Anglo-Australian asset manager Henderson’s take over of US rival Janus Capital is expected to fire the starting gun on a raft of defensive deals in the sector as investment houses battle with pressure on fees and rising regulatory costs.
The all-stock deal between the two active managers will create one of the 20 largest independent investment houses with more than $320bn of assets. It comes as fund houses that try to outperform the market are being squeezed by a significant shift to low-cost tracker funds.
Peter Lenardos, an analyst at RBC Capital Markets, says: “Henderson and Janus were both in a tough place — this is a defensive merger.”
Haley Tam, an analyst with Citi in London, says: “As more fund flows head to passive, only the best will survive and competition between active managers to outperform will intensify.”
According to figures from data provider Morningstar, assets managed in passive mutual funds, which provide lower-cost exposure to markets by tracking an index, have grown four times faster than traditional actively managed products since 2007.
In the US alone, index-tracking funds have increased their share of assets by $2tn since 2013.
“This is one of many transnational deals we’re likely to witness with the relentless rise of passive management. Active managers need serious cost efficiencies to ride out this turbulent phase. Business as usual is no longer an option,” says Amin Rajan, chief executive of Create Research, the fund management consultancy.
He adds: “Passives are eating the lunch of active managers, who need to respond.”
According to Morningstar, assets under management in passive mutual funds have grown 230 per cent globally, to $6tn, since 2007. In contrast, assets held in active funds have grown 54 per cent, to $24tn.
Henderson’s Andrew Formica, who will become co-chief executive of the newly named Janus Henderson Global Investors alongside Janus’s Dick Weil, agreed the continued rise of passive funds has “created a threat to everyone’s margins”.
But he argues that international ambition rather than fear was the main driver of the merger. “This deal does not represent a defensive move. Both organisations have great growth potential,” he says. “But we might have lost ground with big clients if we were not able to show we are a global player.”
Last year, the global fund industry’s average operating margins, or the ratio of profits to net sales, fell for the first time since the 2008-09 financial crisis, according to Casey Quirk, the consultancy.
More on Janus and Henderson
Lex: Active aggressive
Growth of passive investing prompts active managers to seek cost savings
Lombard: Janus Henderson
Like the Roman god himself, the direction of travel will be ambiguous, says Jonathan Guthrie
Andrew Formica: Henderson’s serial dealmaker
Feisty Australian helped fund group to more than double its asset base
Janus survived 2 decades of turmoil
US group rode the dotcom boom and bust then recruited Gross
Will Riley, co-manager of the Guinness Global Money Managers Fund, says: “I like the deal. The client base is clearly complementary. We considered both companies to be part of the group of the biggest 50 ‘midsized’ listed asset managers but this deal propels them into the top-20 large listed managers. They can now join the top tier.”
Consultants at McKinsey estimate that about a third of the profits earned by investment managers globally could be “wiped out” by 2018, unless more radical steps are taken to cut costs.
Regulators are also scrutinising the active management industry. The UK watchdog is investigating fees as part of a wide-ranging review into the fund industry, while investment companies are also struggling to comply with sprawling reforms, such as the EU’s Mifid II.
Mr Formica says: “The regulatory burden and the challenges arising from that are plain to see. Following the financial crash, the regulatory response has not been equal and aligned in terms of what each authority is doing. The cost of complying with Mifid II, for example, is the same whether we have $10bn of assets or $100bn. Now we only have to carry that cost once.”
Investors welcomed the announcement. Shares in Henderson rose more than 16 per cent on Monday, giving it a market capitalisation of about £3bn. The deal is expected to complete in the second quarter of next year. Janus shares were up 14 per cent in lunch time trading in New York.
Henderson, which is in the middle of a five-year strategic plan due to conclude at the end of 2018, has a history of buying other asset managers. Up to now, its acquisitions had been predominantly in the UK, including the 2011 purchase of Gartmore and of New Star in 2009.
By consolidating, Janus and Henderson hope to achieve cut costs of $110m annually within three years of closing from areas such as IT and office space. The tie-up is also a bet that a broader asset base will attract capital at a time when fund sales for active managers have stalled.
Mr Formica says: “The rationale is not about the cost synergies. Together we can grow faster than on our own . . . I am firmly convinced that the best answer for addressing client needs is a new breed of active manager with a global brand, presence and capabilities.”
Dan Fannon, an analyst at Jefferies, reiterated that similar deals are likely in the future. “Given the increasing challenges for active managers to grow organically, we anticipate global consolidation to continue.”
Additional reporting by Chris Flood