Filed with the SEC from May 3 to May 9:
Janus Capital (JNS)
Gamco owns 9,610,702 shares (5.1%) after purchasing 1,731,351 from March 5 through May 3 at prices ranging from $7.18 to $9.63 each.
The investment-management firm also reported that it had sold 35,700 shares from March 15 through April 24 at $7.71 to $9.54 a share.
Janus Capital Group Inc. and its subsidiaries (collectively, "JCG" or the "Company") provide investment management, administration, distribution and related services to individual and institutional investors through mutual funds, other pooled investment vehicles, separate accounts and subadvised relationships (collectively referred to as "investment products") in both domestic and international markets. Over the last several years, JCG has expanded its business to become a more diversified manager with increased investment product offerings and distribution capabilities. JCG offers three distinct types of investment advisory services, including fundamental equity (includes growth and core equity, global and international equity, and value investment disciplines), fixed income and mathematical equity, through its three primary subsidiaries, Janus Capital Management LLC ("Janus"), INTECH Investment Management LLC ("INTECH") and Perkins Investment Management LLC ("Perkins"). Each of JCG's primary subsidiaries specializes in specific investment styles and disciplines. JCG's investment products are distributed through three channels: retail intermediary, institutional and international. Each distribution channel focuses on specific investor groups and the unique requirements of each group. As of December 31, 2011, JCG managed $148.2 billion of assets for shareholders, clients and institutions around the globe.
Revenues are generally based upon a percentage of the market value of assets under management and are calculated as a percentage of the daily average asset balance in accordance with contractual agreements. Certain investment products are also subject to performance fees, which vary based on a product's relative performance as compared to a benchmark index and the level of assets subject to such fees. Assets under management primarily consist of domestic and international equity and debt securities. Accordingly, fluctuations in domestic and international financial markets, relative investment performance, sales and redemptions of investment products, and changes in the composition of assets under management are all factors that have a direct effect on JCG's operating results.
Janus considers itself a leader in U.S. and global equity investing, beginning with the launch of the Janus Fund over 40 years ago. Janus offers growth and core equity, global and international equity, as well as balanced, fixed income and retail money market investment products. Janus' investment teams take a long-term view and use a bottom-up, company-by-company investment approach to gain a differentiated view in the marketplace. Janus believes its depth of research, experienced portfolio managers and analysts, willingness to make concentrated investments when Janus believes it has a research edge and commitment to delivering strong long-term results for its investors differentiate Janus from its competitors.
During 2011, Janus continued to further diversify its business through the build-out of the fixed income franchise, ending 2011 with more than $20 billion of fixed income assets under management for the first time in the Company's history. At December 31, 2011, Janus managed $88.7 billion of long-term assets and $1.5 billion of money market assets, or 61% of total Company assets under management.
INTECH has managed institutional portfolios since 1987, establishing one of the industry's longest continuous performance records of mathematical equity investment strategies. INTECH's unique investment process is based on a mathematical theorem that seeks to add value for clients by capitalizing on the volatility in stock price movements. INTECH's goal is to achieve long-term returns that outperform a specified benchmark index while controlling risks and trading costs. At December 31, 2011, INTECH managed $39.9 billion, or 27% of total Company assets under management.
Perkins has managed value-disciplined investment products since 1980, focusing on building diversified portfolios of what it believes to be high-quality, undervalued stocks with favorable reward characteristics. With its fundamental research and careful consideration for risk, Perkins has established a reputation as a leading value manager. Perkins offers value-disciplined investment products, including small, mid and large cap and global value investment products. At December 31, 2011, Perkins managed $18.1 billion, or 12% of total Company assets under management.
Retail Intermediary Channel
The retail intermediary channel serves financial intermediaries and retirement platforms in the U.S., which include asset managers, banks and trusts, broker-dealers, independent planners, third-party 401(k) administrators and insurance companies. In addition, this channel serves existing individual investors who access JCG's investment products through mutual fund supermarkets.
Assets in the advisory subchannel, a component of the retail intermediary channel, have more than tripled since 2004 and totaled $23.8 billion at December 31, 2011. Significant investments have been made in strengthening the Company's presence in the advisory subchannel over the last several years, doubling the number of external and internal wholesalers, focusing on technology and building out robust home office coverage, including a dedicated analyst relations team. Overall assets in the retail intermediary channel totaled $96.5 billion, or 65% of total Company assets under management, at December 31, 2011.
The institutional channel serves corporations, endowments, foundations, Taft-Hartley funds and public fund clients and focuses on distribution direct to the plan sponsor and through consulting relationships. Investors in the institutional channel often rely on advice from third-party consultants. The institutional channel operates in the U.S. market. Accordingly, JCG has assembled a consultant relations team dedicated to providing information and services to institutional consultants. Although the current asset base in this channel is weighted heavily toward INTECH's mathematical products, the Company is striving for increased penetration of Janus equity and fixed income strategies as well as Perkins products. Assets in the institutional channel totaled $36.4 billion, or 25% of total Company assets under management, at December 31, 2011.
The international channel primarily serves professional retail investors outside of the U.S., including central and local government pension plans, corporate pension plans, multi-managers, insurance companies and private banks. International products are offered through separate accounts, subadvisory relationships and Janus Capital Funds Plc, a Dublin-domiciled trust. During 2011, JCG continued to strategically expand global distribution and product capabilities in the international channel. Assets in the international channel totaled $15.3 billion, or 10% of total Company assets under management, at December 31, 2011.
The investment management industry is relatively mature and saturated with competitors that provide services similar to JCG. As such, JCG encounters significant competition in all areas of its business. JCG competes with other investment managers, mutual fund advisers, brokerage and investment banking firms, insurance companies, hedge funds, venture capitalists, banks and other financial institutions, many of which are larger, have proprietary access to certain distribution channels, have a broader range of product choices and investment capabilities, and have greater capital resources. Additionally, the marketplace for investment products is rapidly changing; investors are becoming more sophisticated; the demand for and access to investment advice and information are becoming more widespread; and more investors are demanding investment vehicles that are customized to their personal requirements.
JCG believes its ability to successfully compete in the investment management industry will be based on its ability to achieve consistently strong investment performance, provide exceptional client service, build upon its distribution relationships and continue to create new ones, develop new investment products well-suited for its distribution channels and attractive to underlying clients and investors, offer a diverse platform of investment choices and vehicles, provide effective shareowner servicing, retain and strengthen the confidence of its clients, and attract and retain talented investment and sales personnel.
The U.S. Securities and Exchange Commission (the "SEC") is the federal agency generally responsible for administering the U.S. federal securities laws. The investment management industry is subject to extensive federal, state and international laws and regulations intended to benefit or protect the shareholders of investment products such as those managed by JCG's subsidiaries and advisory clients of JCG subsidiaries. The costs of complying with such laws and regulations have significantly increased and may continue to contribute significantly to the costs of doing business as an investment adviser. These laws and regulations generally grant supervisory agencies broad administrative powers, including the power to limit or restrict the conduct of businesses such as JCG's, and to impose sanctions for failure to comply with the laws and regulations. Possible consequences or sanctions for such failure to comply include, but are not limited to, voiding of investment advisory and subadvisory agreements, the suspension of individual employees (particularly investment management and sales personnel), limitations on engaging in certain lines of business for specified periods of time, revocation of registrations, disgorgement of profits, and censures and fines. Further, such laws and regulations may provide the basis for civil litigation that may also result in significant costs and reputational harm to covered entities such as JCG.
The Investment Advisers Act of 1940
Certain subsidiaries of JCG are registered investment advisers under the Investment Advisers Act of 1940, as amended (the "Investment Advisers Act") and, as such, are regulated by the SEC. The Investment Advisers Act requires registered investment advisers to comply with numerous and pervasive obligations, including, among others, recordkeeping requirements, operational procedures, registration and reporting requirements, and disclosure obligations. Certain subsidiaries of JCG are also registered with regulatory authorities in various states and foreign countries, and thus are subject to the oversight and regulation by such states' and countries' regulatory agencies.
The Investment Company Act of 1940
Certain of JCG's subsidiaries act as adviser or subadviser to both proprietary and nonproprietary mutual funds, which are registered with the SEC pursuant to the Investment Company Act of 1940, as amended (the "1940 Act"). Certain of JCG's subsidiaries also serve as adviser or subadviser to investment products that are not required to be registered under the 1940 Act. As an adviser or subadviser to a registered investment company, these subsidiaries must comply with the requirements of the 1940 Act and related regulations including, among others, requirements relating to operations, fees charged, sales, accounting, recordkeeping, disclosure and governance. In addition, the adviser or subadviser to a registered investment company generally has obligations with respect to the qualification of the registered investment company under the Internal Revenue Code of 1986, as amended (the "Code").
JCG's limited purpose broker-dealer subsidiary, Janus Distributors LLC ("JD"), is registered with the SEC under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and is a member of the Financial Industry Regulatory Authority ("FINRA"), the securities industry's domestic self-regulatory organization. JD is the general distributor and agent of the sale and distribution of shares of certain mutual funds that are directly advised or serviced by certain of JCG's subsidiaries. The SEC imposes various requirements on JD's operations including disclosure, recordkeeping and accounting. FINRA has established conduct rules for all securities transactions among broker-dealers and private investors, trading rules for the over-the-counter markets and operational rules for its member firms. The SEC and FINRA also impose net capital requirements on registered broker-dealers.
JD is also subject to regulation under state law. The federal securities laws prohibit states from imposing substantive requirements on broker-dealers that exceed those under federal law. This does not preclude the states from imposing registration requirements on broker-dealers that operate within their jurisdiction or from sanctioning these broker-dealers and their employees for engaging in misconduct.
Certain JCG subsidiaries are also subject to the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and related regulations to the extent they are considered "fiduciaries" under ERISA with respect to some of their clients. ERISA, related provisions of the Code, and regulations issued by the U.S. Department of Labor impose duties on persons who are fiduciaries under ERISA and prohibit some transactions involving the assets of each ERISA plan that is a client of a JCG subsidiary as well as some transactions by the fiduciaries (and several other related parties) to such plans.
On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") was signed into law. The Dodd-Frank Act enacted numerous legal and regulatory changes for the financial services industry. Many provisions of the Dodd-Frank Act are subject to rulemaking by the SEC and other agencies and will take effect over several years. The regulations affect, among other things, corporate governance, including proxy access by shareholders and "say-on-pay" with respect to executive compensation. The Company will continue to review and evaluate the Dodd-Frank Act and the extent of its impact on its business as the various rules and regulations required for implementation continue to be adopted.
Certain JCG subsidiaries are authorized to conduct investment business in international markets and are subject to foreign regulation. JCG's international subsidiaries are subject to the regulatory supervision and requirements of various agencies, including the Financial Services Authority in the United Kingdom, the Central Bank of Ireland, the Securities and Futures Commission of Hong Kong, the Monetary Authority of Singapore, the Financial Services Agency of Japan, the Commissione Nazionale per le Societa e la Borsa in Italy, the Federal Financial Supervisory Authority of Germany, the Australian Securities and Investments Commission, and the Canadian Provincial Securities Commissions. These regulatory agencies have broad supervisory and disciplinary powers, including, among others, the power to temporarily or permanently revoke the authorization to conduct regulated business, the suspension of registered employees, and censures and fines for both regulated businesses and their registered employees.
Many of the non-U.S. securities exchanges and regulatory authorities have imposed rules (and others may impose rules) relating to capital requirements applicable to JCG's foreign subsidiaries. These rules, which specify minimum capital requirements, are designed to measure general financial integrity and liquidity and require that a minimum amount of assets be kept in relatively liquid form.
As of December 31, 2011, JCG had 1,125 full-time employees. None of these employees are represented by a labor union.
Copies of JCG's filings with the SEC can be obtained from the SEC's Public Reference Room at 100 F Street, N.E., Washington, DC 20549. Information can be obtained about the operation of the Public Reference Room by calling the SEC at (800) SEC-0330. The SEC also maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at http://www.sec.gov.
JCG makes available free of charge its annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K and amendments thereto as soon as reasonably practical after such filing has been made with the SEC. Reports may be obtained through the Investor Relations section of JCG's website (http://ir.janus.com) or by contacting JCG at (888) 834-2536. The contents of JCG's website are not incorporated herein for any purpose.
JCG's Officer Code of Ethics for Principal Executive Officer and Senior Financial Officers (including its chief executive officer, chief financial officer and controller) (the "Officer Code"); Corporate Code of Business Conduct and Ethics for all employees; corporate governance guidelines; and the charters of key committees of the board of directors (including the Audit, Compensation, Nominating and Corporate Governance, and Planning and Strategy committees) are available on its website (http://ir.janus.com/documents.cfm), and printed copies are available to any shareholder upon request by calling JCG at (888) 834-2536. Any future amendments to or waivers of the Officer Code will be posted to the Investor Relations section of JCG's website.
ADDITIONAL FINANCIAL INFORMATION
See additional financial information about segments and geographical areas in Part II, Item 8, Financial Statements and Supplementary Data, Note 19 â€” Segment and Geographic Information, of this Annual Report on Form 10-K.
Timothy K. Armour , age 63, has been a director of the Company since March 2008 and served as Interim Chief Executive Officer ("Interim CEO") of the Company from July 2009 until February 1, 2010. He serves as a director of AARP Services Inc. (a non-profit organization for retired persons) and as the independent chairman of AQR Funds' Board of Trustees (a mutual fund investment company). In May 2010, Mr. Armour was appointed a director of ETF Securities, a private offshore issuer of exchange traded funds and commodities located in the Channel Islands. He was Managing Director of Morningstar Inc. from 2000 until his retirement in March 2008. Mr. Armour was Morningstar Inc.'s President from 1999 to 2000 and its Chief Operating Officer from 1998 to 1999. Morningstar provides investment research, including stock and fund analysis, reports and tools as well as company, investing and financial news. From 1992 to 1998, he served as President of the Mutual Funds Division of Stein Roe & Farnham, Inc.
In determining that Mr. Armour should serve as a director of the Company, the Board of Directors identified Mr. Armour's extensive oversight experiences related to mutual fund and other asset management companies, domestic and international distribution channels, evaluation of investment products and investment performance, and general executive management as an executive officer at Morningstar and Stein Roe & Farnham.
J. Richard Fredericks , age 66, has been a director of the Company since October 2006. He also serves as Managing Director of the money management firm Main Management LLC, as a director of Cadence Bancorp LLC (a bank holding company f/k/a Community Bancorp LLC) and Chambers & Chambers Wine Merchants, LLC (an importer and distributor of fine wines), and serves on the boards of several non-profit organizations. From 1977 to 1999, he worked at Banc of America Securities (formerly Montgomery Securities), initially as a partner and later as Senior Managing Director. From 1999 to 2001, he served as U.S. Ambassador to both Switzerland and Liechtenstein, and from February 2003 to April 2006, he served as a director for Chiron Corporation until it was acquired by Novartis International AG.
In determining that Mr. Fredericks should serve as a director of the Company, the Board of Directors identified Mr. Fredericks' extensive experiences related to investment management, security analyst, investment banking while at Banc of America Securities and corporate oversight as a member of several boards of directors.
Lawrence E. Kochard, age 55, has been a director of the Company since March 2008. Mr. Kochard is the Chief Executive Officer of the University of Virginia Investment Management Company and has been a member of the Investment Advisory Committee of the Virginia Retirement System since March 2011. He previously served as the Chairman of the College of William & Mary Investment Committee until October 2011. From 2004 to 2010, he was the Chief Investment Officer for Georgetown University and Managing Director of Equity and Hedge Fund Investments for the Virginia Retirement System from 2001 to 2004. Mr. Kochard worked as an Assistant Professor of Finance at the McIntire School of Commerce at the University of Virginia from 1999 to 2001. He started his career in financial analysis and planning, corporate finance and capital markets for E.I. DuPont de Nemours and Company, Fannie Mae and The Goldman Sachs Group, Inc. Mr. Kochard holds the Chartered Financial Analyst designation and a Ph.D. in Economics.
In determining that Mr. Kochard should serve as a director of the Company, the Board of Directors identified Mr. Kochard's extensive experiences related to investment management, investment adviser oversight, general executive management and his economic-focused academic background while a senior executive officer on the investment teams of University of Virginia, Georgetown University, Virginia Retirement System, Fannie Mae and The Goldman Sachs Group.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
JCG finished 2011 with assets under management of $148.2 billion, a decrease of 12.6% from 2010, as a result of long-term net outflows combined with market volatility. Long-term net outflows of $12.2 billion in 2011 were primarily driven by performance challenges in certain fundamental equity investment products.
Five-year investment performance remained strong across all strategies. Short-term investment performance for fundamental equity and fixed income strategies has improved while three-year performance metrics across all strategies have declined.
Net income attributable to JCG for 2011 totaled $142.9 million, or $0.78 per diluted share, compared with net income of $159.9 million, or $0.88 per diluted share, for 2010.
During 2011, JCG made significant progress on a number of strategic priorities, including:
Further diversification of the business through continued build-out of the fixed income franchise, with more than $20 billion of fixed income assets under management at the end of 2011, an increase of 35% from 2010.
Strategic expansion of distribution capabilities through the build-out of JCG's institutional and international channels.
Expansion of product offerings with the launch of approximately $120 million of U.S. and non-U.S. products across the equity, fixed income and alternative disciplines.
Achievement of JCG's long-term goal of operating margins in excess of 30%, with full-year operating margin of 31.8%.
Looking forward to 2012, JCG is focused on controlling expenses while continuing to invest in the business for long-term growth as the Company seeks to become more diversified and to continue to increase its global presence. JCG anticipates downward pressure on operating margins in 2012 as a result of expected negative mutual fund performance fees.
Investment products are generally evaluated based on their investment performance relative to other investment products with similar disciplines and strategies or benchmark indices. JCG's relative investment performance is as follows:
56% of the Company's complex-wide mutual funds have a 4- or 5-star Overall Morningstar Rating TM at December 31, 2011.
43%, 34% and 81% of complex-wide mutual fund assets ranked in the top half of their Lipper categories on a one-, three- and five-year total return basis, respectively, as of December 31, 2011.
38%, 38% and 79% of the Company's fundamental equity mutual fund assets ranked in the top half of their Lipper categories on a one-, three- and five-year total return basis, respectively, as of December 31, 2011.
80%, 5% and 100% of the Company's fixed income mutual fund assets ranked in the top half of their Lipper categories on a one-, three- and five-year total return basis, respectively, as of December 31, 2011.
75%, 43% and 69% of the Company's mathematical equity strategies surpassed their respective benchmarks, net of fees, over the one-, three- and five-year periods, respectively, as of December 31, 2011.
Assets Under Management
The value of assets under management is derived from the cash and investment securities underlying JCG's investment products. Investment security values are determined using unadjusted or adjusted quoted market prices and independent third-party price quotes in active markets. For debt securities with maturities of 60 days or less, the amortized cost method is used to determine the value. Securities for which market prices are not readily available or are considered unreliable are internally valued using appropriate methodologies for each security type or by engaging third-party specialists. The value of the vast majority of the securities underlying JCG's investment products is derived from readily available and reliable market price quotations.
The pricing policies for mutual funds advised by JCG's subsidiaries (the "Funds") are established by the Funds' Independent Board of Trustees and are designed to test and validate fair value measurements. Responsibility for pricing securities held within separate and subadvised accounts may be delegated by the separate or subadvised client to JCG or another party.
Assets Under Management and Flows
Total Company assets under management decreased $21.3 billion, or 12.6%, from 2010, as a result of long-term net outflows of $12.2 billion and net market depreciation of $9.1 billion. Long-term net flows represent total Company net sales and redemptions, excluding money market assets.
Fundamental equity long-term net outflows were $12.1 billion in 2011 compared with long-term net outflows of $4.3 billion in 2010. The increase in net outflows was primarily driven by underperformance in fundamental equity and lower demand for active equity strategies.
JCG continued to make progress toward building out its fixed income franchise, with positive long-term net inflows of $4.9 billion in 2011 compared to $4.0 billion in 2010.
Mathematical equity strategies continue to deliver positive relative investment performance, which led to a decline in redemptions in 2011. Mathematical equity long-term net outflows were $5.0 billion in 2011 compared with $10.5 billion in 2010.
Results of Operations
2011 Compared to 2010
Investment management fees increased $9.7 million, or 1.2%, primarily as a result of the 1.0% increase in average assets under management.
Performance fee revenue is derived from certain mutual funds and separate accounts. The decrease in total performance fee revenue of $44.3 million was primarily due to negative performance fees incurred on certain mutual funds in 2011. These negative mutual fund performance fees totaled $20.9 million and were driven by underperformance compared to the mutual funds' respective benchmarks. Mutual fund performance fees represent up to a positive or negative 15 basis point adjustment to the base management fee.
At December 31, 2011, $54.7 billion and $7.6 billion of mutual fund and private account assets, respectively, were subject to performance fees. As approved by mutual fund shareholders in 2010, six additional mutual funds representing $29.7 billion of assets under management at December 31, 2011, became subject to performance fees in 2011, with the first fee adjustment for the impacted funds calculated in the second quarter 2011. Had these additional mutual fund assets been subject to performance fees for the full 12 months ended December 31, 2011, an incremental $57.7 million in negative performance fees would have been recognized in 2011.
Employee compensation and benefits decreased $19.6 million, or 6.2%, principally due to lower investment team incentive compensation as a result of lower profits and a change in the compensation plan. Effective July 1, 2011, JCG adopted a new investment team incentive compensation plan designed to link variable compensation to operating income. The previous investment team incentive compensation plan was linked to individual long-term investment performance and also tied the aggregate level of compensation to revenue.
Long-term incentive compensation decreased $20.1 million, or 24.2%, primarily due to a decline of $19.0 million from the vesting of awards granted in previous years and a decrease of $12.6 million in Perkins senior profits interest awards expense, which was driven by a decline in investment performance in 2011. The Perkins senior profits interest awards have a formula-driven terminal value based on revenue and relative investment performance of investment products managed by Perkins. (See discussion of Perkins senior profits interest awards on page 24.) The decrease in long-term incentive compensation was partially offset by $13.0 million of expense from new awards granted in 2011.
Long-term incentive awards granted during 2011 totaled $66.8 million and will generally be recognized ratably over a four-year period. Future long-term incentive amortization will also be impacted by the 2012 annual grant totaling $55.0 million, which will generally be recognized ratably over a four-year period. In addition to these awards, JCG granted $1.2 million in price-vesting units to its Chief Executive Officer on December 30, 2011. These price-vesting units comprise two tranches of $0.6 million each. The first tranche is subject to a stock price hurdle representing a 27% premium over the $6.31 closing price of the Company's common stock on the date of grant and the second tranche is subject to a stock price hurdle representing a 58% premium over the same closing price. Both tranches vest ratably over a four-year service period. To achieve each price hurdle, the Company's common stock must close at or above the prescribed price for 20 consecutive trading days at any time during the service period of the award. The units only vest if both the price hurdle and the service conditions are met. The price-vesting units award is required to be amortized using the graded-vesting method due to the underlying market conditions as represented by the stock price hurdles. In addition, the expense will be recognized irrespective of achieving the price hurdles provided service conditions are satisfied.
Marketing and advertising decreased $7.8 million, or 21.8%, primarily due to $9.1 million of fund proxy costs included in the prior year for the election of the mutual fund trustees for JCG's domestic mutual funds.
Depreciation and amortization expense decreased $5.8 million, or 14.8%, primarily as a result of lower amortization of deferred commissions from a decline in sales of certain mutual fund shares.
General, administrative and occupancy expense decreased $12.3 million, or 10.1%, primarily as a result of $13.6 million of client reimbursements related to two significant fund administrative errors during the third quarter 2010. The errors were unrelated and involved delayed security trades in client portfolios. The securities underlying both trades appreciated in value between the time that the trades should have occurred and the time the trades were executed. The $13.6 million incurred in the third quarter 2010 represented the amount necessary to make clients whole by paying the increased costs of trades due to appreciation in value of the applicable securities. During the fourth quarter 2010, JCG received insurance recoveries relating to the fund administrative errors totaling $6.5 million, resulting in a full year net impact of $7.1 million.
Interest expense declined $12.2 million, or 19.3%, primarily as a result of the retirement of $120.9 million of outstanding debt in the first quarter 2011 and a 25 basis point decrease in the interest rates payable on all of JCG's senior notes, excluding the convertible senior notes, as a result of S&P increasing JCG's credit rating to BBB- on January 10, 2011. During the fourth quarter 2010, JCG exercised its call right on the $120.9 million carrying value of the 6.250% Senior Notes and retired the notes in January 2011. Under the terms of the call, JCG was required to pay the present value of the interest that would have been paid if the debt remained outstanding through maturity. As a result, JCG recognized a $9.9 million net loss on early extinguishment of debt in the first quarter 2011.
Net investment losses totaling $21.9 million for the year ended December 31, 2011, primarily include $13.0 million of mark-to-market losses on seed capital classified as trading securities, a $7.2 million loss from mark-to-market adjustments on the mutual fund share award economic hedge and $1.9 million of losses generated by put spread option contracts. The put spread option contracts were purchased by the Company in the fourth quarter 2011 to mitigate potential negative impacts on 2012 profitability in the case of a market downturn.
The mark-to-market losses on trading securities were partially offset by $1.2 million of gains generated by an economic hedging strategy implemented in late 2008, covering the majority of seed capital. The hedging strategy utilizes futures contracts to mitigate a portion of the earnings volatility created by the mark-to-market accounting of seed capital investments. JCG may modify or discontinue this hedging strategy at any time.
JCG's income tax provision includes the reversal of $5.2 million of income tax contingency reserves in 2011 as a result of the expiration of statutes of limitations, creating a net tax benefit of $3.3 million.
Noncontrolling interests in net income increased from $8.7 million in 2010 to $10.5 million in 2011 primarily due to an increase of $4.2 million in the noncontrolling interest portion of Perkins earnings, partially offset by $1.8 million of losses associated with the noncontrolling interest in consolidated investment products.
2010 Compared to 2009
Investment management fees increased $150.6 million, or 22.0%, primarily as a result of the 19.5% increase in average assets under management driven by improved market conditions.
Performance fee revenue increased $3.7 million, or 12.8%, primarily due to an increase of $9.2 million in separate account performance fees, partially offset by a $5.5 million decline in fees earned on mutual funds. JCG recognized performance fees of $17.1 million in 2010 from a separate account client, which terminated in late 2010.
Shareowner servicing fees and other revenue increased $12.7 million, or 9.4%, over the prior year primarily from higher transfer agent fees. Transfer agent fees are based on average assets under management distributed directly to investors by Janus, excluding money market assets, which increased 21.4% over the prior year.
Employee compensation and benefits increased $17.9 million, or 6.0%, principally due to higher investment team incentive compensation. The investment team compensation plan in 2010 was linked to individual long-term investment performance, but also tied the aggregated level of compensation to revenue, which increased from 2009.
Long-term incentive compensation increased $22.1 million, or 36.2%, primarily as a result of awards granted in 2010 and from a higher valuation of the Perkins senior profits interest awards based on 2010 relative investment performance.
Also included in long-term incentive compensation in 2010 is a $2.7 million mark-to-market adjustment for changes in fair value of mutual fund share awards. During the fourth quarter 2010, JCG concluded that the accounting for the mutual fund share awards and the associated hedge was incorrect. Accordingly, for financial accounting purposes, the hedging relationship was terminated and mark-to-market adjustments on the awards and associated hedge, previously recognized as increases or decreases in the mutual fund share award liability, were recorded in earnings in the fourth quarter 2010. See discussion of net investment gains below for the impact of recording investment gains in earnings. JCG assessed the significance of the incorrect accounting and concluded that recognizing a cumulative adjustment in the fourth quarter 2010 was not material either to JCG's financial statements for any reported individual prior period or on a cumulative basis to 2010.
Marketing and advertising increased $8.0 million, or 28.8%, primarily due to $9.1 million of fund proxy costs for the election of the mutual fund trustees for JCG's domestic mutual funds in 2010.
Distribution expenses increased $32.5 million, or 30.2%, as a result of a similar increase in assets under management subject to third-party concessions. Distribution fees are calculated based on a contractual percentage of the market value of assets under management distributed through third-party intermediaries.
Depreciation and amortization expense increased $3.2 million, or 8.9%, primarily as a result of higher amortization of deferred commissions from an increase in sales of certain mutual fund shares.
General, administrative and occupancy expense decreased $19.1 million, or 13.6%, primarily as a result of lower legal expenses due to litigation settlements and an unfavorable judgment totaling $31.4 million in 2009. The decrease was partially offset by $13.6 million of client reimbursements related to two significant fund administrative errors during the third quarter 2010, net of insurance recoveries of $6.5 million received during the fourth quarter 2010, resulting in a full year net impact of $7.1 million.
Interest expense declined $10.8 million, or 14.6%, primarily as a result of the August 2009 tender offer, partially offset by $7.7 million of interest expense associated with the July 2009 issuance of convertible senior notes.
Net investment gains totaling $24.7 million include a $14.3 million gain from mark-to-market adjustments on the mutual fund share award hedge which were recorded in earnings in the fourth quarter 2010. Also included in net investment gains for 2010 is a $5.8 million gain from the sale of SIV securities originally acquired in 2007 from money market funds advised by Janus (the "Money Funds"). In December 2007, JCG purchased securities originally owned by Stanfield Victoria Funding LLC from certain Money Funds in response to Moody's downgrading these securities to a rating below what is generally permitted to be held in the Money Funds.
Mark-to-market gains on trading securities for the year ended December 31, 2010, were partially offset by losses generated by the economic hedging strategy implemented in late 2008. Net investment losses of $5.6 million for the year ended December 31, 2009, include impairment charges totaling $6.6 million, which were primarily related to seed capital classified as available-for-sale.
2011 Cash Flows
On an annual basis, JCG's cash flow from operations historically has been positive and sufficient to fund ordinary operations and capital requirements. Fluctuations in operating cash flows are attributable to changes in net income and working capital items, which can vary from period to period based on the amount and timing of cash receipts and payments. The decrease in cash flow from operations from the prior year was primarily driven by lower revenues as a result of a decline in performance fee revenue.
Cash provided by investing activities in 2011 includes purchases, sales and maturities of investments as well as economic hedging and vesting of mutual fund share awards. Purchases of investments in 2011 totaling $199.0 million include $120.7 million from the seeding of new investment products and $36.4 million from the economic hedging of mutual fund share awards. Sales and maturities of investments totaling $228.0 million include the maturity of $93.1 million of U.S. Treasury notes, which were purchased in the second quarter 2010 and matured in August 2011, $46.9 million from the vesting of mutual fund share awards and proceeds of $32.6 million from the disposal of SIV securities in the first quarter 2011. The SIV securities were traded on December 1, 2010, and settled on February 23, 2011. Accordingly, the sale was recognized on the trade date and the majority of the cash flow associated with the trade was recognized at settlement.
Cash used for financing activities in 2011 primarily represents the repayment of $213.1 million principal amount of long-term debt for $223.0 million, $12.1 million of distributions to noncontrolling interests and $28.0 million of dividends paid to stockholders.
2010 Cash Flows
The increase in cash flow from operations from the prior year was driven by higher revenues as a result of the increase in average assets under management.
Cash used for investing activities in 2010 primarily represents $137.8 million for the net purchase of investments, including an aggregate total of $92.8 million of U.S. Treasury notes purchased in the second quarter 2010 which matured in August 2011. Other purchases and sales of investments are related to seed capital as well as hedging and vesting of mutual fund share awards.
Cash used for financing activities in 2010 primarily represents $31.4 million for the purchase of an additional 3% interest in INTECH combined with $12.5 million of distributions to noncontrolling interests and $7.4 million of dividends paid to stockholders.
2009 Cash Flows
Operating cash flows in 2009 decreased $61.7 million to $176.5 million due to lower revenues as a result of the decline in average assets under management.
Cash used for investing activities in 2009 primarily represents $9.0 million for the purchase of property and equipment.
Cash used for financing activities in 2009 primarily represents the repurchase of $443.3 million and the repayment of $22.0 million of long-term debt, partially offset by the issuance of $218.1 million and $170.0 million of common stock and convertible debt, respectively. Cash used for financing activities in 2009 also includes acquisitions of noncontrolling interests of $28.5 million and $6.5 million of dividends paid to stockholders.
Common Stock and Convertible Senior Notes Offerings, and Tender Offer for Certain Outstanding Senior Notes
On February 21, 2012, JCG launched a tender offer for up to $100 million aggregate principal amount of its outstanding 6.119% Senior Notes due 2014 (the "2014 Senior Notes") and 6.700% Senior Notes due 2017 (the "2017 Senior Notes"). JCG is making two separate offers to purchase (the "Offers") which are being conducted (i) as an "Any and All Offer" for the 2014 Senior Notes and (ii) as a modified "Dutch Auction" for the 2017 Senior Notes. The Any and All Offer price is $1,080.00 per $1,000 of principal amount of the 2014 Senior Notes and the Dutch Auction price is subject to a minimum of $1,060.00 per $1,000 of principal amount of the 2017 Senior Notes and a maximum of $1,090.00 per $1,000 of principal amount of the 2017 Senior Notes. In addition, the modified Dutch Auction Offer is subject to a repurchase limit equal to the lesser of (i) $50 million or (ii) $100 million less the aggregate principal amount of the 2014 Senior Notes repurchased in the Any and All Offer. Both offers will be funded with cash on hand and expire at 11:59 p.m., New York City time, on March 19, 2012, unless extended or earlier terminated by JCG. The complete terms and conditions of the Offers are set forth in the Offer to Purchase and the Letter of Transmittal that were sent to holders of the 2014 Notes and 2017 Notes.
In July 2009, JCG completed concurrent common stock and convertible senior notes offerings. Proceeds, net of issuance costs from the common stock and convertible senior notes offerings, totaled approximately $218.1 million and $164.3 million, respectively. On August 13, 2009, the combined proceeds of the common stock and convertible senior notes offerings, together with available cash, were used to repurchase $443.3 million aggregate principal amount of the Company's outstanding 2011, 2012 and 2017 senior notes in a tender offer. JCG recognized a $5.8 million net gain on early extinguishment of debt related to the tender of these notes.
Money Market Funds Advised by Janus
Janus advises Money Funds that seek to provide capital preservation and liquidity, with current income as a secondary objective. JCG attempts to limit the Money Funds' exposure to losses by investing in high-quality securities with short-term durations that present minimal credit risk. Adverse events or circumstances related to individual securities or the market in which the securities trade may cause other-than-temporary declines in value. JCG continuously evaluates the securities held by the Money Funds to determine if any holdings are distressed or may become distressed in the near future. In such circumstances, JCG would consider whether taking any action, including, but not limited to, a potential election by JCG to provide support to the Money Funds that could result in additional impairments and financial losses for the Company, would be appropriate. Under certain situations, JCG may elect to support one or more of the Money Funds to enable them to maintain a net asset value equal to one dollar through a variety of means, including but not limited to, purchasing securities held by the Money Funds, reimbursing for any losses incurred or providing a letter of credit. However, JCG is not contractually or legally obligated to provide support to the Money Funds. As a result of JCG's exiting its institutional money market business in early 2009, JCG's money market assets have declined to $1.5 billion at December 31, 2011.
JCG's decision to provide support to the Money Funds is based on the facts and circumstances at the time a holding in the Money Funds becomes or is expected to become distressed. A holding is considered distressed when there is significant doubt regarding the issuer's ability to pay required amounts when due, often resulting in a decline in the securities' credit ratings. If a security falls below the minimum rating required by investment restrictions, the Money Funds must dispose of the investment unless the Money Funds' Board of Trustees determines that such disposition is not in the best interests of the Money Funds. In determining whether to take any action in response to a distressed condition or a downgrade affecting securities held by the Money Funds, JCG considers many factors, which may include the potential financial and reputational impact to the Money Funds and JCG, regulatory and operational restrictions, the size of a holding, a security's expected time to maturity and likelihood of payment at maturity, general market conditions, discussions with the Money Funds' Board of Trustees and JCG's Board of Directors, and JCG's liquidity and financial condition. No single factor is determinative and there is no predetermined threshold with respect to each factor that would lead JCG to consider providing support to the Money Funds.
Short-Term Liquidity and Capital Requirements
The Company has cash and investment securities of $672.0 million at December 31, 2011. JCG believes that existing cash and cash from operations should be sufficient to satisfy its short-term capital requirements. Expected short-term uses of cash include ordinary operating expenditures, dividend payments, income tax payments, and interest and principal payments on outstanding debt. JCG may from time to time use available cash for acquisitions and for general corporate purposes. In addition, JCG may repurchase its outstanding debt securities and common stock through cash purchases, in open market transactions, privately negotiated transactions, tender offers or otherwise.
Common Stock Repurchase Program
JCG's Board of Directors authorized five separate $500 million share repurchase programs beginning in July 2004 with the most recent authorization in July 2008. As of December 31, 2011, $521.2 million is available under the current authorizations. JCG has not repurchased any of its common stock since 2008. Any repurchases of debt securities or common stock will depend on prevailing market conditions, the Company's liquidity requirements, contractual and legal restrictions, and other factors.
Richard Mac Coy Weil
Thank you, operator. Welcome, everybody, to the first quarter 2012 Janus Capital Group call. I'm obviously Dick Weil and with me as usual is Bruce Koepfgen, our CFO. The story of the first quarter 2012 for us is one where we demonstrated fundamental business improvement across importantly both investment performance and better net flows. However, the expected performance fee impact we've discussed with you in prior quarters took full effect and more than offset fundamental business improvement in our financial results. Let me focus on investment performance for just a moment.
Prior to the first quarter 2012, our Janus-managed large-cap growth strategies have been through a very difficult 18 months. In the first quarter, their performance improved dramatically. It's hard to generalize about many different portfolios but one very substantial difference is the change in the environment. Since the crisis at the end of 2008's correlations between stocks, the number of stocks and the broad index moving in the same direction on the same day had been very high. Buyers alternatively scared and optimistic about global macro and the stability of financial institutions have expressed those views by buying and selling beta or in other words, the index. In such periods, the rewards for differentiated bottoms-up stock picking are reduced. In such period, the more one looks like the index, the better. As a high-conviction fundamental manager, our Janus platform is not at its best during these periods.
During the first quarter of 2012, correlations have fallen dramatically to much more normal levels compared to history, and our differentiated stock picking has once again been rewarded. This gives us the opportunity to demonstrate the strengths of our research and our investment team. We recognize one quarter's good performance is far too short to fully remedy our recent underperformance, but Q1 2012's is a very good start.
Turning to our quarterly results. Q1 2012 EPS was $0.12 compared to $0.19 in fourth quarter 2011. When evaluating this result, please take care to understand elements around both the fourth quarter of '11 and the first quarter of '12. Bruce Koepfgen will take you through the details of this more carefully, but the first quarter included about $0.03 charge due to 2 elements: change in LTI forfeiture estimates, less people are leaving than we expected; and charges related to our recent debt buyback. When you compare that against fourth quarter of last year, you should remember that about $0.05 of benefit in the fourth quarter of last year was from compensation reversals.
Finally, I want to point out that we announced a 20% increase in our regular quarterly dividend. This small step demonstrates that our board is confident in the strength of our balance sheet, that we continue to generate strong free cash flow from operations and we take seriously our duty to return capital to our shareholders.
With that, I'll turn it over to Bruce.
Bruce Lewis Koepfgen
Thanks, Dick. Good morning, everyone. As I work my work through the materials, I'll attempt to focus on a few items that I think help to explain our quarterly results.
First, total company net flows improved quarter-over-quarter. Second, revenue improved primarily from market tailwinds but also significantly improved investment performance. Third, the quarter-over-quarter increase in operating expenses, particularly compensation and LTI, are being driven by the fact that several fourth quarter items did not repeat. And fourth, our improving balance sheet and our capital deployment philosophy.
If you're following along on the deck, I will begin my comments starting on Slide 5. Earnings per share for the first quarter was $0.12, as Dick mentioned, compared to $0.19 in the fourth quarter and $0.21 a year ago. As noted on the slide, fourth quarter earnings per share included a $0.05 benefit from compensation reversals. For the current quarter, earnings per share included a total charge of $0.03 related to a change in our LTI forfeiture estimates and the loss on the earlier extinguishment of debt. We do not expect to have either of these charges repeat in the second quarter. First quarter average AUM of $158.9 billion improved 7%, driven by strong markets and investment performance. First quarter revenue of $218.4 million only increased slightly as the increase in average AUM was mostly offset by the expected increase in negative mutual fund performance fees. First quarter operating expenses were $161.9 million, which was $16.9 million higher than the prior quarter, primarily due to year-end compensation and LTI adjustments that we had in the fourth quarter that did not repeat. As a result, operating income of $56.5 million declined 20%, as the slight revenue improvement was more than offset by a 12% increase in these operating expenses. Margins for the quarter were 25.9% versus 32.7% in the fourth quarter.
Turning to investment performance. As Dick mentioned, we are very encouraged by our year-to-date performance, especially in our large-cap equity strategies that underperformed in 2011. At the same time, we want to be realistic, and we recognize that more work is necessary to improve intermediate track records. 5-year performance remains strong across the complex and 58% of our funds had 4- or 5-star overall Morningstar rating at March 31, compared to an industry average of 32.5%.
Slide 7 details the components of company net flows for the quarter, driven largely by an improvement in fundamental equity gross sales. Total company net outflows of $2.5 billion improved 38% compared to the prior quarter. Fundamental equity posted first quarter net outflows of $1.9 billion versus $3.2 billion in the fourth quarter. Improvement was driven by a 53% increase in gross sales. Fully 80% of our fundamental equity strategies had quarter-over-quarter improvement in gross sales. INTECH saw net outflows of $1.8 billion in the quarter, compared to $2.2 billion in the fourth quarter on lower redemptions. In our fixed income business, net sales remained strong at $1.2 billion on continuing momentum across all channels. We remain optimistic about the prospects for this business. Portfolios are performing and continue to be well-received by our clients.
Turning to Slide 8. Total revenue increased 1% in the quarter, as revenue from higher-average assets was offset by the expected increase in negative performance fees. First quarter was the first full quarter where all planned funds were subject to performance fees. As in prior quarters, we have a schedule on Page 15 listing performance fees by fund for your reference. Largely as expected, we saw the negative performance fees on our mutual funds increase to $19.5 million from $13.8 million last quarter.
Slide 9 compares operating expenses quarter-over-quarter. First quarter operating expenses increased $16.9 million as a result of several compensation adjustments that occurred in the prior quarter, which did not repeat. Compensation increased $9.9 million, primarily due to the $9 million accrual reversal that took place in the fourth quarter and did not reoccur in the first quarter. The compensation-to-revenue ratio was approximately 33% this quarter. All things being equal, this sits in a reasonable range to apply going forward.
Long-term incentive compensation increased $8.9 million for 3 reasons: First, in the fourth quarter, we had a $4.2 million valuation adjustment with the Perkins SPIs that did not repeat in the first quarter. Second, during the first quarter, we made an adjustment to the LTI forfeiture estimates as employee turnover improved over the past year. This adjustment resulted in $2.1 million of higher expense. We do not expect this to repeat in the second quarter. Third, we rolled out our 2012 LTI grant, which resulted in a $2.6 million of additional expense for the quarter. At the suggestion of many of you, we have added the LTI amortization schedule back in the appendix, which I think you'll find on Page 17.
So just to be completely clear, fourth quarter included a total of $13.2 million in cost benefits related to compensation adjustments, which did not repeat in the first quarter; $9 million of accrual reversals; and the $4.2 million Perkins SPI adjustment. Additionally, in the first quarter included a $2.1 million charge related to a change in LTI forfeiture estimates, which also will not repeat in the second quarter. The distribution costs increased $1.8 million. This increase was largely in line with assets subject to these distribution fees.
Lastly, management continues to exercise financial discipline when it comes to discretionary expenses. Our combined marketing, advertising and G&A lines were $4 million lower than the prior quarter. The management team will remain vigilant on these discretionary expenditures, but we'll be careful not to deprive the business of the resources necessary to achieve our strategic objectives.
Lastly, a look at Slide 10 highlights the continued improvement of the balance sheet. As we have mentioned in the past, we believe a strong balance sheet is a precondition to our long-term success. It protects the interests of our clients, our employees and our shareholders.
In the first quarter, we saw our cash balance decline as a result of our successful debt tender and the seasonal payment of bonuses. In the last few quarters, we have talked about capital deployment so it makes sense to summarize our capital planning process here again. First, as a general principle, we believe that preserving liquidity and financial flexibility is critical. Second, we will set aside capital for contractual obligations. Third, we look to deploy cash strategically in the business to drive future growth. Finally, we consider the return of excess cash to our shareholders.
Based on this framework, we have taken the following actions this quarter. We've repurchased $59 million of outstanding senior notes through our recent tender. We initiated a programmatic anti-dilutive share repurchase program to offset stock issuance related to our LTI program beginning with the 2012 grant, which was roughly 2.3 million shares. We paid out a previously established quarterly dividend of $0.05 a share and as Dick mentioned today, we announced the 20% increase in our quarterly dividend to $0.06. We recognize that these actions are incrementally small, but we believe they demonstrate management's commitment to returning capital to shareholders, consistent with maintaining a strong balance sheet.
That's all I have, and I'll turn it back to Dick.
Richard Mac Coy Weil
Thank you, Bruce. Just in conclusion, before we take your questions, for me, the key messages for the first quarter of 2012 are improved fundamental equity performance, as we discussed earlier; a significant improvement in total company net flows, as Bruce detailed in his comments a moment ago; negative performance fees coming in, unfortunately, substantially negative but about as expected and we continue to execute our conservative capital policy in terms of the debt reduction steps and then increasing the dividend, as Bruce described; and lastly, we continue to execute our strategy of intelligent diversification, driving forward in fixed income, building out our non-U.S. franchise, strengthening our efforts in institutional space, all the while continuing to deliver operational excellence, and that has been and continues to be our strategic outlook.
With those comments, I'll take questions from those on the call. Thank you very much. Operator?