You've made a splash with the New Star deal. Did you expect to make such a bold move so quickly? In these markets, it's very difficult just to stand still. New Star, from an organizational point of view, enabled us to really move forward. New Star is compelling to us as a strategic positioning, particularly in the U.K. retail market. It's an area where we just haven't been a force or haven't had the presence we would like. The transaction also gives us all that we think is a very compelling price from a financial perspective ... If you don't move quickly and take advantage of these opportunities, you're going to look back and say “well why didn't I?” If you don't do it now, then when are you going to do it?
How did you decide that retail is where Henderson should be expanding? The retail area is a difficult and challenging market if you think about it from a client's perspective. The confidence they have has been severely tested. But the fundamentals on a long-term basis are still very sound. We are moving from defined benefit to defined contribution, requiring individuals to take greater responsibility for their savings needs. When interest rates have been coming down as low as they are, people are going to have to look for (new) ways to obtain (investment) returns.
How do you plan to position the institutional business? On the institutional side, there are two areas that we see most interesting in the short-term, and that's property and fixed income. A lot of clients in the institutional space have not moved to their full allocation in property. Due to the current downturn, there's an opportunity to move their weightings up to where they wanted to be. One of the biggest areas of interest at the moment is in the U.K. because U.K. valuations have been marked down over 40% peak-to-trough and are approaching 50%. Coupled with a devaluation of the sterling, the U.K. is looking very attractive particularly from a foreign investor's point of view, whether you're in Europe or America. In fixed income, we've performed very well in credit last year, and this has been of particular interest to institutional clients as well.
What about equity? I think the interest there will be on long/short types of strategies that allow for some downside protection. What's happened in the hedge funds of funds has meant that clients are now looking more at single strategy (approaches). Institutions are much more discerning, not just about the manager but also the business model and how sustainable the firm is.
What other strategies do you think clients will want? As an industry, we need to look at how we can deliver greater stability or security, so what's potentially very interesting is a focus on an absolute level of capital returns. We've seen hedge funds attempt to offer some of these; we've seen other absolute-return focused products. None of them have really delivered, particularly in 2008, compared to what their promise was. That doesn't mean, however, that we shouldn't be trying to find the simple, easily understood products that give greater stability in terms of downside protection. I'm not talking about capital guarantees; I think clients need to accept that there are going to be periods when you will lose money. It's about not losing 30-, 40- or 50% in a bad year, but equally, not expecting that when markets are up by 60% to be up there with it.
Where do you see growth in Henderson's institutional base? I think (institutional) growth will be in geographical terms for us. The bulk of our institutional clients have been in the U.K., and we're seeing a lot of interest at the moment in North America, particularly for our (Europe, Australasia and Far East) product but also hedge fund products and property. Europe is also compelling, and the Fortis (currency team) acquisition has helped because of the team's strong institutional presence there. An area in which we haven't been very successful in the past, partly because we haven't really focused on it, is sovereigns and other large players both in the Middle East and Asia. This is an area in which we haven't spent a lot of time previously, but we are now making inroads recently.
How will you integrate New Star? The areas that most attracted us to New Star were the penetration and relationships that the sales and marketing team has. This is absolutely critical and top of the list in terms of what we want to keep. On the fund management side, New Star's performance has been, by and large, disappointing in a number of areas. Henderson is stronger in quite a number of areas. But New Star still has a number of talented managers, and we'll be working on the combined business strengths of both organizations. We will take the best from both, but also look outside if we're not comfortable with what either side offers, which I think is good. Henderson is an organization of more than 800 people; we'll only be bringing somewhere between 100 and 150 (employees) from New Star.
Are there cultural differences between the firms that could be a concern? The images of both organizations are quite different, particularly in the U.K. New Star is probably seen as brash and individualistic, but actually it is much more team-oriented than you would have guessed from the image. Henderson probably comes across a little bit more old-fashioned, staid and safe, which is not a bad thing in this environment. We want to maintain some of the momentum of the entrepren-eurial spirit and the vibrancy for which New Star is known, though our culture still will be the dominant culture.
What have you enjoyed most about your job within the past few months? It's clearly the response I've had, from the board and the staff. You feel, as an individual, you have a view or a direction you want to take an organization. To know that everyone is pulling in that same direction is just fantastic. I didn't expect to get such wholesale support so early. You'd expect that in a tough environment, morale of the business is low. But it's actually probably stronger now than it has been for the past six to 12 months because they feel that we're an organization that's looking forward.