Good morning. My name is Grant, and I will be your conference facilitator today. Thank you for standing by, and welcome to the Janus Henderson Group Q3 2021 results briefing. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer 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 sections of the company's most recent Form 10-K and other more recent filings made with the SEC. Janus Henderson assumes no obligation to update any forward-looking statements made during the call. Thank you.
Now it is my pleasure to introduce Dick Weil, Chief Executive Officer of Janus Henderson. Mr. Weil, you may begin your conference.
Welcome, everyone, to the Q3 2021 Earnings Call for the Janus Henderson Group. I'm Dick Weil, and as usual, I'm joined by our CFO, Roger Thompson. In today's presentation, I'll start with progress we're making toward delivery of our strategy of simple excellence. I'm gonna give you an update on our view of the sector and how that influences our growth initiatives. Then, as usual, I'll hand it over to Roger, who will take you through the results with more precision. As always, following the prepared remarks, we'll take your questions. Turning to slide three. five years ago this month, we announced the merger of Janus and Henderson. At the time, each firm believed that we needed more scale, and by that we mean we needed to be more global and have more product breadth in distinct areas to compete successfully in our shifting asset management landscape.
Long ago, we successfully completed the integration of these two firms, but this five-year milestone provides a useful opportunity to reflect on where we've come from and where we're going. Our combined company is vastly better positioned than either of its predecessors were five years ago. Our enhanced platform has allowed us to invest in people, in technology and systems, which improves investment, distribution, and compliance outcomes, and it enables us to drive strong operating leverage. We've built a strong and unified company culture with a shared purpose. That has contributed to our success in attracting exceptional talent at all levels of the organization, and that is, of course, the key to our business. We've continued to make significant progress executing our strategy across the four pillars you can see on this page.
As a result, we're seeing momentum building in our business, which we've laid out on the next slide. We have first-class investment teams delivering active investment excellence and differentiated performance across the breadth of liquid asset classes, backed by a strong legacy of fundamental research, engagement, and investing with conviction. Our solid investment performance forms the foundation for growing distribution momentum. We've globalized our distribution teams and scaled our presence across institutional and intermediary client channels. We've broadened our capability set by product and geographic reach. For example, our Balanced strategy, which was traditionally strong in the U.S., continues to be a net inflow in all regions of our business. The strategy has grown from an AUM of $19 billion at time of merger to $48 billion today.
Our Global Strategic Fixed Income strategy, managed out of London, has more than doubled in size since the merger to over $10 billion in AUM and has seen consistent inflows now in the U.S. We've also made significant progress in the last three years towards our near-term aim of positive net flows excluding quantitative equity. The organic growth rate over the last 12 months, excluding quant equity, is almost flat, as you can see on the graph on the top right of this page. We've built a resilient high-margin business. We've been driving towards best-in-class operating leverage and growing profitability in the business. Our adjusted operating margin for the quarter is 46.4% and 43.5% year to date.
Our average net fee rate has expanded by 2.6 basis points over the last two years in a time of fee compression in the broader industry. Let's turn our attention from flows to revenues and think about that for a second. Year to date, we've posted $3.3 billion of net outflows excluding quant equity. This has actually delivered almost $10 million of positive adjusted revenue on an annualized basis as a result of replacing lower fee assets with higher fee assets. Despite the fact that we're frustrated with flows not being as positive as we would like, the revenue effects of our net flows are positive, and we're very proud of that. We're focusing on the right kinds of business, and our clients are valuing our services.
While we acknowledge the positive impact of markets and changes in the underlying asset mix, we're succeeding in selling high-quality assets, and that's showing up in our business results. This then filters through to higher profitability and also to cash flow generation. Speaking of cash flow, our balance sheet is resilient, and we've been disciplined with our capital. This gives us the financial stability and the flexibility to invest in our business and pursue growth organically and inorganically. We've generated over $800 million in cash flow from operations in the last 12 months. We've also been returning excess cash to our shareholders, both through a stable and progressive dividend as well as share buybacks.
Since we commenced our buyback program three years ago, we've actually reduced our share count by 15%. We've made tremendous progress in the delivery of our strategy of simple excellence, although we still have much more work to do. We've also dramatically improved our flows and trajectory, but we're still not yet consistently delivering the growth that we plan and aspire to deliver. We acknowledge also that our quant equity faces significant challenges. We also recognize that the majority of our business operates in mature markets. Our areas of strength are poised to gain market share, but are not necessarily aligned with the high growth vectors in asset management. However, the strong base that we've built through simple excellence and our very strong cash flow generation from our core franchise gives us the strategic and financial resources required to invest in our business to deliver growth.
We know that the market continues to evolve, and there are several trends that we are observing in relation to our business. I'd like to call out four in particular that we've discussed with our leadership team and board. First, the importance of ESG continues to accelerate changes in the investment landscape and is critical for competitive positioning in active management. Second, in our core retail channels, technology is enabling growth in packaged and customized solutions delivered through multi-asset class portfolios, accompanied by the growth of ETFs as a preferred vehicle for tax and transparency reasons. Third, the world continues to need high-quality income solutions and uncorrelated returns, and we expect to see increased allocations to alternatives across virtually all client sub-channels.
Finally, while still in a nascent stage, increased institutionalization and evolution and deployment of solutions developed on blockchain technology and digital assets will be an opportunity for asset managers who are able to participate. The good news for us is we have a strong foundation, and we've made progress, which means we're well-placed to capture growth opportunities both organically and inorganically. Very importantly, our clients value us as a trusted partner. I sit in meetings with some of our biggest institutional and intermediary partners, and they tell me that they trust us, they value our relationship, and they wanna grow with us. They want to do more business in more areas with us. They tell me that they want us to do more in alternatives, in private debt, and more in model portfolios.
Our clients want to do more business with us, meaning we have an opportunity to broaden our capabilities where we can deliver and succeed in higher-growing areas. We also have the board's full support in the execution of this strategy, so you can expect us to be more aggressive in responding to the delivery of future growth. Let me now turn it over to Roger, who can take you through the results in some more precision.
Thank you, Dick, and thanks everyone for joining us. I'm pleased to report another strong set of financial results. In looking at the Q3, investment performance remained solid, with 64% or more of assets beating their respective benchmarks over the one-, three-, five-, and 10-year periods. Market strength during the quarter provided a good backdrop for average AUM and revenues. For the quarter, average AUM increased 3%, but market weakness at the end of September left closing AUM down 2% from June. Net outflows of $5.2 billion, while disappointing, were concentrated in our quantitative equity capability. The overall flow figure masks positive flows in our intermediary business and continued strength in our multi-asset, fixed income, and alternative capabilities.
Adjusted EPS was $1.16, flat to the strong prior quarter and up significantly compared to the $0.70 the same period a year ago. Finally, we returned $140 million of cash to shareholders during the quarter via dividends and share repurchases. Turning to slide 8 to look at investment performance. Investment performance remained solid, with at least 64% of firm-wide assets beating their respective benchmarks over all time periods as at the 30th of September. Starting this quarter, we've begun providing 10-year investment performance against benchmark and peers in an effort to provide greater transparency into investment performance. We hope you find it useful. Short-term relative performance compared to peers improved during the quarter, with 47% of AUM represented in the top two Morningstar quartiles on a one-year basis compared to 33% in the prior quarter.
As stated at the top of the page, the longer-term important Morningstar metrics show that almost one-half of our AUM is in the top quartile against the competitive universe on a three- and five-year basis, a further improvement from the Q2. Now turning to total company flows. As said, net outflows were $5.2 billion, compared to $2.5 billion last quarter. These outflows were dominated by quantitative equity outflows, as I've said, and over the next few slides, I'll discuss some of the many encouraging trends we're seeing in the business. Slide 10 shows the breakdown of flows in the quarter by client type. Net inflows for the intermediary channels were positive $1.2 billion, resulting in a 2% annualized organic growth rate.
By region, intermediary flows were positive in EMEA, Latin America, and Asia-Pacific, and these were partially offset by small and improved outflows in the U.S. In looking closer at the regions, for EMEA and Asia-Pacific, Q3 flows mark the sixth consecutive quarter of positive flows for each region. Within both regions, all major geographies were positive, including the U.K. and Continental Europe for EMEA, and Australia, Japan, and Asia in APAC. It's important to note that the management fee margin in EMEA, Latin America, and Asia-Pacific intermediary is higher than other areas of the business. These flows are contributing to our strength in the management fee rate, as Dick's just mentioned. In U.S. intermediary, we're seeing a diverse set of products generating inflows.
In fixed income, we had more than 10 strategies with positive flows during the Q3, led by Multi-Sector Credit, JAAA, which is our AAA CLO ETF, and Developed World Bond. Elsewhere, the Balanced strategy continues to gather flows. These areas of momentum are being offset by the impact of the 2020 performance challenges in our SMID and Mid Cap Growth strategies, but we note that investment performance has improved in 2021. Moving to institutional, the $5.8 billion of outflows in the Q3 were primarily driven by quantitative equity outflows. Elsewhere, we've taken steps in globalizing the institutional team and bringing on talent, including a new head of North American institutional and head of North American consultant relations. I've talked about our strong and diversified pipeline in prior quarters, and while funding this quarter has been modest, we remain confident for 2022.
Finally, net outflows for the self-directed channel, which includes direct and supermarket investors, with $600 million for the quarter, a further small but sequential improvement. Moving to slide 11 and the breakdown of flows in the quarter by capability. Equity net outflows for the Q3 were $2.6 billion. The quarterly outflows were driven primarily by small and midcap growth strategies in U.S. retail, as well as a $1 billion global enhanced index institutional redemption. Areas of strength included contrarian, global sustainable equity, and overseas. Flows into fixed income were $700 million positive in the quarter compared to -$100 million in the prior quarter. The results included $1 billion in intermediary flows across a wider range of strategies, including multi-sector income, tactical income in Australia, global strategic fixed income, and asset-backed securities in the U.K.
Total inflows for multi-asset were $800 million, driven by continued inflows into the balanced strategy across North America, EMEA, and Asia Pacific. Quantitative equity outflows in the Q3 were $4.4 billion. Finally, alternative inflows were $300 million, flat to the prior quarter. The inflows were driven by our absolute return and multi-strategy products. We continue to see growth in our higher fee alternatives business, showing another benefit of our diversified product set. Slide 12 is our standard presentation of the U.S. GAAP statement of income. Moving to slide 13, which shows a strong set of summary financial results. The solid green on the right-hand side of the slide shows the improvements in our financial results from just one year ago, with EPS flat to our very strong prior quarter.
Total adjusted revenues decreased 10% compared to the prior quarter, as higher management fees were offset by seasonally lower performance fees. Adjusted operating income in the Q3 is $253 million, was down 6% from the prior quarter, but is up 56% from the same period a year ago. Q3 adjusted operating margin was a very strong 46.4% compared to 44.6% in the Q2 and 36% a year ago. Lastly, adjusted diluted EPS was $1.16 for the quarter, up 66% on a year ago. Turning to slide 14, which outlines the revenue drivers for the quarter. As I've just mentioned, the biggest drivers of the quarterly change in adjusted revenue were higher management fees from average assets, which were more than offset by seasonally lower performance fees.
Net management fee margin for the Q3 was 47 basis points, which is down very slightly from 47.1 basis points in the Q2, but up compared to 45.8 basis points a year ago. The strength in net management fee margin was due to both positive markets and changes in underlying asset mix. As Dick's just discussed, inflows are coming into higher fee margin areas such as EMEA and Asia Pacific intermediary, with outflows being in relatively lower fee margin areas, including quantitative equities. Performance fees were $600,000 in the quarter versus $77 million in the prior quarter, when there were more accounts and funds eligible for fees. Turning to operating expenses on Slide 15. Adjusted operating expenses in the Q3 were $292 million, which is down 13% from the prior quarter.
Adjusted employee compensation, which includes fixed and variable costs, was down 14%, primarily as a result of lower variable compensation on lower revenues and particularly lower performance fees. Adjusted LTI was down 30% from the Q2, largely due to mark-to-market and fair value adjustments related to certain LTI awards. We provided the usual table in the appendix to allow you to model LTI for future years. Due to lower variable compensation and market adjustments to LTI, the Q3 adjusted comp-to-revenue ratio was 36.9%. Through the first nine months of the year, the ratio was 40.3, and for the full year, we still anticipate the ratio to be at the low end of the 40%-42% range, demonstrating the operating leverage in our business with higher assets under management.
Adjusted non-comp operating expenses were 1% lower compared to the prior quarter, as higher marketing was offset by lower G&A. For 2021, we now anticipate non-comp operating expense growth to be at the upper end of mid-single-digit expectation we previously communicated. This implies significant growth in the Q4 as we invest in the business through technology, brand and marketing, for example, in supporting the recent launch of our five sustainable ETFs. Finally, our recurring effective tax rate for the Q3 was 21%. The lower tax rate included $2.1 million in one-time benefits, primarily due to a state tax refund. Turning to slide 16, which is a look at our liquidity. Cash and cash equivalents were $931 million at the 13th of September, a decrease of $34 million.
A strong cash flow generation was offset by capital return and seed capital funding. The funding included approximately $160 million into five sustainable ETFs launched in September. This shows our strong commitment to investing in the business where we see opportunities for growth, including in ETFs and ESG. During the Q3, we paid approximately $65 million in dividends to shareholders and declared a $0.38 per share dividend to be paid on the 24th of November to shareholders of record as at the eighth of November. In the quarter, we purchased 1.8 million shares of our stock for a total of $75 million. As Dick mentioned, since we started our buyback program in Q3 2018, the stock buyback program has been 15% accretive. Now I'd like to turn it back over to the operator for Q&A.
We will now begin the question-and-answer session. To ask a question, you may press star then one on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Ken Worthington with JP Morgan. Please go ahead.
Hi. Good morning, and thank you for taking my questions. On non-comp, can you give us some more examples of what you're investing in, beyond five ETFs, maybe the technology products and other initiatives? Is the spending likely to continue at that Q4 pace, through 2022? Or should it fall off or even accelerate? Thank you.
Okay, it's Roger. Thanks for that. Yeah, Q4 certainly includes some catch up and one-off items. As you say, we're investing in a number of things where we think we can accelerate that strategy Dick talked around simple excellence, either getting to just be a better, more efficient firm or accelerating to future flows. Yes, we're putting money behind those ETF launches and several other launches we're doing. We're doing a little bit more marketing. We're also investing in technology. That's more around small bits of kit to make sure that we've got our teams with exactly the right infrastructure technology for them in this new agile world. There is a little bit of catch up in Q4.
I expect Q4 to be higher than a regular quarter.
Okay. Okay, great. Thank you. I'll try to dance around this tricky question, but Trian has reported a big position in Janus, and interestingly, it continues to grow. Dick, if possible, can you talk about how you're working with Trian to drive shareholder value? I think their part of their investment thesis is consolidation. This morning you began your comments with the merits of the Henderson transaction. Are you signaling, or do you continue to think that maybe further consolidation can be really value added to Janus as we look forward over, you know, the coming three to five years?
Thanks, Ken. Yeah, taking your second part of your question first, I think we're trying to state plainly that we're gonna look hard for opportunities that are both organic and inorganic to enhance our growth prospects. We've tried to give you a sense of some of the trends that we're looking at responding to in this communication. I don't really think about that as consolidation, but you know, we can all apply a lot of different words towards those ideas. There will be a significant number of things that we can and should do organically. There also may be some opportunities to do some things inorganically. We'll have to see. I hope we're stating as plainly and clearly as we can. On Trian.
Look, Trian is our largest shareholder, and we work hard to try and communicate on a regular basis with our large shareholders, and that certainly includes Trian. Their situation is a little complicated as they sit on the board of a competitor. As a consequence, you know, they're not probably perfectly positioned to have the detailed sorts of conversations with us, that they might otherwise be. But we're very anxious to hear their ideas and other shareholders' ideas about what's the best way to enhance shareholder value and deliver the growth, that we're aspiring to deliver.
You know, we're in open communication with them. We're enthusiastic listeners to their ideas as well as other people's ideas. We don't care who the author is, we just wanna win.
Okay, awesome. Thank you so much.
The next question comes from Ed Henning with CLSA. Please go ahead.
Thank you for taking my questions. Two from me. Dick, you talked about today about pursuing more aggressively the growth strategy. Can you just talk a little bit more in detail what you're talking about there as in pursuing a little bit more aggressively? As a second question, if you look at your gross sales over the last few quarters, they've declined in equities and fixed income. Is this a concern for you as a second one? Thank you.
Yeah. On the first one, you know, I don't know how much more specific I can be. We've tried to point you towards the fact that we see ESG, we see re-channeling retail distribution, we see some product opportunities in alts and income. And we're hard at work in trying to find the very best, organic and inorganic ways, to get in front of those trends and do the best job to position us for growth. In another part of our comments, we mentioned alts and private debt and model portfolios. These are things that are right at the top of our list that we're, you know, working hard on and interested in developing. But it's not just what you want. It's also, something about what's pragmatically, a good opportunity in the marketplace.
Sometimes conversations can even come down to things like what are the prices for paying for some of these organic and inorganic developments. I think we've been as specific and clear as we can be with you at this point. You know, if you have a better idea of how to help my response, you know, help me refine it.
Maybe another way of asking that is, what do you think? You know, you've run through a number of things there. What are the more near-term opportunities that have potentials for you as opposed to more medium-term opportunities?
Yeah. Look, we, you know, by saying this, it's not like we're gonna have an announcement in these areas tomorrow. These are areas that we're working on, but one never knows how fast one can deliver change in those spaces. You know, my crystal ball is imperfect, but these are areas of high energy and high focus. That's what I can tell you.
Let me pick up on the second part on growth flows. You really need to split that into intermediary and institutional. When we look at our intermediary growth flows, and we look at them on a trailing twelve-month basis, growth flows are actually up, I think it's 30%. We're seeing really strong growth in intermediary, and we're seeing it in a number of different areas. As I said, I talked about in my script around the growth by geography. But if we look at that in product areas, you know, that includes great growth in global sustainable. It includes growth in European Equity that we haven't seen for a while. It includes strong flows in fixed income. It obviously includes strong growth in Balanced.
It includes growth in areas like our ETFs. Our AAA JAAA CLO I think raised $135 million in the quarter. Clients have now asked us to do a high-yielding ETF, and we've got prelim registration for JBBB. Intermediary flows, gross sales are strong, and they're increasing. What we haven't seen this year is a significant amount of funding on the institutional side. That's, you know, a little frustrating. There are, you know, a number of really good things going on behind the scenes. A bit of delay in funding, but that's what's driving those overall lower gross numbers you're seeing. I think you need to split it down into the two pieces. Intermediary is going very well.
Institutional, we're gonna wait a little bit longer for things to fund.
Okay. The pipeline in institutional is still there, it's just taking a little bit longer? Or are there some issues there on the institutional space?
No, we've always said there's investment for us to do in institutional. Again, we've talked about how we globalized that, how we strengthened that in the last. You know, we've brought on new people, new consultant relations heads. We're continuing to develop products in that area. Some of the things Dick's talked about around growth areas would also improve our institutional offering. But yeah, we've got a number of things with slightly delayed funding.
Okay. Thank you, Roger.
Our next question comes from Elizabeth Miliatis with Jarden. Please go ahead.
Thanks for taking my question. The first one is just on Intech. Obviously it's been a part of the business that's been struggling for a number of years, and the outflow that you recognized today was quite disappointing. I find it curious as well that on your momentum slide, you look at the business ex Intech. At what point in time might you start to consider, you know, potentially divesting that business, and focusing on the other four parts of the business and whatever inorganic things you might also find?
Thank you, Elizabeth. Look, Intech is facing some really challenging situations. It has been facing negative flows. Its performance this year is not what we needed it to be. It's fair to say that I'm working really hard with the leadership of Intech to assess what are the best opportunities, what are the ways you might reinvest in the business, what are the ways you might reinvigorate that business, because clearly it's going through an extraordinarily challenging period of time. You know, Adrian and I and the other leaders of that firm are in very intense communication about, you know, what are the best ways to help and to move forward into a better direction.
It's fair to say they're facing difficult circumstances and this year, their performance hasn't been as good as we would have hoped and needed it to be. I think we're not through the difficult period, there's more to go.
I think picking up the specific part of your question, Elizabeth, you know, what we said is that our intention, aspiration, but intention, was to be positive, consistently positive flows, ex quant equity, 'cause we knew that would take a little bit longer. That's why we separated it out. I think the other bit, and I think, again, most people realize this, is that, you know, an average fee rate of 45 basis points, that includes the quant equity business in the high teens. We disclosed that number in the Q4 results, in terms of the average fee rate. But that's why we split it out. We own the whole lot, but we, you know, we can. You know, we have an intention, aspiration, to be positive flow.
As Dick said, we have positive revenue on flows, but we're not yet positive on flows, ex quant equities. We are headed the right way, but we're not quite there yet.
Okay, got it. My second question is just on the non-compensation growth, sort of follow-on question to earlier. Your guidance does suggest a pretty big step up in the Q4, but I believe that's seasonal, so if you could give color on that. Looking out to FY 2022, should we expect more heightened cost growth coming through just in a post-COVID world?
As I said, there's you know there is some one-off in Q3. So sorry that we're telling you about now that will come through in Q4. There are as you say there are costs that you would expect to come through in 2022 as hopefully the world returns to a more normal base. We've all learned to adapt. I'm not expecting our T&E bill to be at the same level it was pre-COVID. But hopefully it will increase from where it is now as we go to see more clients that there is certainly demand to do that both from us and from our clients.
Yeah, you're right, there are some things which have been low for the last couple of years you'd expect to come through. We'll give guidance on next year with 2022 results. Sorry, with 2021 full year results.
Yeah. Thank you.
Our next question comes from Dan Fannon with Jefferies. Please go ahead.
Thanks. Just wanted to follow up on the inorganic discussion where you've obviously, you know, been a little bit more forthright in terms of thinking about that today and in the press release and on the call. I guess curious just more about why now, we're obviously seeing this industry is seeing a lot of consolidation, the value of scale. Just wanted to get a sense of how you are thinking about size, or appetite for larger transactions versus bolt-ons or a little bit more context around the inorganic opportunities that you are looking at.
Sure, Dan. You know, with respect to scale, I think we've talked about this in prior quarters. Scale is helpful if it comes with excellence, and diversifying excellence even better still in many cases. But not at all helpful, just to get bigger and get more mediocre. Scale won't save the day if you're not excellent. You know, the problem that a lot of mergers run into is excellence doesn't always run hand in hand with scale, and you got to be careful about that trade-off. Any transaction, any inorganic thing that we would look at would be primarily aimed at enhanced excellence more than just scale. But if you have that enhanced excellence, scale can be extremely helpful. We have benefited from the increased scale that we've had to make all sorts of investments across our business.
You know, it can be helpful as long as the quality level is maintained. In terms of, you know, the rest of what we're looking at, you know, I think I've been as articulate about that as I can be at this point. You're right, the prices for some things that you might otherwise like to do have gotten to the point where you probably won't do those things at this price. It's an intersection of, you know, costs and benefits, and you got to weigh the costs as well as the benefits. In the world these days, the price of transactions is definitely higher than it was in some prior periods. That counts in the equation, and it's definitely something we think about as we look to execute.
If something's really good and the right people and the right fit, you know, small differences in price are something that you know, bankers can work hard to bridge gaps. What we really wanna find is we wanna find the right fit in terms of excellence and in terms of culture. That's always a hard thing to find. You always have to describe that as sort of a tail risk. The middle of the bell curve is, you know, you probably don't find a lot of those opportunities. They're hard to find. It's hard to find really good things that are inorganic. Most of them may be good in their own right, may be good in a different context, but won't fit you. It's hard to predict, but what we're signaling, I think very clearly on this call, is we're looking.
Understood. Then, Roger, just to follow up on some commentary around kind of the institutional stuff and kind of the outlook for flows as you look into 2022, you seem to be a bit more optimistic there. You also mentioned a few hires. Maybe you can just a little bit more context in terms of, you know, what, as you look at either performance or products or some of the momentum or maybe less of a redemption, you know, kind of issue as you think about the near term. Curious just more around the outlook and the positive zone as you think about next year.
Yeah, I mean, institutional will always be, you know, more lumpy than the intermediary business. We saw that in Q4 last year when we had some really strong growth flows. And, you know, under Suzanne Cain's leadership, Nick Adams specifically around global institutional, you know, that's a team we've been building out. As I say, we've brought on this year a new, very strong global head of consultant relations. This quarter, we've added a new head of global, of North American institutional. That's an area we are just, you know, we're just mis-sized in. So, you know, you know, there will be more work to do. We've added a new head of US consultant relations, as well.
Nick and team are working really hard. There are some really interesting things, but as I say, you know, institutional is a, I guess, more of a rifle shot type game. We need to continue to diversify that pipeline, you know, that's what the team are working on. Sorry, I can't really get more specific than that. Sorry, Dan.
Understood. Thanks.
Our next question will come from Patrick Davitt with Autonomous Research. Please go ahead.
Hey, good morning, everyone. First one, last year, you know, around this time, you started to indicate concern about the performance in those Mid Cap Growth strategies. Indeed, the flows did get worse. Now this year, we're seeing a similar decline in the one-year performance in the multi-asset bucket. Is there something about the Balanced strategy that you think can make it more resilient than the equity side? Or is it just that the three and five-year numbers are still pretty good?
I think the Balanced—if I'm not mistaken, I think the Balanced remains ahead of its benchmark, although perhaps not as far ahead as some of its peers, but over medium and long term and very long term, it's exceptionally strong as a track record. I do think in Balanced, in multi-asset portfolios, sometimes clients can be slower to move. Those tend to where the asset allocation is built into the product.
Yeah.
They can be slower to move. I think both things that you point to are true and have an effect on balance. Balance is still, you know, leading inflows across, you know, every region for us. It continues to be a growth story.
Great. Then second one, sorry if I missed this somewhere in the materials, but could you give an update on how much AUM you believe is kind of true ESG or impact and how flows have been tracking there?
I guess we didn't give that, Patrick, because it's a difficult one. A significant amount of our assets are ESG influenced, and we're working through that. The sort of taxonomy as to what that is, as you know, the whole industry is sort of and regulation is grappling with. Very specifically, we've got a global sustainable equity product that's thirty-odd years old and has had the same manager for a decade, and has fantastic numbers, and is growing very well around the world. That is about a $4 billion strategy. We've launched a number of new specific ESG Article Eight and Article Nine funds, and we'll register a number more.
About half of our AUM in our European range, in our Luxembourg range, will be specific, you know, will be registered ESG, hopefully by January next year. We've been very cautious. I think we've talked about this in the past. We do think some people have jumped to count as much as they can. As you would expect, hopefully from us, we've been a little bit more cautious around that. We wanna do the right thing, we wanna do the right thing from our clients, and we wanna do the right thing with regulators. We have been cautious around that. You know, again, another example would be the five ESG ETFs that we've launched this quarter. We've taken our
Our investment teams, as you know, manage money, you know, you know, with a breadth of style. We don't have one investment discipline or top-down strategy, if you like. We do have an integrated ESG team. We've taken that from four people that is rising to around 15 people, working very closely with our investment team. It's an incredibly important area. We're moving fast, and we have a base, as I said, of 30 years of being involved with ESG. We've got a really good foundation. We just wanna make sure we leverage that properly, rather than jumping to some things that you may be seeing elsewhere.
Dick, anything you'd add to that?
No, I'd just underline. Look, ESG is not going away. It's for real, it's here, and it's growing. Climate, every scientist or scientific thing I read suggests the climate challenges are going to continue to increase. As a consequence, I think, you know, it will rise in importance in regulators' minds and client minds. You know, I think this is something that our industry and the world is looking to integrate and reconcile with in the right way. There's a bunch of unknowns, and we're grappling with that. As Roger said, we're very committed to doing things the right way.
We don't wanna make promises that we don't know how to deliver and then, you know, make a big public statement and then run home and look at each other and say, "Well, how are we actually gonna do that?" We'd rather do it in the other order, which is to know how we're gonna do something and then make the public promise. I think that may not be everyone's approach, but that's been ours. That may make us just a tiny bit slower than others to make some of these promises, but we're very much on the path and working hard and going as quickly as we can.
Helpful. Thanks.
Our last question today will come from Alex Blostein with Goldman Sachs. Please go ahead.
Hi, everyone. Good morning. This is actually Aditya just filling in for Alex. Just a quick question on fee rates. Your fee rate remains very resilient, especially relative to the rest of the industry. Can you speak to how much of that stability is coming from the mix shift of the underlying assets? And also, how are you thinking about pricing on new mandates won?
If I take the first part, and I'll leave you to think on the second part, Dick. You're right. It's a blend of both. I think I guess you could back into it from you know, from our description of flows. We said that flows you know, this is ex the quant equity business. Flows of $3.3 billion year to date have around $10 million of positive revenue. You know, we are adding higher fee business. Clients value what we do. They're asking us to do interesting business, and they're you know, and they're paying you know, a right price for that product. We are adding to the fee mix. On...
You're right. On top of that, there is beta and that has come through over the last couple of years as equity markets have risen. You know, I think it is. You know, I'm pleased it's been picked up. It's what we've always said, is that assets aren't the only measure. They are the very simplistic measure of comparing businesses in our industry. Not all assets are made equal. We're very pleased to be adding quality assets and have seen our fee rate increase over 2 basis points over the last two years. You know, it is a combination of the two. Dick, in terms of fee rates with clients.
I don't have anything magical to say about how we set fee rates with clients. We try and have a philosophy where you charge a fair price for the alpha or the expected alpha that you deliver. We also charge all of our fees against a marketplace which is highly competitive. The two inputs tend to be, you know, what's a fair ratio of the expected alpha, and what's the market price? We sit down with those two ideas in our head and try and price things fairly. You know, I don't think we have any special insight or magic to it.
Where we're looking to grow, where we're focusing our energies, where we have some opportunities, we've clearly directed internal resources towards opportunities that we view as not only, you know, better alpha for the clients but better economically for us as well. Some of those things are working. I mean, we launched a new hedge fund last year in life sciences that's still pretty small, but $ a few hundred million and with the opportunity to grow significantly. Obviously, those assets are depending on what you imagine performance fees might be, 10, 15, 20 times as valuable as, you know, the average asset in the firm. We're trying to focus on opportunities that represent the core of what we do for a living.
We use research and very careful hard work to uncover the opportunity to deliver alpha where alpha matters. You know, we wanna be active where the clients really care about a differentiated and active approach. I think we're doing a good job of focusing our resources there. Some of the outflows have been in places which are, you know, much lower priced. As a consequence, the shift has been good in addition to the mix shift resulting from the beta. With that, I'm sorry?
I think there may be some more questions.
There may be. We apparently have some more questions, so we could keep going. Operator, we can take some more questions.
Our next question will come from John Dunn with Evercore. Please go ahead.
Hi. You guys talked about increasing allocations to alts, and I think you mentioned private debt, but maybe you could just talk a little more about areas you might wanna push into in that space. Then maybe just more generally, what you want your alt segments kinda look like a few years from now.
Yeah. I think in an ideal world, you'd have alts that on an economic basis was a third or fourth pillar in the firm, that it was of a size that when equity beta went against you, uncorrelated returns could really you know, diversify and carry the weight. That would be a very significant change from where we are today. That would be a whole lot of alts, but that would be the ideal. As you look across the spectrum of the kinds of alts, you've gotta ask yourself, "Well, what would we be good at? What relates to work that we already do? What relates to reputation and relationships that we already have with our clients?
How can we benefit from taking the franchise that we have and developing it into some of these opportunities?" You know, not all the alts possibilities are a good fit for us. We've looked across the spectrum, and we have some ideas that some are better fits than others. We've mentioned, you know, private debt as something that might have a good fit. It's related, I think, very closely in terms of what we do to the credit work that's already in the house. I think it relates to the reputation that we already have with the clients. I think our distribution would know how to assist in building relationships for that kind of an approach. Then again, the pricing for that these days in the current world is extremely robust.
Whether or not you could find an opportunity in that space, who knows? We'll see. Clearly, there are some kinds of alts that are better fits for us than others, and we're trying to be very sensitive to those truths.
I guess in the meantime, you know, we will continue to grow what we've got in-house. You know, we've got a very successful absolute return range in Europe. Dick mentioned, you know, the hedge fund that we added on to the very successful life sciences business. I've talked in prior quarters around multi-strategy being something which again, you don't really notice it in asset terms, but it is an alt type C product. So, you know, we're growing the alts business organically as well. You should look forward to seeing continued results from that.
Great. Then just a quick one on digital. You mentioned institutionalization of solutions in digital and how, you know, a bunch of people are bulking up in that region, like that area. You know, what's some of the stuff that can help you be one of the winners in digital?
Well, first and very exciting, our newest board member, Alison Davis, really knows a lot about this space. If you go look at her record, she's written a couple books, and she is well-versed in, you know, what the blockchain technology is doing for ownership of assets and the creation of some new markets. I think there's over $2.5 trillion of Bitcoin in the world these days. Not just Bitcoin, but electronic currencies combined. This is, you know, a major development in financial markets, and it isn't gonna stop. There'll be frauds, there'll be volatility, there'll be all sorts of mess, but underneath it, there's a trend here which is important and will be sustained in changing how assets are owned and what legal vehicles clients can use to access certain investments.
Younger people tend to like some of these newer tools more than some of the older legal vehicles. I think it behooves us to pay a lot of attention to that and to try and get educated. We're at the beginning phases of that industry. We're also at the beginning phases of our involvement and learning about it here at this firm. I wouldn't expect us to do anything, you know, too wild and dramatic, but I think it's a place where we ought to have an oar in the water. I think it's and we ought to be developing our knowledge and our participation with an awareness that a bunch of this stuff is gonna turn out to be fraud or wrong-headed.
You gotta be cautious in a sort of a Wild West market like digital assets are today. It would be foolish to ignore it. We're looking for opportunities to participate in an appropriate size and way. The good news is we have some people internally who know a good bit about it. We also have a board member who knows an awful lot about it, and obviously, the world has some other experts who are willing to help educate us. We're looking and learning and looking forward to finding ways to participate, albeit, you know, more cautiously than some.
Makes sense. Thanks very, very much, guys.
Our next question comes from Nigel Pittaway with Citi. Please go ahead.
Oh, hi, guys. Just thanks for taking the question. Just wanted to return, if I could, to the lower compensation expense and the explanation there that it was due to lower revenue, particularly performance fees. Or at least to give us.
Yeah.
a broad idea of how the performance fees actually impact comp, because my understanding was it wasn't as direct an impact as it used to be.
Well, no, you see, but you know, our variable comp is. The simple answer there is, Nigel, is our variable comp is variable. Revenues were $58 million lower this quarter.
You're right, that was, you know, more than all of that, $77 million of that was performance fee decline. You know, that drives lower variable comp. That's the vast majority of the reduction this quarter.
Okay. I mean, obviously, if it was all due to revenue, you wouldn't have this sort of big expansion in the operating margin. It just seems as though there might be something else there.
Well, you've also got LTI, yeah. LTI has got a big you know it's a much lower number this year. You know, that's you know LTI is mark-to-market. You know markets have risen for four quarters in a row, and therefore our LTI has been high for four quarters. Q3 markets were flat to slightly down. We also did have a you know one mark-to-market fair value adjustment on one particular LTI award. LTI is also a part of that, driving that a little bit lower.
Okay, thank you.
Again, that's high in the past and low now.
Our last question today comes from Marcus Barnard with Bell Potter Securities. Please go ahead.
Yeah, morning, gents. My question sort of follows on from the activist investor, Trian. I'm just wondering if having that person on the shareholder list changes the way you think about running the business. I'm not talking about major changes. I'm just thinking about at the margin. Do you think about risk differently? Do you think about hurdle rates differently? Are you thinking more about returning cash to shareholders rather than investing in the business? I'm just interested in your thoughts on that. Thanks.
I think we've already been thinking about all those things as hard and well as we could. You know, I think knowing that there's another sharp pair of eyes and an active largest shareholder who's, you know, focused on all the numbers and all the details and cares a lot about it and will be communicating actively, it, you know, probably adds energy into the system and sharpness, you know, to the conversation. Do we get up a few minutes earlier and look a little harder? I don't know that I could prove that scientifically, but probably it adds that sort of energy into the system.
Really substantively, all the issues that we're thinking about, we have been thinking about, you know, we're doing our best and are still doing our best. We were open to ideas not made here. We still are open to ideas not made within these four walls. When I say it, I really mean it. We don't care. We just wanna win. We're happy to collect good ideas and advice from our owners, as we always have been. Certainly Trian is a place that, you know, can have really good ideas and offer good advice. That's another good place to go to listen to ideas, so we're happy to go there. It really doesn't change fundamentally how we think about running our business.
I think we've laid out what we think is the best path for driving that with our best abilities. With that, I think we've taken our last question. I just wanna thank everyone for your time and attention today. I hope the presentation has been useful to you. As always, we'll be available to you after the call to collect ideas on how we can do better in the future. Be safe and be well. We'll talk to you next quarter.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.