happy to do that, Alex. At the end of the year I think it was about 4% behind its benchmark and it's -- again that's made up for the January, either we'll become fully public, but it's over 1% in January.

Alexander Blostein -- Goldman Sachs -- Analyst

Got it. Great, thanks.

Operator

And ladies and gentlemen, that does conclude today's conference. We appreciate your participation today. You may now disconnect.

Duration: 65 minutes

Call participants:

Richard Weil -- Chief Executive Officer

Roger Thompson -- Chief Financial Officer

Brian Bedell -- Deutsche Bank -- Analyst

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

Nigel Pittaway -- Citigroup -- Analyst

Patrick Davitt -- Autonomous Research LLP -- Analyst

Andrei Stadnik -- Morgan Stanley -- Analyst

Craig Siegenthaler -- Credit Suisse -- Analyst

Simon Fitzgerald -- Evans & Partners -- Analyst

Alexander Blostein -- Goldman Sachs -- Analyst

Michael Carrier -- Bank of America Merrill Lynch -- Analyst

Daniel Fannon -- Jefferies & Company, Inc. -- Analyst

Christopher Harris -- Wells Fargo Securities -- Analyst

Robert Lee -- Keefe, Bruyette & Woods -- Analyst

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