INTECH hopes new gains mean long-term business

An investment performance rebound this year at INTECH, the institutional, quantitative investment arm of money manager Janus Henderson Investors, has company officials hoping the company will be turning a corner from years of outflows.

Every one of INTECH's more than 35 investment strategies outperformed their respective benchmarks in the first six months of 2017, according to Janus Henderson statistics, a reversal from 2016 when most strategies underperformed.

And its largest strategy, the $10 billion-plus U.S. enhanced-plus flagship strategy, had a net return of 19.8% for the year ended Sept. 30 vs. 18.6% for its S&P 500 benchmark, INTECH statistics showed.

INTECH, with $46.7 billion in assets under management, still had net outflows of $1.8 billion in the quarter that ended June 30, but that amount was down from $3.7 billion in the preceding quarter. The firm reported $7.8 billion in net outflows in 2015 and 2016 combined.

Adrian Banner, INTECH CEO and chief investment officer, is optimistic.

He said the potential new business pipeline for the firm is more robust than in recent memory. "Let's say it's probably the highest that it's been in 10 years," he added.

Mr. Banner wouldn't offer specifics.

The better investment performance is an encouraging development, said Craig Siegenthaler, managing director and senior equity analyst at Credit Suisse Group, New York.

"Over the last five years, (INTECH) has had soft performance, but actually it's been improving pretty rapidly year to date," Mr. Siegenthaler said. "So 2017, great performance; the back half of 2016, they underperformed."

Janus Henderson officials are eager to feature a growing INTECH as one piece of evidence that the merger of Denver-based Janus Capital Group Inc. and London-based Henderson Global Investors in May can create a global world-class investment organization.

INTECH's nascent rebound has been a long time coming.

Known as a quantitative investment manager, the firm applies advanced mathematics and systematic portfolio rebalancing using stock price volatility as a source of excess returns and risk control.

Quant firms, including INTECH, took a beating during the financial crisis. INTECH's assets under management totaled almost $70 billion as of Sept. 30, 2007, but fell to $47.3 billion by Sept. 30, 2009. Fundamental active equity strategies also suffered massive losses during the crisis and outflows continue today in a bull market that has seen passive strategies topping many active ones.

Quant investing now is back in vogue, and outperformance by some quant firms has led to a general conviction by investors that scientific investment models are a better bet, said Tayfun Icten, an ​ alternatives strategies senior analyst at Morningstar Inc., Chicago.

"People want to know what the sources of returns are, where is the return coming from?" he said.

Mr. Icten said the scientific quantitative model seems more credible to many investors than betting on a fundamental manager's continued skill in picking the stocks that will outperform on a consistent basis. "Manager alpha is going away, people don't believe in it," he said.

Uneven performance in some investment strategies combined with management changes has led some investors to flee in recent years. The firm's co-founders — E. Robert Fernholz, who was chief investment officer, and CEO Robert A. Garvy — both departed at the end of 2011.

That didn't sit well with some clients. In 2014, the $23.3 billion San Francisco City & County Employees' Retirement System cited concerns about management changes and performance as reasons to terminate the firm. INTECH managed $250 million for the fund.

Mr. Banner, who joined the firm in 2002 and was serving as co-CIO, took over as CIO in January 2012 and was named CEO in November 2012.

Seeing a steady stream of net inflows at INTECH will most likely depend on avoiding a repeat of the second half of 2016, when investment performance collapsed.

None of INTECH's 20-plus relative-return strategies, which make up more than 80% of INTECH's assets under management, topped their benchmarks in 2016, show Janus Henderson statistics.

Janus Henderson co-CEO Richard Weil told analysts in January that INTECH had gotten off to a good start in 2016.

"They had a good first six months, and then basically got just slaughtered by the reversal that the world is calling the Trump rally," he said.

Mr. Weil said 2016 was a "very unusual period" as it applied to INTECH strategies. "In the first half of the year, it was good to be long the low-beta, low-volatility stocks, and they were, and they were doing just fine. And then when utilities got crushed and banks took off and high-beta stocks took off and (INTECH) didn't own them, they really — they paid the price."

More recently, Mr. Weil had better news for analysts announcing the outperformance for all of INTECH investment strategies for the first six months of 2017. But those numbers were tempered by the fact that only 48% of INTECH strategies were outperforming their respective benchmarks on a three-year basis as of June 30. That number went up to 61% as of Sept. 30, show Janus statistics.

Janus Henderson is scheduled to announce its third-quarter results, including those of INTECH, on Nov. 9.

Convincing new clients to invest with INTECH also will mean swaying consultants. Janus Henderson officials also told analysts during an Aug. 8 conference call that investment consultants to institutional investors still had INTECH on watch because of the prior performance issues — and that could continue throughout 2017.

Mr. Banner said long-term INTECH results have been solid.

"We'll take our 30-year track record, for example, and our U.S. enhanced-plus flagship strategy and, say, stack that up against any long-term track record in a similar sort of thing; we've been able to add value over that time," Mr. Banner said.

The strategy has outperformed beyond its one-year numbers. For the three years ended Sept. 30, the strategy had an annualized net return of 11.3% vs. 10.8% for the benchmark, according to INTECH statistics. On a five-year basis, it returned an annualized net 14.4% compared to the benchmark's 14.2%. For 10 years, the strategy produced an annualized net return of 7.9% compared to the benchmark's 7.4%.​

While there have been some institutional client terminations, Mr. Banner said most investors have stuck with INTECH, believing in its investment process.

"In terms of the outflows, that's not all driven by performance," Mr. Banner said. "Our performance has generally been very good and yet we have seen outflows in U.S. equity strategies, and this is not unique to INTECH. If you look at industrywide outflows, especially in U.S. large-cap equities from active to passive, this is a huge circular trend that doesn't show much sign of abating."

Mr. Banner said INTECH over the past three years has seen significant growth in its global/international equity strategies, with more than $8 billion of net inflows during this period. He said the firm now has around $25 billion invested in global/international strategies, a little more than half its assets under management.