When Janus Capital and Henderson Global Investors agreed a deal in 2016, it was touted as being transformative for the two struggling midsized asset managers.
Andrew Formica, one of the architects of the all-stock merger and former co-chief executive of the enlarged company, said the move would create a “a new breed of active manager” with global heft, allowing it to withstand the relentless pressures on traditional stockpickers.
Fast forward to four years later and Janus Henderson may be about to be pushed towards doing another deal to allow it to survive. The London-based fund group has been targeted by Nelson Peltz’s Trian Partners, which bought a 10 per cent stake in it last month and called for a fresh round of consolidation among underperforming asset managers.
The activist investor’s targeting of Janus Henderson, which oversees $358bn in assets, reflects shareholder dissatisfaction with the company since its tie-up.
“Janus Henderson hasn’t flourished over the past three years,” says Will Riley, who holds a position in the group in his Guinness Global Money Managers fund.
The group has been hit by higher-than-average investor outflows, losing $68.8bn since the start of 2018. This has hit revenues and affected its share price, which has declined almost 14 per cent since the transaction completed in May 2017. The share price fall stood at about 30 per cent before Trian disclosed its stake.
Janus Henderson’s woes are testament to just how brutal the headwinds facing active managers have become, as well as exemplifying the risks inherent in megamergers.
As consolidation in asset management gains momentum once again, Janus Henderson’s experience points to the thorny choices ahead for active managers, as they consider how to scale up while not destabilising their workforce and clients.
The Janus Henderson tie-up was hailed as a way of allowing two managers with limited geographic overlap to compete on the global stage. The idea was to help London-based Henderson, which ex-CEO Mr Formica grew by buying up undervalued investment boutiques in the aftermath of the financial crisis, to break into America while boosting Janus’s profile in Europe.
These results, however, have not yet come through. According to Morningstar, the organic average growth rate of the combined company has lagged that of its US listed asset manager peers between 2015 and 2019, and it is forecast to continue to struggle over the next four years.
Janus Henderson chief executive Dick Weil, who took sole charge of the group in 2018 after leading Janus into the deal, is the first to acknowledge the company’s slow pace of progress. Speaking to media at a conference this week, Mr Weil said that he was confident that Janus Henderson is on track to establish a global presence “that neither independent firm could have afforded separately”. But he added that this process was taking a “frustratingly long amount of time”.
CFRA Research analyst Cathy Seifert says that Janus Henderson has been hindered by its position as a mainly active investment house at a time when the investor flight into index-tracking funds has gathered pace.
“The merger was designed to gain scale and diversification but what it did not address was the secular trend towards passive investing, which has accelerated in the last four years,” Ms Seifert says.
But Janus Henderson has also been hit by specific issues linked to its integration, such as tensions sparked by cultural differences between the two companies.
One former employee points to the contrast between the chummy, relationship-based culture of Mr Formica’s Henderson and the more structured, practical way of doing things at Janus under the leadership of Mr Weil, a former lawyer.
“On the Henderson side there was a very loyal core group of people who had worked together for a long time. Blending an organisation like that with a US firm, which has a more direct way of communicating, was challenging,” the person says.
The divisions were not helped by the merged company’s unusual geographic structure — it is headquartered in London, with dual listings in New York and Australia, and an investment hub in Denver — and its initial co-CEO structure.
Another ex-employee points to the company’s failure to appoint fresh blood to its board — it has appointed only one director unaffiliated with either faction since the merger — as a source of its cultural divisions.
Against this tumultuous backdrop, Janus Henderson has lost a number of high-profile investment staff. The departures have included a number of teams, such as the six-strong high-yield bond and emerging market equities teams.
Meanwhile, several Janus Henderson funds have experienced dire performance, further unnerving clients. Intech, the company’s quantitative investment division, has been particularly hard hit: as at the end of 2019, 84 per cent of the assets run by the unit lagged behind their benchmarks on a five-year basis.
But Mr Weil is upbeat about the merged group’s prospects. At the conference this week, he rejected suggestions of a divided company, describing the group as “genuinely global and not dominated by one culture or the other”.
The chief executive also distanced himself from suggestions that Janus Henderson needs to join forces with a competitor. “There is a lot a good reason and foundation for being sceptical about mergers,” he said. Most deals do not go “anywhere near as well as planned”, he added, pointing to the Janus-Henderson tie-up as an exception to this trend.
It is not yet clear what Trian’s plans are for Janus Henderson or whether it will succeed. The asset manager was only made aware of Trian’s stake the day before it was officially disclosed and has not granted board seats to Trian, as Invesco did earlier this month. Trian declined to comment.
Shareholder Mr Riley believes that the company has the potential to turn itself round on its own. He wants to see it focus on cutting its cost base by 5-10 per cent and repurchasing stock to boost its share price.
He intends to continue holding Janus Henderson based on what he sees as encouraging fund performance potential — according to Credit Suisse, about 55 per cent of the manager’s assets have top Morningstar ratings, compared with an industry average of 32 per cent — combined with its low valuation and 5.7 per cent dividend yield.
Should M&A be called for, Mr Riley says that it would make more sense for Janus Henderson to be acquired by a larger rival, as these deals tend to be less disruptive than mergers of equals, where it is unclear who is in charge.
Ms Seifert agrees that there is reason for optimism at Janus Henderson. “If it can stem investor outflows, its headwinds could become a tailwind,” she says.
However, the fact that the company still languishes among the fund industry’s “squeezed middle” means it is “not inconceivable” that it will seek a partner in future to boost its assets and gain exposure to more passive strategies, she predicts.