Balanced View on Janus Capital

We have reiterated our Neutral recommendation on Janus Capital Group Inc. (JNS - Analyst Report), based on the company’s better expense management, strong assets under management (AUM) and healthy capital position. However, negative performance fees were 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. In the third quarter of 2012, fixed income business recorded positive net sales for the 15th consecutive quarter at $1.0 billion. Moreover, the recent strategic alliance with Dai-ichi, the third largest life insurer in Japan, forms a major part of the company’s policy to develop internationally, and prosper both in terms of reputation and building relationships as well as distribution in Tokyo.

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.

To enhance shareholders’ value, Janus Capital’s board of directors accelerated quarterly cash dividend payment in December 2012, which would have been declared in January 2013. 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 and mathematical equity funds have remained volatile in the past few quarters due to fluctuation in sales, as well as overall redemptions. Moreover, low interest rate environment affecting money markets remains a drag on the bottom line. Consequently, the company’s substantial exposure to the money market can hinder the achievement of targeted goals in the long run.

Nevertheless, given its healthy balance sheet and strategic initiatives, we believe Janus Capital has the potential to perform well 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.

However, Janus Capital currently retains a Zacks #4 Rank, which translates into a short-term Sell rating. However, the company’s peer – The Blackstone Group LP (BX - Analyst Report) retains a Zacks #2 Rank.