The merger between U.S.-based Janus Capital Group and U.K.-based Henderson Group announced Monday is designed “to create a global asset manager with diverse geographic footprint,” according to the official announcement. But while it is expected to increase the distribution of the firms’ mutual funds, under the new Janus Henderson Global Investors name, it’s not clear the merger will curb the asset outflows of either firm.
Since 2000, Janus has had only two years of net inflows, and outflows this year through August were $1.6 billion—almost as much as the $1.7 billion for all of 2015, according to Morningstar.
Henderson Group had outflows of 2 billion British Pounds in the first half of this year, equivalent to $2.55 billion.
Underlying these outflows is the growing preference by investors for passively managed funds and ETFs over actively managed mutual funds, which is the bread and butter of Janus and Henderson. Investors withdrew $166.2 billion from actively managed U.S. stock funds through August, while they poured $109.9 billion into passively managed U.S. stock funds, according to Morningstar.
“While the deal brings both sides added distribution capabilities in previously untapped global markets, it’s unclear whether that will be enough to curb the asset outflows that have plagued Janus in recent years,” wrote Morningstar analyst Andrew Daniels in a note about the merger.
Morningstar analyst Greg Carlson told ThinkAdvisor that the merger makes sense from a distribution point of view, since the combined firm will have a bigger presence in markets that the two firms individually didn’t have—Janus in Western Europe and Henderson in North America.
Janus CEO Dick Weil, in a statement, called the merger “a transformational combination for both organizations. Janus brings a strong platform in the U.S. and Japanese markets, which is complement6ed by Henderson’s strength in the U.K. and European markets.”
The new firm will be renamed Janus Henderson Global Investors and have more than $320 billion in assets and a market cap of approximately $6 billion, according to the press release announcing the deal. In addition, the deal is expected to save an estimated $110 million in “cost synergies” in its first three years.
The current CEOs of each firm—Weil of Janus and Andrew Formic of Henderson—will lead the new firm together, which will apply to trade on the NYSE under the symbol HGG, Henderson’s current listing on the ASX (Australian Securities Exchange).
Under the merger, Janus shareholders will own approximately 43% of the new firm, while Henderson shareholders will own 57%. It’s expected to close in the second quarter of next year, subject to shareholder and regulatory approvals.
In Monday trading, Janus’ stock (JNS) rallied 12% on the news, but by midday Tuesday it had given back more than half those gains. Henderson Global (HGG.LN ) stock rallied 16.7% after the news broke and gave back only 3% on Tuesday. Year-to-day Henderson stock, however, has lost 15.6%, while Janus shares are up 5.5%.
Jefferies downgraded Janus shares from a buy to a hold on Monday, based on valuation.
“We view shares of the pro forma earnings profile as fairly valued at approximately. 14.5x 2017 EPS, which represents a premium to its peers,” wrote analyst Daniel Fannon. “While we view the proposed transaction positively from a strategic sense, growth for the combined entity will remain difficult given current industry trends.”
Jefferies cited the “the broader challenges” of active management as well as the Department of Labor fiduciary rule in the U.S., Brexit and the second installment of the Markets in Financial Instruments Directive in Europe.
In contrast, Jefferies upgraded Henderson Global from an underperform to a hold. “Given the headwinds the business (and the industry) has been facing, it makes a lot of sense to scale up with someone that has a complementary geographic and product suite and this is exactly what Janus provides,” wrote analyst Phil Dobbin. In addition to the merger, Jefferies also cited a partial reversal of the firm’s Brexit assumption, improved AUM and upcoming dividend payment.
How the merger will impact advisors and investors is unclear. In the immediate term expect no impact but down the road could be a different story. “There’s talk of potentially lower costs but it’s not clear if that will translate into lower fees or where they will show up,” said Carlson. “We don’t know at this point.
“There could be collaboration between two firms in terms of running strategies, where managers or team from one from one takes over strategy of another.” No word yet on how the merger will affect Janus’ most well-known fund manager, Bill Gross, who joined the firm in late September 2014 after a sudden departure from Pimco.
In the meantime Carlson recommends advisors and investors watch for personnel changes at Janus funds they own, but he said, “There is no immediate need to get rid of something. It’s so early in the process.”
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