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Neutral on Janus Capital

JNS AB

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We have reiterated our Neutral recommendation on Janus Capital Group Inc. (JNS - Analyst Report), based on the company’s better expense management and healthy capital position. However, downtrend in performance fees is a matter of concern.

Janus Capital has been striving hard to strengthen its businesses. The company is currently focused on enhancing its fixed income business including trading and investment. It ended 2011 with more than $20 billion in fixed income AUM for the first time in the history of the company. Moreover, second quarter 2012 marked the 14th consecutive quarter of fixed income business recording positive net sales at $1.1 billion. We expect the company’s strategic efforts to lead to such strong outcomes and thereby aid top-line expansion in the upcoming quarters.

Janus Capital continues to improve its operating leverage by enhancing its organic growth in addition to focusing on reducing expenses and strengthening both fixed and discretionary cost savings. We expect the company’s strategy of achieving growth with operating leverage to boost both the top and bottom-line results and provide a greater foundation to the company’s operations in the future.

As a result of the strengthening of balance sheet due to the early retirement of debt, Janus Capital’s Board of Directors increased regular quarterly cash dividend by 20% in April 2012. Such actions are expected to boost investors’ confidence in the company.

On the flip side, majority of the company’s total assets are in equities, which makes it more vulnerable to the volatilities of the equity market. The performance of fundamental equity funds remained volatile in the past few quarters due to fluctuation in sales, as well as overall redemptions. Outflows of fundamental equity funds decreased to $4.4 billion in the first half of 2012 from $5.1 billion recorded in the comparable prior-year period, primarily driven by lower redemptions. Despite having declined, these outflows will affect the company’s financials through lower performance fees, thereby hampering overall growth.

Nevertheless, given its healthy balance sheet, positive operating leverage and dividend increment, we believe Janus has the potential to outperform its peer group in the long run. The risk-reward profile of Janus Capital is currently balanced and hence, we have reiterated our Neutral recommendation on its shares.

Janus Capital currently retains a Zacks #2 Rank, which translates into a short-term Buy rating. The company’s peer – AllianceBernstein Holding L.P. (AB - Snapshot Report) also retains a Zacks #2 Rank.

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