Janus, Henderson merger will reduce investment lineup

The merger between Janus Capital Group Inc. and Henderson Group PLC isn't scheduled to close until May 30, but the two companies already are pruning investment funds, a precursor to what will likely be larger changes in investment management operations.

The initial moves aren't all cross-continent changes between Denver-based Janus and London-based Henderson, with assets under management of $204.7 billion and $128.9 billion, respectively, as of March 31. Some of the changes involve Janus tightening its own offerings.

“They're consolidating their fund lineup and focusing on their best-performing funds,” said Greg Carlson, a Chicago-based senior analyst with Morningstar Inc.

The soon-to-be combined company, which will be called Janus Henderson Global Investors, will be based in London, where co-CEOs Richard Weil of Janus and Henderson's Andrew Formica will work. The stock will trade on the New York Stock Exchange.

The initial changes, occurring in May, include:

• Collapsing the $8.2 billion Janus Twenty Fund and moving investors into the $2.2 billion Janus Forty Fund. Both funds focused on large-cap growth stocks but the Janus Forty fund held more positions and had better performance than the Janus Twenty Fund.
• Closing the $7.8 billion Janus Fund, a large-cap growth equity fund and transitioning shareholders into the $4.7 billion Janus Research Fund, a large-cap growth equity fund with Janus research analysts' top picks.
• Merging the $86.2 million Janus Emerging Markets Fund into the $92.4 million Henderson Emerging Markets Fund.

After the companies complete their merger, the $218.4 million Henderson Global Technology Fund will merge into the $1.5 billion Janus Global Technology Fund. Janus also will make fund-level changes in its quantitative investment group, INTECH, merging the $616.9 million INTECH U.S. Core Fund into the $465.3 million INTECH U.S. Managed Volatility Fund, said Janus spokeswoman Erin Passan.

Most of the funds being closed had poorer performance than that of the survivors, but a Janus official, speaking on background, explained fund inflows and prospects for growth also determined which funds survived.

Janus could have closed some of its poorer-performing or out-of-favor funds earlier, but the merger has given the company a chance to re-examine its operations and do “some housecleaning,” said Donald Putnam, managing partner at investment bank Grail Partners LLC in San Francisco.

Mr. Putnam said he expects that over the next several years, investment teams at both Janus and Henderson will be combined and the best-producing investment strategies of those teams will be kept. Ms. Passan said the two companies jointly employed more than 2,200 people at the end of 2015.

Janus and Henderson officials say they expect to save $110 million yearly by reducing staff and streamlining operations. In documents filed with regulators, the companies have estimated that 25% of the savings will come from “reducing combined headcount in investment management and trading functions,” including “removing duplication of certain investment and research teams.”

Officials have not said which teams might be merged, but the area where the firms have the biggest overlap is global equities. Janus manages $20 billion in global equities while Henderson has $34 billion.

Henderson's former head of global equities, Matthew Beesley, who joined GAM as head of equities in March, is one of several top investment managers at the firm to depart.

At Janus, investment managers who are scheduled to leave include Hiroshi Yoh, who managed the Janus Emerging Markets Fund and was head of the firm's Singapore office, and Barney Wilson, co-portfolio manager of the Janus fund, Ms. Passan said.

Ms. Passan said Mr. Yoh is expected to leave in June while Mr. Wilson is scheduled to depart when the merger closes May 30.

In one case, an entire investment team, Henderson's U.S.-based high-yield bond team, moved in February to T. Rowe Price Group.

Mr. Putnam said the merger of Janus and Henderson could create a truly global asset management firm. He said a joint distribution force made up of sales professionals from both companies could focus on the three premier worldwide markets: the U.S., Europe and Asia.

Janus and Henderson officials have pitched a larger global reach as a key merger rationale.

Institutional investment consultants are closely monitoring the changes.

One consultant, who asked not to be identified, said his firm is reviewing any changes to investment teams but also will be on the lookout for post-merger cultural clashes. He said those potential clashes could lead to investment personnel being distracted.

Janus spokeswoman Ms. Passan said in a statement that officials have been meeting with consultants and clients to explain changes. She said the two companies expect “a seamless integration and do not expect any changes to our investment processes or philosophy.”

Mr. Putnam said the Janus-Henderson combination could potentially double or even triple assets under management, and the company could acquire other money managers to gain additional scale or specialties.

But there are no guarantees, and Mr. Putnam said it might take at least two years post-merger to get a sense of whether it is working.

A bigger challenge, analysts said, will be reversing net outflows at Janus. Since 2000, Janus has only had two full years of net inflows.

Particularly troublesome for Janus has been INTECH, whose low-volatility investment strategies have had severe underperformance against their benchmarks.

Janus statistics show that none of INTECH's strategies net of fees beat their benchmark over the one- and three-year periods ended March 31 and 17% beat their benchmark over a five-year period, the company reported in its earnings release.

Janus CEO Mr. Weil acknowledged INTECH's performance during a conference call with analysts on April 4, after the company reported INTECH had $3.8 billion in net outflows in the first quarter. That followed $7.8 billion in net outflows in 2016 and 2015 combined.

“INTECH has delivered stronger results for clients over 30 years, but not all clients have experienced those 30 years,” Mr. Weil said. “If you've only been here for a year and the first thing that's happened to you is you've been punched in the nose, that's pretty darn disconcerting.”

INTECH had $46 billion in assets as of March 31, most of it from institutional investors.

Equity Analyst Robert Lee, a managing director at Keefe, Bruyette & Woods Inc., said the worst thing Janus Henderson management could do is intervene in the investment process at INTECH, because “it's a recipe for disaster.”

“It's something INTECH has to work through, stick to their knitting,” he said. “Look, these are businesses that can take a long time (to recover) when you fall out of favor.”

Henderson reported net outflows of more than $5 billion in 2016, its first full year of net outflows since 2013, but Craig Siegenthaler, a managing director and senior equity analyst at Credit Suisse, New York, said Henderson had strong inflows in 2014 and 2015.