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Janus Henderson under pressure as Trian eyes consolidation



When Janus Capital and Henderson Global Investors agreed a deal in 2016, it was touted as being transformative for the two struggling midsized asset managers.

Andrew Formica, one of the architects of the all-stock merger and former co-chief executive of the enlarged company, said the move would create a “a new breed of active manager” with global heft, allowing it to withstand the relentless pressures on traditional stockpickers.

Fast forward to four years later and Janus Henderson may be about to be pushed towards doing another deal to allow it to survive. The London-based fund group has been targeted by Nelson Peltz’s Trian Partners, which bought a 10 per cent stake in it last month and called for a fresh round of consolidation among underperforming asset managers.

The activist investor’s targeting of Janus Henderson, which oversees $358bn in assets, reflects shareholder dissatisfaction with the company since its tie-up.

“Janus Henderson hasn’t flourished over the past three years,” says Will Riley, who holds a position in the group in his Guinness Global Money Managers fund.

The group has been hit by higher-than-average investor outflows, losing $68.8bn since the start of 2018. This has hit revenues and affected its share price, which has declined almost 14 per cent since the transaction completed in May 2017. The share price fall stood at about 30 per cent before Trian disclosed its stake.

Janus Henderson’s woes are testament to just how brutal the headwinds facing active managers have become, as well as exemplifying the risks inherent in megamergers.

As consolidation in asset management gains momentum once again, Janus Henderson’s experience points to the thorny choices ahead for active managers, as they consider how to scale up while not destabilising their workforce and clients.

Janus Henderson has struggled to shine since its 2017 merger

The Janus Henderson tie-up was hailed as a way of allowing two managers with limited geographic overlap to compete on the global stage. The idea was to help London-based Henderson, which ex-CEO Mr Formica grew by buying up undervalued investment boutiques in the aftermath of the financial crisis, to break into America while boosting Janus’s profile in Europe.

These results, however, have not yet come through. According to Morningstar, the organic average growth rate of the combined company has lagged that of its US listed asset manager peers between 2015 and 2019, and it is forecast to continue to struggle over the next four years.

Janus Henderson chief executive Dick Weil, who took sole charge of the group in 2018 after leading Janus into the deal, is the first to acknowledge the company’s slow pace of progress. Speaking to media at a conference this week, Mr Weil said that he was confident that Janus Henderson is on track to establish a global presence “that neither independent firm could have afforded separately”. But he added that this process was taking a “frustratingly long amount of time”.

CFRA Research analyst Cathy Seifert says that Janus Henderson has been hindered by its position as a mainly active investment house at a time when the investor flight into index-tracking funds has gathered pace.

“The merger was designed to gain scale and diversification but what it did not address was the secular trend towards passive investing, which has accelerated in the last four years,” Ms Seifert says.

But Janus Henderson has also been hit by specific issues linked to its integration, such as tensions sparked by cultural differences between the two companies.

One former employee points to the contrast between the chummy, relationship-based culture of Mr Formica’s Henderson and the more structured, practical way of doing things at Janus under the leadership of Mr Weil, a former lawyer.

“On the Henderson side there was a very loyal core group of people who had worked together for a long time. Blending an organisation like that with a US firm, which has a more direct way of communicating, was challenging,” the person says.

The divisions were not helped by the merged company’s unusual geographic structure — it is headquartered in London, with dual listings in New York and Australia, and an investment hub in Denver — and its initial co-CEO structure.

Another ex-employee points to the company’s failure to appoint fresh blood to its board — it has appointed only one director unaffiliated with either faction since the merger — as a source of its cultural divisions.

Against this tumultuous backdrop, Janus Henderson has lost a number of high-profile investment staff. The departures have included a number of teams, such as the six-strong high-yield bond and emerging market equities teams.

Meanwhile, several Janus Henderson funds have experienced dire performance, further unnerving clients. Intech, the company’s quantitative investment division, has been particularly hard hit: as at the end of 2019, 84 per cent of the assets run by the unit lagged behind their benchmarks on a five-year basis.

Investors have pulled money from Janus Henderson since its merger

But Mr Weil is upbeat about the merged group’s prospects. At the conference this week, he rejected suggestions of a divided company, describing the group as “genuinely global and not dominated by one culture or the other”.

The chief executive also distanced himself from suggestions that Janus Henderson needs to join forces with a competitor. “There is a lot a good reason and foundation for being sceptical about mergers,” he said. Most deals do not go “anywhere near as well as planned”, he added, pointing to the Janus-Henderson tie-up as an exception to this trend.

It is not yet clear what Trian’s plans are for Janus Henderson or whether it will succeed. The asset manager was only made aware of Trian’s stake the day before it was officially disclosed and has not granted board seats to Trian, as Invesco did earlier this month. Trian declined to comment.

Shareholder Mr Riley believes that the company has the potential to turn itself round on its own. He wants to see it focus on cutting its cost base by 5-10 per cent and repurchasing stock to boost its share price.

He intends to continue holding Janus Henderson based on what he sees as encouraging fund performance potential — according to Credit Suisse, about 55 per cent of the manager’s assets have top Morningstar ratings, compared with an industry average of 32 per cent — combined with its low valuation and 5.7 per cent dividend yield.

Should M&A be called for, Mr Riley says that it would make more sense for Janus Henderson to be acquired by a larger rival, as these deals tend to be less disruptive than mergers of equals, where it is unclear who is in charge.

Ms Seifert agrees that there is reason for optimism at Janus Henderson. “If it can stem investor outflows, its headwinds could become a tailwind,” she says.

However, the fact that the company still languishes among the fund industry’s “squeezed middle” means it is “not inconceivable” that it will seek a partner in future to boost its assets and gain exposure to more passive strategies, she predicts.

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Pimco’s Ivascyn warns of inflationary pressure from rising rents




US Inflation updates

A leading US bond manager has warned of inflationary pressure from housing rental costs that could push interest rates higher and overturn a sense of complacency among investors.

The comments by Dan Ivascyn, chief investment officer at Pimco, which has $2.2tn under management, comes after US 10-year interest rates eased in recent months to about 1.25 per cent. Fears of an inflation surge sparked alarm among bond investors at the start of the year and pushed the important benchmark to a peak of 1.75 per cent by the end of March.

“There is a lot of uncertainty on inflation and while our base case is that it proves transitory, we are watching the relationship between home prices and rents,” Ivascyn told the Financial Times. “There may be more sustained inflation pressure from the rental side.”

Owners’ equivalent rent is a key input used for calculating the US consumer price index. As rents become more expensive, investors could become increasingly concerned about “sticky inflation”, pushing the 10-year Treasury yield back towards 1.75 per cent, said Ivascyn. 

Line chart of US 10-year expected rate of inflation showing long-term bond market inflation expectations loiter near decade peaks

The Federal Reserve said in its latest policy statement last week that it had made “progress” towards its goals of full employment and 2 per cent average inflation. Jay Powell, the Fed’s chair, said there was more “upside risk” to the inflation outlook, although he expressed confidence in transitory price pressure over time.

The latest measure of core consumer prices, which is followed by the central bank, ran at 3.5 per cent over the 12 months to June, the fastest pace since July 1991.

“There is a lot of noise and uncertainty in the data” and “the Fed has a difficult job deciphering the economic information coming in”, said Ivascyn.

The fund manager said the potential for much higher bond yields is probably capped by the prospect of the central bank tightening policy in the event of inflation expectations breaking higher.

Bar chart of assets under management ($bn) showing Pimco Income ranks as the largest actively managed bond fund

“We do believe if the Fed sees inflation expectations rise out of their comfort zone, that they will probably act,” said Ivascyn. “That has been the message from Powell’s last two press conferences.”

Pimco expects the central bank will announce a tapering of its current $120bn monthly bond purchases later this year, with a view to starting the process in January. While the policy shift is being “well telegraphed” and data dependent, Ivascyn said higher bond yields and more market volatility were likely.

“This is a tough market environment and it is a time when you want to be careful,” he said, adding that Pimco had been reducing its exposure to interest rate risk as the bond market had pulled borrowing costs lower. 

“Valuations are stretched and it makes sense to adjust our portfolios.”

Ivascyn oversees the world’s largest actively managed bond fund, according to Morningstar. The $140bn Pimco Income Fund co-managed with Alfred Murata, has a total return of 2 per cent this year, versus a slight decline in the Bloomberg Barclays US Aggregate index. Over the past year, the fund has extended its long record of beating its benchmark, according to Morningstar.

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Wall Street stocks follow European and Asian bourses lower




Equities updates

Wall Street stocks followed European and Asian bourses lower on Friday after markets were buffeted this week by jitters over slowing global growth and Beijing’s regulatory crackdown on tech businesses.

The S&P 500 closed down 0.5 per cent, although the blue-chip index still notched its sixth consecutive month of gains, boosted by strong corporate earnings and record-low interest rates.

The tech-focused Nasdaq Composite slid 0.7 per cent, after the quarterly results of online bellwether Amazon missed analysts’ forecasts. The tech conglomerate’s stock finished the day 7.6 per cent lower, its biggest one-day drop since May 2020.

According to Scott Ruesterholz, portfolio manager at Insight Investment, companies which saw significant growth during the pandemic may see shifts in revenue as consumers move away from online to in-person services.

“[Consumers are] going to start spending more on services, and so those businesses and industries which have benefited in the last year, companies like Amazon, will be talking about decelerating sales growth for several quarters,” Ruesterholz said.

The sell-off on Wall Street comes after the continent-wide Stoxx Europe 600 index ended the session 0.5 per cent lower, having hit a high a day earlier, lifted by a bumper crop of upbeat earnings results.

For the second quarter, companies on the Stoxx 600 have reported earnings per share growth of 159 per cent year on year, according to Citigroup. Those on the S&P 500 have increased profits by 97 per cent.

But “this is likely the top”, said Arun Sai, senior multi-asset strategist at Pictet, referring to the pace of earnings increases after economic activity rebounded from the pandemic-triggered contractions last year. Financial markets, he said, “have formed a narrative of peak economic growth and peak momentum”.

Column chart of S&P 500 index, monthly % change showing Wall Street stocks rise for six consecutive months

Data released on Thursday showed the US economy grew at a weaker than expected annualised rate of 6.5 per cent in the three months to June, as labour shortages and supply chain disruptions caused by coronavirus persisted.

Meanwhile, China’s regulatory assault on large tech businesses has sparked fears of a broader crackdown on privately owned companies.

“It underlines the leadership’s ambivalence towards markets,” said Julian Evans-Pritchard of Capital Economics. “We think this will take a toll on economic growth over the medium term.”

Hong Kong’s Hang Seng index closed 1.4 per cent down on Friday, while mainland China’s CSI 300 dropped 0.8 per cent, after precipitous slides earlier in the week moderated.

Japan’s Topix closed 1.4 per cent lower, after the daily tally of Covid cases in Tokyo surpassed 3,000 for three consecutive days. South Korea’s Kospi 200 dropped 1.2 per cent.

The more cautious investor mood on Friday spurred a modest rally in safe haven assets such as US government debt, which took the yield on the 10-year Treasury, which moves inversely to its price, down 0.04 percentage points to 1.23 per cent.

The Federal Reserve, which has bought about $120bn of bonds each month throughout the pandemic to pin down borrowing costs for households and businesses, said this week that the economy was making “progress” but it remained too early to tighten monetary policy.

“Tapering [of the bond purchases] could be delayed, which in many ways is not bad news for the market,” said Anthony Collard, head of investments for the UK and Ireland at JPMorgan Private Bank.

The dollar, also considered a haven in times of stress, climbed 0.3 per cent against a basket of leading currencies.

Brent crude, the global oil benchmark, rose 0.4 per cent to $76.33 a barrel.

Unhedged — Markets, finance and strong opinion

Robert Armstrong dissects the most important market trends and discusses how Wall Street’s best minds respond to them. Sign up here to get the newsletter sent straight to your inbox every weekday

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US regulators launch crackdown on Chinese listings




US financial regulation updates

China-based companies will have to disclose more about their structure and contacts with the Chinese government before listing in the US, the Securities and Exchange Commission said on Friday.

Gary Gensler, the chair of the US corporate and markets regulator, has asked staff to ensure greater transparency from Chinese companies following the controversy surrounding the public offering by the Chinese ride-hailing group Didi Chuxing.

“I have asked staff to seek certain disclosures from offshore issuers associated with China-based operating companies before their registration statements will be declared effective,” Gensler said in a statement.

He added: “I believe these changes will enhance the overall quality of disclosure in registration statements of offshore issuers that have affiliations with China-based operating companies.”

The SEC’s new rules were triggered by Beijing’s announcement earlier this month that it would tighten restrictions on overseas listings, including stricter rules on what happens to the data held by those companies.

The Chinese internet regulator specifically accused Didi, which had raised $4bn with a New York flotation just days earlier, of violating personal data laws, and ordered for its app to be removed from the Chinese app store.

Beijing’s crackdown spooked US investors, sending the company’s shares tumbling almost 50 per cent in recent weeks. They have rallied slightly in the past week, however, jumping 15 per cent in the past two days based on reports that the company is considering going private again just weeks after listing.

The controversy has prompted questions over whether Didi had told investors enough either about the regulatory risks it faced in China, and specifically about its frequent contacts with Chinese regulators in the run-up to the New York offering.

Several US law firms have now filed class action lawsuits against the company on behalf of shareholders, while two members of the Senate banking committee have called for the SEC to investigate the company.

The SEC has not said whether it is undertaking an investigation or intends to do so. However, its new rules unveiled on Friday would require companies to be clearer about the way in which their offerings are structured. Many China-based companies, including Didi, avoid Chinese restrictions on foreign listings by selling their shares via an offshore shell company.

Gensler said on Friday such companies should clearly distinguish what the shell company does from what the China-based operating company does, as well as the exact financial relationship between the two.

“I worry that average investors may not realise that they hold stock in a shell company rather than a China-based operating company,” he said.

He added that companies should say whether they had received or were denied permission from Chinese authorities to list in the US, including whether any initial approval had then be rescinded.

And they will also have to spell out that they could be delisted if they do not allow the US Public Companies Accounting Oversight Board to inspect their accountants three years after listing.

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