Good morning. My name is Nicole, and I will be your conference facilitator today. Thank you for standing by, and welcome to the Janus Henderson Group second quarter 2020 earnings conference call. 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.
Thank you, operator. Welcome, everyone, to the second quarter 2020 earnings call for the Janus Henderson Group. As usual, I'm joined by Roger Thompson, our CFO. Let me start by saying that I hope all of you and your families, and your loved ones are all safe during this unprecedented global health crisis. As we've said on previous calls, on the second and the fourth quarter, we try and give a longer-term perspective on our business. In line with that promise, today Roger will run through the quarterly results, and I'll try and give you a bit more discussion on business and strategy. Then, like usual, we'll take your questions. Turning to slide one. This quarter represents our three-year anniversary since the closing of the Janus Henderson merger.
Before I turn it over to Roger to go over the quarterly results, I just want to touch a little bit on the strategic journey that we've been on over these three years. The industrial logic of the merger between Janus and Henderson was all about bringing two independently successful firms together because they had complementary strengths. By joining them together, we felt we could gain the benefits of those complementary strengths and also increase scale and diversification. As we went through the merger, we identified three immediate priorities. First, we needed to learn how to deliver growth from our enhanced global platform. Second, we needed to consolidate the business footprint and the infrastructure to leverage the benefits of scale. Third, we needed to deliver cost savings. Turning first to growth. The promise of growth has clearly taken longer to materialize than we planned, targeted, or we would've liked.
In this most recent quarter, our institutional flows have been particularly frustrating given the progress that we are making across our business. That said, we're seeing encouraging signs, and we're confident that with the work we're doing to move our company to Simple Excellence, we're going to deliver better results. Later in the call, I will update you on the more specific steps that we're taking to deliver our Simple Excellence strategy, which should lead us to delivering positive organic net flows and profitability growth. Second, we've been successful in creating a unified company with a common culture. That's the work of years, and I think we've made really good progress in recent years and are delivering a strong global culture. We now have a very strong global product lineup.
We've enhanced that with a truly global distribution team, and we are now supported by integrated platforms and operating systems underpinning all of it. We've made challenging but essential long-term decisions to simplify our model, and going forward, we're going to drive modernization across products, capabilities, and global client servicing while still exiting as we have marginal businesses and reducing complexity. Turning third to costs. Through the merger, we successfully delivered $125 million of savings, both ahead of schedule and a bit higher than we targeted. Since that initial phase, we've maintained good cost discipline through our business. Discipline is not really a destination, it's a journey.
Taking a look at the fact that we're three years on living in our shoes as Janus and Henderson, taking a look at the lessons that we're currently learning around the possibilities presented from working at home and more electronic servicing of clients, that's been the bright edge of this terrible dark cloud of the global health crisis. We think it's an appropriate time to take a hard look at our business structure and our expenses, all the while balancing that against the appropriate investments necessary to deliver simple excellence. I'll update you in next quarter and quarters ahead as we progress down the road of re-examining our cost structure, as well as the investments necessary to support simple excellence. In summary, we're confident that our merger has positioned us for success as an active manager. Although we own and acknowledge that it hasn't happened faster.
I'll get more into our strategy and the steps we're taking a little bit later in the presentation. Before I turn it to Roger, let me say a word on the very important topic of diversity and inclusion. Recent events have quite rightly outraged society, triggered really important conversations about prejudice and racial injustice in our communities and institutions, and our firm is no exception. At our firm, we recognize that we are Stronger Together and that our outlook is shaped by people's varied skill sets, backgrounds and cultures. This diversity helps us explore unique avenues and uncover opportunities that are unseen by others and underappreciated by others in our industry and in investing. We are committed to creating an inclusive environment that promotes cultural awareness and respect.
As an example, we committed to reach our women in finance target of 25% by 2022, and we've already met that target. We are encouraged by this progress and wish to continue to build on these first steps. In addition to examining our employee demographic data to understand and measure our progress, this quarter, we've launched a Stronger Together campaign. It is an internal and external initiative that addresses systematic racism, social injustice, allyship privilege, microaggressions, and more. Look, we realize that we have a long way to go. We realize that we need to continue to get better, but we're working hard at it. We're trying to make Janus Henderson a firm that deep in our culture, we value diversity and inclusion, and we treat all of our people with respect. I will now turn it over to Roger to walk through this quarter's results.
Thanks, Dick, and thank you everyone for joining us. I sincerely hope everyone and your friends, family, and colleagues are safe and healthy. Looking at the second quarter's results. The market bounce back during the quarter provided a significantly better backdrop for AUM and financials compared to when we spoke last on the April earnings call. Net outflows of $8.2 billion are disappointing. However, with the strong markets, AUM increased 14%. The overall flow figure marks a strong and important rebound in the intermediary business. Investment performance remains solid, with 60% or more of assets beating their respective benchmarks over the one, three, and five-year time period. Adjusted EPS of $0.67 was better compared to the $0.60 and $0.61 for the prior quarter and the same period a year ago.
Finally, we returned $88 million of cash to shareholders during the quarter via dividends and share repurchases. Moving to slide four on investment performance. Investment performance remains solid, with 60%, 62% and 68% of firm-wide assets beating their benchmarks on a one, three, and five-year basis as of June 30th. Short-term improvements came primarily from our equity and fixed income capabilities. We're encouraged by INTECH's year-to-date performance. The longer term performance remains a concern. Relative performance compared to peers is strong, with at least two-thirds of AUM represented in the top two Morningstar quartiles on a one, three, and five-year basis, the majority of which is in the first quartile. Turning to total company flows. For the quarter, net outflows were $8.2 billion compared to $12.2 billion last quarter. Flows improved quarter-over-quarter, the result is not where we expect it to be.
The quarterly flow number reflects the continuing trend of positive flows into our intermediary business, whilst institutional saw significant outflows. Intermediary flows were positive for the quarter across the U.S., EMEA, and Asia-Pacific. Our U.K. business within EMEA posted its first positive result since the fourth quarter of 2017 and its best quarter since the merger. While U.S. intermediary flows remain positive and relatively diversified, year-to-date investment underperformance in our U.S. SMID and mid-cap growth strategies could impact flows in the second half of the year. We remain encouraged with the institutional pipeline and its diversity across strategies and regions. The focus now is to realize some of those opportunities. Dick will speak more around our strategy on distribution later in the presentation. Moving to slide six, which shows the breakdown of flows in the quarter by capability.
Equity net outflows for the second quarter were $4.2 billion compared to $6.9 billion in the prior quarter. The improvement was primarily due to better market conditions. The equity result reflects a $1.6 billion redemption from an EMEA client who has experienced strong performance and with whom we continue to maintain a strong multi-product relationship. This redemption was simply a de-risking of their portfolio. Flows into fixed income were - $700 million in the quarter, primarily due to a few smaller mandate redemptions. In retail, we continue to see positive flows with several strategies producing inflows, including strategic fixed income, absolute return income, European investment grade, high yield, and our ETFs, JMBS, and VNLA. Those fixed income ETFs were $600 million positive for the quarter and are just under $1 billion of net inflows for the first half of the year. INTECH outflows were $3.9 billion.
Multi-asset flows of +$700 million were driven by strong flows into the Balanced strategy. Alternative net outflows improved to $100 million. Pleasingly, our U.K. Absolute Return Strategy turned positive during the quarter, reflecting its good performance. Slide seven is our standard presentation of the U.S. GAAP statement of income. There is one item to mention impacting the GAAP results this quarter, which is non-recurring and hence not included in the adjusted results. The recent announcement by an unrelated issuer to delist their VelocityShares ETNs impacted the value of intangible assets, which resulted in the impairment of $26.4 million. I remind you that this is a non-cash adjustment. Moving to slide eight for a look at the summary financial results.
Adjusted second quarter operating results were down compared to the first quarter, primarily from lower average AUM. While AUM recovered during the second quarter, average AUM still decreased 8% given the low starting AUM entering the quarter. We enter the third quarter with 4% higher AUM compared to the second quarter's average. Total adjusted revenues in the quarter decreased 7% compared to the prior quarter on the lower average AUM, partially offset by better performance fees and higher net management fee margin as a result of strong markets, outflows from lower fee assets, and inflows into higher fee strategies. Adjusted operating income in the second quarter of $138 million was down 16% over the prior quarter, driven principally by lower revenue. Second quarter adjusted operating margin was 33.5% compared to 37.2% in the prior quarter and 35% a year ago.
Finishing up the financial results, adjusted diluted EPS was $0.67 for the quarter, compared to $0.60 for the prior quarter and $0.61 a year ago. Despite the lower operating income, the cost of EPS benefited from mark-to-market on seed capital, mutual fund share awards, and other investments. On slide nine, we've outlined the revenue drivers for the quarter. Lower average assets was the biggest driver of the quarterly change in adjusted total revenue. Net management fee margin for the second quarter was 45.7 basis points, up from 45.1 basis points in the first quarter and 44.9 basis points a year ago. The margin remains resilient and has increased for three straight quarters. The quarterly increase is primarily due to mix shift and our focus on quality flows.
Performance fees were $17.2 million in the quarter versus $14.6 million in the prior quarter and up from $3.5 million in the second quarter of last year. The second quarter has a significant pool of AUM eligible to earn performance fees, including the SICAV Horizon Range and our U.K. Absolute Return Strategy. In the quarter, we were pleased that both of those ranges of funds earned performance fees, reflecting the much-improved investment performance. U.S. mutual fund performance fees in the second quarter were a - $4 million. Finishing off adjusted revenue, other revenues declined $3.1 million, primarily on lower average assets as well as lower revenue from the ETN business. Going forward, we'd anticipate this line to be slightly lower on a run rate basis due to the uncertainty around the ETNs, which make up a small proportion of other revenue. Turning to operating expenses on Slide 10.
Adjusted operating expenses in the second quarter were $275 million, which was a 1% decline compared to the first quarter. Outside of the increase in LTI, which is market driven and out of our control, the quarterly expenses reflect our profit-based variable comp structure, cost discipline, and our focus on running an efficient business. We remain committed to managing our costs in the light of the elevated uncertainty being created by the global pandemic. Adjusted employee compensation, which includes fixed and variable staff costs, was down 6% compared to the prior quarter. Fixed staff costs were down 3% and variable compensation was lower by 10% due to lower profits and lower sales. Adjusted LTI was up 46% from the first quarter from the absolute impacts of the mark-to-market adjustments in both quarters. In the appendix, we provided updated detail on the expected amortization of existing grants.
The second quarter adjusted comp to revenue ratio was 47.1%. This higher ratio reflects the significant mark to market in our LTI expense in the second quarter. When looking at the first half of the year, the comp ratio on average is 44.7%, which is in line with our mid-40%s guidance. Adjusted non-comp operating expenses were down 11% compared to the prior quarter. The decrease is primarily related to full quarter impact of COVID-19 and our strong cost control, particularly around G&A and marketing. For the year, we now anticipate our non-comp expenses to be down low single digits compared to 2019. Finally, our recurring effective tax rate for the quarter was 22.9%, which is just below the statutory rate guidance of 23%-25%. Lastly, slide 11 is a look at our capital management.
Cash and cash equivalents weigh $880 million as at the 30th of June, of which Janus Henderson's portion was $837 million. You should think about the amount of cash we have on the balance sheet as what the board and management are comfortable operating the business with due to the regulatory requirements, a conservative working capital buffer, and a cash set aside to meet the 2025 debt maturity. As we said previously, we remain committed to returning excess from future cash flow generation to our shareholders. During the second quarter, we paid approximately $66 million in dividends to shareholders and today declared a $0.36 per share dividend to be paid on the 26th of August to shareholders of record as of the 10th of August. We purchased 1.1 million shares of our stock for $22 million in the second quarter.
Our board and management are committed to maintaining a strong balance sheet, which is why, given the low market levels at the start of the quarter, the buyback was lower in the second quarter. Our thoughts around the buyback have not changed, and we believe it is a good use of our excess cash. We will commence the next stage of the $200 million authorized buyback shortly. Now I'd like to turn it over to Dick for an update on our strategy.
Thank you, Roger. I mentioned at the beginning of our call that our strategy is simple excellence. Underneath that strategy, we have five strategic priorities that I'd like to talk to you a little bit about right now. Turning to slide 13. Our strategy is centered on the belief that a combination of relentless focus and disciplined execution across the fundamental parts of our core business, that will drive future success as a global active asset manager. Specifically, our strategy is designed to deliver organic growth and increasing profitability. Let's look at each of the pillars individually. Turning to slide 14. I'd like to highlight some of the work that we've undertaken towards our goal of producing dependable investment outcomes. We have world-class investment teams, and they have overwhelmingly demonstrated industry-leading results, exceeding both benchmarks and peers since the merger.
While the downturn was a shock in many strategies, and admittedly set us back in some places, long-term investment performance remains strong, and our teams remain stable and focused. We're pleased that our one-year performance numbers have improved since last quarter. In the first half of the year, we have taken steps to further strengthen our investment team. We've recruited some excellent talent. Greg Wilensky joined us earlier this year as the Head of U.S. Fixed Income. Matt Peron joined us in April as Director of Research. In addition to those crucial positions, we've made several high-quality additions to our already strong group of analysts. We're very pleased that we continue to be able to recruit the talent at the top of the market, the very best that we see in the marketplace.
Turning to slide 15, we take a look at how we have developed our client experience and enhanced our global distribution platform. As you know, Suzanne Cain joined us as Head of Global Distribution just over a year ago. She's brought real energy and focus and globalized what, to a substantial degree, had been pretty regional efforts. She's revitalized and consolidated her teams under a truly global distribution umbrella. What this has enabled us to do is to take a more focused and strategic approach to global distribution. That includes both products and clients, and it stands on our ability to leverage our client tools more globally. As a small example of this, in the U.S., we have our portfolio construction services portal, our PCS, which is a dedicated award-winning service that we offer intermediary clients. It's very, very popular and well-received in the U.S.
We've just recently launched that in the U.K. and made it available, started making it available anyway, to U.K. clients. It's been well received, and we're very optimistic that that will enhance our ability to build the right kinds of relationships with U.K. clients. Look, we recognize our flows are not where we aspire or need them to be, particularly in institutional, which as I mentioned earlier, has seen a frustrating second quarter. Our efforts are beginning to pay off in many important ways. Annualized organic net growth in our intermediary channel for the quarter was 3%. Our gross sales momentum is strong, and we've substantially recovered from the market dislocation in March. We're capitalizing on a strong list of focused products with high growth potential. We're launching select new vehicles to ensure our products have the appropriate global reach.
For example, in the quarter, we extended our market-leading global sustainable equity offering to the U.S. with launches of a '40 Act and an SMA. We also launched our global multi-strat fund in a UCITS structure and with an Australian-domiciled feeder for distribution in Europe and also Asia Pacific. Despite elevated year-to-date outflows in institutional, despite the fact that the COVID crisis has created delays in searches and in funding of one business, we remain optimistic about the potential we see across the strong and diverse pipeline in our institutional business for the second half of the year. In addition, we continue to make changes and globalize our institutional business to further enhance how we successfully work with clients who often share common objectives and face common challenges, despite the fact they're in different places around the world.
We're learning and positioning to do better in our institutional business globally. Our distribution efforts are complemented by our client experience program, where we've been enhancing and redesigning our most important client journeys. The improving feedback loops that we're building are driving improved client experiences that we intend to move up to market leading status. Done well, we're confident that this global client-centric approach will produce more sustainable relationships, allow us to increase market share, and build longer duration client assets for everyone's benefit. Turning to slide 16. I'd like to highlight some of the work we've been doing around increasing focus and driving efficiency in our business. We operate a complicated global business. It's diversified across regions, across channels, across products.
We believe it is critical for us to keep a focus on what's important, to have strong prioritization, to operate with excellence, and invest in the best infrastructure to support our teams around the world. Looking at focus, I'll give you a small selection of initiatives that we completed. We wound down our Australian equities product. We divested Geneva. We outsourced some of our middle and back-office functionality to BNP Paribas. On the efficiency front, we've moved largely to a single global operating model, maintaining global platforms underpinning our business. All the while, we've maintained a balanced approach between costs and investing selectively. Finally, as I look to the future, we're undertaking a host of actions to strengthen and modernize our infrastructure, which among other things include implementing a major upgrade to our OMS and portfolio risk systems. We're enhancing and modernizing our data architecture and our data stewardship.
We're upgrading our CRM and our client analytics. These are important investments, will help drive towards the goals of simple excellence. Let me remind you that we delivered $125 million in merger-related cost synergies ahead of schedule. While we are maintaining cost discipline, efficiency isn't a destination, it's a journey. What we need to do is keep pressure on that. We're not going to sacrifice making the appropriate and necessary investments in order to deliver simple excellence, we are going to renew and rededicate our focus, ask ourselves the hard questions around our cost structure, as I said, I'll be getting back to you with the results of that balance in future quarters. Slide 17 covers our fourth strategic priority of proactive risk and control environment. Frankly, if you don't do this, you're not going to get a chance to do much else.
Having a strong proactive risk and control environment, a strong compliance culture, is necessary to maintain the trust of clients, to maintain the trust of regulators, and to deliver for our owners and our employees. It's just essential. I won't go through the specifics highlighted on this page, but know that it is a crucial thing for us, perhaps especially during this time when so many people are working from home, that we maintain a focus on proper compliance, proper risk, proper control environment. Turning to slide 18, where we give you some insight into new growth initiatives. Our expansion strategy is centered on leveraging current investment and distribution strengths. That means we're largely led by strengths combined with where our clients are moving. We're focused also in that effort on delivering profitable growth.
On the product side, right now we're supporting our growth in the ETF business where we've already seen really good momentum. Our VNLA and our JMBS ETFs ranked fifth and 15th in year-to-date flows out of over 100 actively managed fixed income ETFs. Today, in Australia, we listed our second active fixed income ETF in that market. Regionally, we are committed to expanding our presence both in Asia Pacific and in LATAM, where we see increasing client demand and underlying growth characteristics that can help us achieve our aspirations. Finally, we remain alert to other expansion opportunities which complement our strategy and our operating model. In conclusion, before handing over to the operator for questions, I'd like to wrap up my view of the second quarter for you.
Despite extraordinary challenges driven to a significant extent by the global COVID-19 pandemic, we've delivered strong financial performance in the second quarter, and our long-term investment performance remains solid. Our intermediary channel remains strong with $900 million of positive net flows and a 3% annualized organic growth rate for the quarter. It's driven by a really nice diverse set of products and across a diverse set of regions. Progress across our business in this quarter really was masked by recent institutional outflows. We continue to have good opportunities in pipeline to improve those institutional flow results in the future. We're convinced that we are on the right path to organic growth and to increasing profitability with our focus on our strategy, simple excellence. We will renew our strong focus on costs balanced against appropriate investments to achieve simple excellence.
We're confident we're on the right path to deliver for our clients, our owners, and our employees, as well as to continue to make really positive contributions to the communities in which we operate. With that, let me turn it over to the operator to get your questions.
Thank you. Ladies and gentlemen, at this time we will conduct the question and answer session. In the interest of time, questions will be limited to one initial and one follow-up question. If you would like to ask a question, please press star one on your phone now, and you will be placed in the queue in the order received. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, please press star one to ask a question, and we'll pause for just a moment to allow everyone an opportunity to signal for questions. We'll take our first question from Ken Worthington from JP Morgan.
Hi, good morning. I wanted to follow up on your comments on the institutional business or institutional distribution. The assets there contracted this quarter while other channels are growing. We know INTECH is a big part of that institutional channel, but at this point it's less than half of the assets. How are the non-INTECH parts of your institutional distribution performing? Maybe what is the path to growing institutional assets even if INTECH continues to suffer outflows?
Thanks, Ken. Nice to hear from you. Institutional flows were just a little bit less than half INTECH. It was a fairly diverse set of other things. We mentioned, I think already in the comments, that we had a substantial redemption from a strong multi-product client, with whom we continue to have a great relationship, but they were de-risking their portfolio. That was part of it. We had a redemption in our global value strategy out of Perkins in Chicago. We had some in other places as well. It was sort of a smattering of, to me, somewhat surprising, hopefully one-off events that nailed us in this quarter. Our institutional business is not as strong as we need it to be. We think with Suzanne Cain's leadership, with Nick Adams, who runs that business out of London, we're taking the right steps to strengthen it.
Clearly, looking at our contacts and communications with clients, we have opportunities ahead to do substantially better than this mark. That has to be delivered, as Roger likes to point out, you don't count it until the cash comes in. We're taking steps to strengthen the process, strengthen the technology, strengthen the team for the non-INTECH institutional business. We're confident that's going to work. The institutional business takes time, and it's subject to lumpy flows one way or the other. In this case, in this quarter, the lumpy flows were against us, and so we're just going to rededicate ourselves to making sure that doesn't happen again.
Okay. Thank you. Then on the direct channel, you reopened the direct channel. I think while it was closed, that maybe Janus didn't invest in some of the basic tools that some of your direct channel peers were making. Why have the risks to the intermediary channel from opening the direct channel diminished? Are you considering investing in the direct channel? If so, what are you planning?
Yeah. We closed the direct channel in 2009 when investor preferences shifted and investors changed their choices from doing business with a single fund company to doing businesses with platforms that offered them a choice of many different asset managers' funds. We were concerned, as you point out, I think, about the potential for competition between advisor-led distribution and our direct distribution. Since 2009, that's been closed. We've now reopened the D share class on July 6th. It's still too early to assess how effective that's going to be in improving flows in our direct channel business in the U.S. It's not a huge investment in sort of competing with Fidelity. It's a way to better serve the needs of the existing shareholders and folks close to them. It won't be a broad, open retail push across the United States.
We think there's a good chance that we can improve the flows in our historic direct business with this moderate effort on reopening. It's just too early to say if it's going to work, but we're optimistic.
We'll move on to our next question from Ed Henning at CLSA.
Thank you for taking my questions. Just a couple from me. Just further on to the flows, and obviously you've touched again on the strong pipeline and what you're doing there. Can you just run through gross sales and the movement, especially maybe from month to month to get a feel of how that's tracking, especially in equities? If you look in equities, the gross sales have trended down for the last three quarters on slide 24.
I think gross sales have moved around certainly in the quarters. One of the biggest effects of that is what's happening in the relevant marketplaces, especially in retail, where you see gross sales. We're a pretty substantial participant in most of the large retail markets that are important to us around the world, and we're not going to escape huge trends that happen in those retail marketplaces. I don't think there's a bigger message to the gross sales number than that. We're not drawing one from the small changes that you see. It has a lot to do with investor appetite. As we've said, our investment performance remains strong, and we're going to be subject to things like COVID-19 in the first quarter and some summertime seasonality in the second quarter, and you're going to see some of that across every player in the industry.
We're not drawing big messages from the changes in gross sales at this point.
Just on that, with obviously COVID hitting early in the quarter, did it improve towards June, towards the end of the quarter?
Not massively. There's ups and downs in different markets. I think, I guess right at the beginning, we were still coming out. May and June were probably better than April. Again, I wouldn't draw any huge lines from it.
Our next question comes from Mike Carrier from Bank of America.
Good morning, and thanks for taking the question. I just have one. Roger, I think you mentioned just on some of the U.S. growth strategies, I think on the SMID side, some weaker performance. I think you just indicated on the second half, could impact flows. I just wanted to clarify, was that on the institutional side, or were you saying more on the intermediary side, and are you just raising a flag just because the performance is a little weaker, so you could see something? Or if there was something actually already known that could impact the outlook? Thanks a lot.
Yeah. Thanks, Mike. Yeah, thanks for clarifying or asking for clarification. I think we've got a range of strategies. There's some things that are fantastic. Our overall performance, as we've talked about, is pretty damn good. There's some things which we think are going to move faster. European equity, I'd say, is on the front foot for the first time in a while. That's great to see, and you're starting to see that come through in our European flows. Our U.S. SMID and mid strategies, which have been fantastic for many years, have had a tough few months. I think we're just recognizing that they're big strategies, and short-term performance has been pretty challenged. They've been fantastic strategies for a very long time for clients. I guess we're just pulling that out.
It's retail, it's not institutional.
Sorry. That is in retail, yeah.
Right. Okay. All right. Thanks a lot.
Okay. We'll take our next question from Simon Fitzgerald from Evans and Partners.
Thank you very much for taking my question. I've just got one. Dick, you mentioned before that you're going to be doing a review of how your cost structure could look, and sort of a deep dive into how that cost structure might unfold. I'm wanting you to elaborate a little bit more of whether this is part of a wider review about products and strategies, and whether this may therefore lead to lower teams or a small amount of headcount or anything like that. Maybe you could just sort of give us a little bit more of a feel about what's behind that.
Sure. This is a constant effort when you're managing a business, and it's been a constant effort for us. I gave some examples in my earlier comments about some areas where we've simplified the business and stepped back from some things that we were previously doing. We'll continue to look at choices like that on an ongoing basis. We also look at trying to find more efficient ways to continue to deliver the BAU responsibilities and improve the quality of client service. What we're saying is we think three years on from the merger, A, and B, in light of the lessons that we're learning from working remotely and the power that the technology can have for our business, we think it's a really appropriate time to sort of renew our commitment to that exercise.
It's not a new exercise, it's a continuation of what we've been doing. We'll raise it up on the priority list. We'll talk about it more, and we'll drive to conclusions that we can come back and share with you all. We haven't prejudged anything in terms of whether there are choices to be made about further simplifying the business. Those are important questions to ask, and we won't shirk from asking them.
All right. Thank you very much.
We'll take our next question from Dan Fannon from Jefferies.
Hi, this is James Steele filling in for Dan. Thanks for taking our questions. Just firstly, thanks for providing some additional color on where the institutional outflows are coming from. I understand the one, I think it was $1.6 million EMEA client de-risking. I'm just curious if, especially since those aren't performance related, if there's any opportunity to keep those assets in-house, maybe move to a different strategy, especially if the de-risking activity is going to continue.
Yeah. Thank you. Good question. It's the same question I ask when I see a flow like that since we have a great relationship with the client. We didn't happen to succeed in keeping those assets in-house at this time. It's what should be on all of our minds and what we're trying to do. Obviously, we have plenty of more conservative choices for a client who's reallocating their asset allocation. In this case, the funds left, they didn't come back to us. You're right to highlight we have to do a better job of continuing to try and keep those flows in-house in our institutional business. It's terrific that we've built this great, strong relationship with the client. We look forward to being able to recapture maybe some of those future flows back in other ways in the future.
In this instance, we weren't able to keep it in-house.
Okay. Thanks. Then just as my follow-up, I believe you mentioned in the prepared remarks, it sounded like there was a delayed funding in one of the institutional businesses related to COVID. I was hoping you could quantify that or provide any additional color on asset class or if that's supposed expected to still fund this year?
No, not really on a specific client-by-client basis. What I was trying to indicate is, look, last quarter, we came to you, and we said we felt that the institutional pipeline was looking better than it had looked in a while. We come this quarter, and we say the institutional flows were pretty substantially more negative than what we wanted or expected, and we're frustrated by that. We're just trying to be transparent about those two truths, and say some of the stuff that we were hoping to achieve it's still hopefully coming. A lot of clients have gone slower through their process of moving from pipeline and finals to funding, and that's a fairly broad truth. Maybe it's related to changing the processes to working from home or your guess is as good as mine in many ways.
We have noticed across the institutional business that the process of moving from pipeline to final decision to funding at each stage has gone a bit slower than it has in some prior times. So we're still hopeful that we have good opportunities to do better on a go-forward basis. We have to deliver, and we have to prove it. We're just trying to be transparent with you through that process.
Understood. Thank you.
We'll take our next question from Nigel Pittaway from Citi.
Good morning, guys. First of all, focusing a little bit more again on the intermediary channel, obviously, you're talking up $900 million of flows and 3% growth. It's still sort of a relatively small number compared to the level of some that you have in that channel. You've obviously flagged the headwinds from SMID and mid-cap growth, but some growth in European equities. Do you think there's any possibility that this could start to grow more substantially in reasonable time frames? Is it just a slow burn, and it's very difficult to see that moving forward any more than it currently is?
Yeah. Hey, Nigel. Sorry. Yeah, absolutely is the answer. I think we showed that going into or through the whole of the back end of last year. Remember, intermediary flows turned positive at the half year. By the fourth quarter, we did $1.7 billion of positive flows. As we said on the first quarter call, the first six weeks of the year was at that level or actually slightly ahead of that level. We're progressing pretty well at that stage. We fell into a hole, as did everyone else in the second six weeks. To do $1 billion of intermediary flows compared to the first quarter, we're pretty happy with, to be honest. It certainly isn't where we intend to stay, no.
We've got a lot of things going the right way, whether they be in fixed income, whether they be in equity, whether they be in multi-asset with balanced in alts with U.K. Absolute Return. There is a good trend there. We've got a focused list of products which are performing very well. You're right, we have called out with U.S. SMID and mid that they may slow us down a little bit in the second half, but we've got an awful lot of things that are firing.
Okay. Thanks for that. The second question is just on the LTIP. As you went through, you said it was out of your control and driven by markets. If we do look at what you've shown us on slide 40, it does suggest that 2Q has taken a fair, probably more than its fair share, would maybe be a way to describe it in terms of LTIP and what's coming in the remaining two quarters. Firstly, is that true? Secondly, given that your related compensation ratio was mid-40%s, probably struck at the low of the market, is there no scope for that to be a bit better now moving forward?
On the second half of the question, the answer is yes. Our guidance going into the year is low to mid-40%s. We said it was more likely to be mid-40%s with where the markets were at the end of the first quarter. With where they are now, you should expect it to be more low to mid-40%s as we guided at the beginning of the year. In terms of the LTI charge in the quarter, that purely is the mark-to-market on it. Some of that is hedged, and therefore that's part of the investment gain you see below the line. You've just got to take the rough with the smooth with that. In Q1, we had a very low figure, and that number came down. In Q2, it goes up. That's why I'm saying it's out of our control.
We hedge what we can. The hedge part of that comes through below the line. I think you should look at the first half on average. As you say, in the appendix on 40%, we've shown what the future charges would be given markets where they are at the moment.
Our next question comes from Alex Blostein from Goldman Sachs.
Hi, good morning, everybody. Dick, appreciate the strategy update. I guess on this journey to simple excellence, what are the key financial and operating targets we should keep in mind? I guess targets that you all set up for yourself and your management team as you progress through this process and over what timeframe?
Yeah. We have internal measurements for the different parts of the story. I've tried to give you a sense of some of the underpinnings in this call, but I don't have more specific stuff to give you. Look, the big score on the scoreboard is earnings and flows. What we've told you is the big score is we need to get to positive organic growth and growing profitability. Those are the main metrics that are targeted in the strategy of simple excellence. I don't think I can do a better job of highlighting the underpinnings of that than I have done.
Okay. I guess just to follow up.
I guess the only other bit I'd add. Sorry, Alex. The only bit I'd add to that is around, we don't look at flow in isolation. We look at quality flow. It is about growing the profitability of our business, and I think the fee margin is something which shows that the assets we're adding are quality assets. Again, that's something we look to do over a period of time.
No, of course. That makes sense. I guess as a follow-up to that, when you talked about the second or I guess one of the pillars from this is revisiting the cost structure again more holistically, and I guess one of the things you mentioned is OMS, portfolio risk systems, data, et cetera. Can you just remind us, I guess, what are you guys spending across these buckets today? Is it all insourced or is it outsourced? What is really the opportunity you see there to rationalize some of that kind of tech stack and some of these services?
Let me pick that up. They are pretty chunky investments as Dick said. They are in our guidance, so you shouldn't be concerned that there is a bunch of costs coming down the track. Some of those things should have some improvement around the tech stack, as you point out, and our data, and allow us to further simplify the business, which as Dick's pointed out, is part of the strategy. The main reason we're doing those things is for improved tools for our fund managers around CRM, for our sales forces. It's around giving access to the best information. We want to have the best technology, and we've got some work to do there. They're the investments we're making, but that is baked into the current costs.
Yeah, we'd like to think there's some simplification off the back end of it, but it's more around improving the tools for our staff.
Yeah, I'll just add. Look, we need to be excellent or we should all go home. In order to be excellent, you got to have the proper tools, and they have to be implemented in a simple way, which will make them cost efficient and also more reliable. We have scope to do much better across some of our infrastructure systems and data architecture and stewardship and those sorts of things. We're making investments, and we'll continue to make investments in those areas. That's about driving to simple excellence. It's not as much about reducing the cost base. In order to fund those investments and also to continue to deliver distributions and share buybacks and such to our owners, we've got to be as efficient as humanly possible on how we're spending the money. It's a balance, right?
It's not a new balance, but we're renewing our commitment to that, to say, "Let's go back and re-ask the hard questions." We'll get back to you about both sides of that, about progress we're making on the retooling of the infrastructure and making the appropriate investments as well as the cost control side in the future.
We'll take our next question from Andrei Stadnik with Morgan Stanley.
Good morning. Good afternoon. I just wanted to ask two questions. Firstly, is there any color in terms of where the retail flows actually are sitting to start the September quarter, where they've headed in the month of July?
Andrei, we don't really talk about monthly flows. As we said, the intermediary flows in the third quarter are positive in all three regions across the U.S., in EMEA, in the U.K., and the U.K. particularly strongly, and in Australia. As Dick mentioned, we just launched a new fixed income ETF in Australia that will hopefully add to those intermediary flows. The other thing, while we've been on the call, we've just filed a preliminary registration for a new CLO ETF in the U.S. Yeah, we're seeing flows across all regions.
Thank you. My line must have been patchy earlier. Another question, a fairly sort of mechanical one, but in terms of the operating margin outlook for 2020, at the last call, you mentioned lower 30% spreading margin would be more likely, but we've seen some things on the cost of revenue side maybe headed a little bit better. What should we be thinking about in terms of operating margin at this point?
I think similar answer to my question to Nigel earlier. The guidance we gave at the beginning of the year was mid-30%s, and we revised that down when the markets were lower. You should be expecting mid-30%s margins, sort of similar to 2019.
Thank you.
Our next question comes from Robert Lee from KBW.
Great. Thanks. Good morning. Thanks for taking my question. I was hoping to maybe drill into the intermediary channel a bit more in the U.S. You clearly placed that better success. Can you maybe kind of parse that down a bit? I'm curious within that, there's so many different types of channels and products. How is the tail there kind of split, if you will, between, say, more traditional funds versus SMAs or model portfolio products like the model portfolios? Also any color on kind of wire house versus the RIA channel and the direct platforms. Just trying to get a feel for where momentum is and the opportunities there.
Rob, a bit difficult to hear you. Perhaps we can follow up with you afterwards. I think it was around the different parts of U.S. intermediary. Our SMA channel is certainly growing well. Let's pick up with you. We'll pick up with you offline. We'll just give you a call.
Thank you. Sorry about that.
We will be taking our final question today from James Cordukes from Credit Suisse.
Hi, guys. Thanks for taking my question. Just an inquiry on the Balanced Fund. You've obviously had some changes there. Interested in knowing what the response of the clients has been, whether there's been any engagement with the rating houses and how comfortable they are with the changes to the team there.
Sure. Yes, we've seen that Marc Pinto has announced that at the end of this coming March, after a 26-year career, he'll be stepping down from the fund. The client reaction has been as good as we would hope at this point, obviously it's really too early to say what effect that'll have on a go-forward basis. Marc's successor has been a co-portfolio manager with him for a number of years. Jeremiah Buckley's been an excellent co-portfolio manager with Marc. If you drew up a sort of an ideal transition, I think this would probably fulfill all those conditions that you might describe. That said, a transition is always a moment of higher risk for one of your big, very successful strategies. Certainly Marc has been just absolutely first-class for our business and for his clients in the Balanced Fund for a long time.
He will be missed as a person, as a leader, as an investor. What he's done for the firm is give us great succession in terms of a partner carrying on in exactly the same style and given lots of warning and doing all the appropriate things in terms of client meetings and communications to make sure that this goes as smoothly as possible. Fingers crossed, it is a transition, and transitions are moments of heightened risk. I don't know how we could have done this transition better.
All right. Thanks. Maybe just one for Roger on the buyback. You completed about 10% of the $200 million buyback in the last quarter, and said you're still committed to it. Should we expect purchases to increase in future quarters to make that up? I guess tied into that is, what are your plans for the proceeds from the Geneva acquisition, if you could remind us of that again?
As you say, we did go a little bit slower in Q2, and that was as we set that at the beginning of the quarter. Obviously, there was a lot of uncertainty, and markets were at a low. We did go slower this quarter. We were also kept out of the market a few days because of the 5% rule in Australia. The buyback was pretty low. With market levels where you are, you'd expect us to be stepping that up in Q3. The buyback is a $200 million buyback authorized through the end of Q1 next year. We've done about $50 million of it. You'd expect to see us back in the market shortly at an increased level. Again, being very careful and looking at volatility. The Geneva piece is part of our regular cash and capital.
I guess it's part of the $200 million that the board committed to at the end of the first quarter.
ladies and gentlemen, that was our final question. Well, that does conclude today's conference. We appreciate your participation today. You may now disconnect.