To succeed, Janus/Henderson merger will need to counter decline of active management

The merger of Denver-based Janus Capital Group and London-based Henderson Group will create a global money management firm with more than $320 billion in combined assets, but for the new company to prosper, it will have to counter headwinds that are buffeting active managers, analysts say.

Both Janus CEO Richard Weil and Henderson CEO Andrew Formica — who will be co-CEOs of the new entity — announced the consolidation deal Oct. 3 in London, touting a new global distribution footprint that will give Janus, with $195 billion in assets under management as of June 30, greater access to the U.K. and European markets while giving Henderson, with £95 billion ($127 billion), June 30, greater reach in the U.S.

The all-stock deal is expected to close in the second quarter of 2017.

The resulting firm will be renamed Janus Henderson Global Investors PLC and will be based in London. But regardless of the newly combined company's reach, Janus and Henderson are active managers in an investment world that is embracing passive strategies.

“Increasingly, assets are going toward passive strategies,” said Todd Rosenbluth, director of ETF and mutual fund research at S&P Global Market Intelligence. “The challenge Janus, Henderson and other active managers have is to counter that.”

Mr. Formica said in a conference call and meeting with analysts that he and Mr. Weil were in strong agreement that active management can still flourish, ”if you've got a high quality product and investment team that does what it says, and, through the cycle adds value.”

Mr. Rosenbluth said he agrees that strong investment performance would be the best counter to passive headwinds, which have been strengthened by investors' appetite for lower-cost options. He noted that Janus also bought an ETF company in 2014, VS Holdings Inc., the parent company of VelocityShares LLC. Velocity Shares specializes in institutionally-focused exchange-traded funds, and, at the time of the deal, had raised $2 billion in assets. Velocity Shares data shows it had $3.7 billion in 17 funds as of Oct. 13.

Janus has struggled with inflows since the tech bubble burst.

The last time Janus reported a full year of net inflows was 2009, with company financial data showing net inflows of $900 million. From 2010 through 2015, the company saw a total of $62. 6 billion in net outflows, Janus data shows.

Outflows have slowed recently. In the first six months of 2016 through June 30, Janus reported $1.7 billion in net outflows.

Henderson Group has had stronger history of recent inflows, with $22.9 billion in net inflows between 2010 and 2015, shows Morningstar data, which includes mutual funds but not institutional separate accounts.

More recently the firm has struggled. In June, July and August of this year, Henderson reported $2.9 billion in net outflows, though it still had net inflows of $1.6 billion for the first eight months of 2016 through Aug. 31, according to Morningstar.

Investment teams and distribution personnel are not expected to be affected in a major way by the merger, analysts said.

In an interview Oct. 7 with Pensions & Investments, Mr. Formica said that, while it is still early days, client reaction to the combination has been encouraging, citing one wealth manager who recently reconfirmed its commitment to a large allocation to the manager.

Henderson also has a “relatively large pipeline of pension and institutional clients for the fourth quarter, which have all reiterated their commitment to fund,” and Janus has received further wins and commitments post-announcement, he said.

“It is the institutional market that is most likely...to pause and consider what it means, and on both sides we have seen very strong endorsement in just a few days,” Mr. Formica added.

Mr. Weil said in a conference call with analysts that “from the Janus side, a majority of our institutional assets are with INTECH (Janus' quantitative equity division) and it's clear in the transaction that INTECH is going to continue largely as is.”

Janus officials said that INTECH and its Perkins equity investment subsidiary in Chicago will continue to be run independently with their own leadership teams and will be unaffected by the merger other than having increased distribution.

Janus holds $68.2 billion in global institutional assets, show company statistics as of June 30. INTECH reported $49 billion in assets of as June 30, but Janus does not report what percentage of those assets are institutional.

Thirty-eight percent of Henderson's $127 billion in assets is institutional, according to company data.

The deal between the two managers is expected to produce $110 million in cost savings over a three-year period.

Consolidation of middle and back offices is expected to produce savings, as will the ability to deal with necessary regulatory spend.

“If you take MiFID II as an example: the MiFID II costs are independent of the size of asset management firm or how many assets you have. Janus has to do it, Henderson has to do it, so we were doing it twice. We are now doing it once,'' Mr. Formica told P&I.

Mr. Formica and Mr. Weil, in the P&I interview, said one potential benefit of savings from the merger may allow the combined firm to take on new investment capabilities.

“That additional saving allows us to invest in new ideas, new investment capabilities, they may be team hires, or they may be just fund structures built out of the existing capabilities,'' Mr. Formica said.

“So, for example, as the market is looking for more absolute-return products, more bond-like return, but away from the duration-led products of fixed-income markets, we can create those sorts of products, often with the teams that are in place,“ he added.

Mr. Weil cited the benefits of new distribution channels for both Henderson and Janus. “Henderson has wonderful client relationships across the U.K. and Europe that are in many ways deeper than we can build from the Janus side,“ he said. “In the U.S. and Japan, we have some relationships that are special and would be challenging for Henderson to build. And combined we create a roster of clients and relationships and distribution resources that are terrific.”

He also said that size matters in the asset management industry, which should give the combined entity an advantage.

“Scale matters in this business, in terms of the ability to create positive returns for your clients, operate more efficiently with better operating leverage,” Mr. Weil said. “To be able to afford the necessary investments to keep up with the changing regulatory environment. To invest in new products. All those things come out of the financial stability and strength, and combined we are stronger than either one of us would be separate.”

Data from Janus and Henderson show only small overlaps among investment strategies. Henderson has large European equity as well as alternative investment strategies, an area where Janus has only a small focus. Janus' large quantitative investment division, INTECH, specializes in institutional accounts and U.S.-centric fixed-income teams.

Overlaps include global equity strategies — Janus manages $20 billion in global equity strategies while Henderson has $34 billion in such strategies, data from the firms show. In 2014, Henderson acquired Milwaukee-based Geneva Capital Management, a growth equity investment firm with approximately $5 billion in assets under management, as of June 30, 2016. Janus also runs about $12 billion in growth equity strategies.

Mr. Formica said during the conference call on Oct. 3 that “the current expectation is that both investment processes (at Janus and Geneva) will remain separate.” Mr. Formica also said Janus and Henderson senior portfolio managers had not signed exclusive agreements that prevent them from leaving.

Robert Lee, a managing director and equity analyst at Keefe, Bruyette & Woods in New York, said the co-CEO's structure was “unusual and rare and is probably not the long-term solution.”

Mr. Weil and Mr. Henderson said in investor calls that the current management structure will be kept for at least two years but will be reviewed by the Janus Henderson board after that.

London Bureau Chief Sophie Baker contributed.