Introduction
Janus Henderson Group (NYSE:JHG) has had a pretty good run since I downgraded my rating to Hold in February 2024. As at the time of writing, JHG is up by ~8.5% since the downgrade, which compares to an increase for the S&P 500 of 8.1%. All else being equal, fund managers that have AUM (assets under management) with a heavy exposure to equities will generally outperform when equity market returns are positive and underperform when equity market returns are negative (JHG has 63% of AUM in equities plus additional exposure to the equities asset class via ‘multi-asset’ products). With that in mind, JHG’s outperformance of the S&P 500 is not at all surprising, and it could certainly be argued that the JHG share price has underperformed relative to its expected leverage (or beta) to equity markets.
The company published 1Q24 results on May, 2 2024 and concurrently announced two acquisitions described by CEO Ali Dibadj as ‘prime examples of our strategic pillars of amplify and diversify’. In this note, I will focus on JHG’s product investment performance and comment on the new deals. I will also review my rating for JHG in light of an updated valuation assessment.
Product Investment Performance
A successful and sustainable funds management business relies upon the ability to consistently deliver strong investment performance for clients. Both peer-relative and benchmark-relative metrics are important; the former particularly so for the retail sales channel. In the charts below, I have tracked JHG’s investment performance metrics over all reported time periods at quarterly measurement points dating back to 4Q18 (note that the 10-year data only started to be provided from 4Q20 onwards). The data is split into Equity, Fixed Income and Total AUM.
Peer-relative analysis:
Benchmark-relative analysis:
JHG management have been describing product investment performance as ‘solid’ for many quarters, and repeated this message once more in their 1Q24 commentary. For the most part, I have agreed with management’s assessment of product investment performance, although during 2021 I thought that ‘slightly soft’ would have been a more accurate label to use.
As the charts above illustrate, broadly speaking, product investment performance as at 1Q24 is certainly not bad, and ‘solid’ strikes me as a fair adjective to apply. The problem with ‘solid’ investment performance, is that although it is supportive of client AUM retention, it is not so helpful for AUM gathering (for which, top quartile investment performance is needed). There is nothing in the investment performance data that points to an obvious JHG-specific cause of net outflows, and so I think that it is reasonable to conclude that JHG’s net flow problems are more of an industry issue than a company issue. Which leads nicely on to the topic of the deals that JHG announced on May 02, 2024.
Amplifying & Diversifying
Similar to many other large ‘traditional’ fund managers, JHG has been battling to stem a steady stream of net outflows for several years. In JHG’s case, my view is that the company is not doing anything obviously wrong that is driving net outflows – product investment performance is at least satisfactory, and I am not aware of any major problems with JHG’s sales/distribution functions. Similar to peers, JHG has concluded that it needs to beef up its exposure to sectors of the investment product market that are showing more promising growth potential than exists for its legacy product range.
An obvious risk to be mindful of here is that JHG and peers may be reacting with a sense of urgency and simply chasing the latest fad (recall the very recent boom and hype around ESG funds, which is already fading). At present, my view is that many acquisitions which are justified by traditional fund managers on the sensible grounds of diversification are actually more like momentum trades. It is somewhat ironic that active fund managers who talk enthusiastically about the benefits of not following the crowd in their investment decisions tend to be rather sheep-like when it comes to strategic actions at the operational level.
Organic development of new product capabilities takes time, and even more so when moving into market sectors in which a fund manager lacks existing expertise. It was fairly obvious that CEO Dibadj was hired to drive change and it is apparent that he has been given access to JHG’s balance sheet in order to achieve that goal. In June 2023, JHG announced a JV with Privacore that was focused on the distribution of alternative investment products to retail clients. Under the categorization of CEO Dibadj’s strategic vision for JHG, the Privacore deal falls within the ‘Diversify’ pillar and represents the addition of a new capability in the Alternatives space. At 1Q24, we learned that JHG has made two further investments – one falling within Diversify, and the other within Amplify. It should be noted that neither transaction was large enough to require the disclosure of financial terms.
Looking first at the Amplify play: JHG announced that it will acquire Tabula Investment Management (Tabula), an independent ETF provider in Europe with $500m in AUM. An attraction for JHG was that Tabula runs nine UCITS ETF products (mainly fixed income and sustainability). UCITS is an EU investment vehicle regulation scheme; UCITS-compliant funds can be marketed to retail investors and must adhere to common risk and fund management standards. UCITS is now the dominant wrapper via which European retail investors make investments in fund products. Investors beyond Europe are also able to invest in UCITS vehicles and JHG hopes to leverage this distribution flexibility.
JHG’s push into active fixed income ETFs in the US market is going well, and I believe that this success has emboldened management and the board to make the move for Tabula. If JHG is correct in its assessment that the European ETF market has an attractive future growth profile, then this Amplify deal may pay off. In terms of balance sheet implications, on top of the deal cash costs incurred, it is also worth noting that JHG will very probably pump funds into new Tabula ETFs post completion.
Under the Diversify pillar: JHG announced that it has entered into a partnership with NBK Wealth, the wealth management arm of the National Bank of Kuwait Group, under which NBK Wealth’s private investments team – NBK Capital Partners – will join JHG. NBK Capital is an alternative investment manager, active in private capital asset markets in the Middle East, North Africa and other emerging regions. JHG already has emerging markets exposure via equity funds and a recently launched emerging markets public debt business, and so NBK Capital Partners is being put forward as a further diversification of emerging markets offerings. Management argue that private capital products are under-represented in emerging markets and that this deal represents a growth opportunity. A further potential upside from the deal is that it may give JHG access to a broader range of clients that have existing relationships with NBK Wealth, including sovereign wealth funds in the Middle East and Asia.
I am pleased that the NBK deal does not come with a substantial price tag, as there is a very real risk that JHG is making a momentum-style acquisition here, and doing so at a potentially worrying time. Private credit strikes me as the new ‘must have’ product offering for fund managers and I fear that growth expectations for private credit markets may be too optimistic. With so much capital having moved into private debt markets in recent years, there is a good chance that credit risk in the sector has been significantly underpriced, which is likely to result in material losses when the next credit cycle emerges.
JHG has an established alternative investment products segment (note: this is a very broad ‘asset class’ that is not well-defined). As the chart below shows, despite lots of positive noises about the growth potential of the Alternatives space, JHG’s AUM exposure to Alternatives at 1Q24 was very low at 2.4% of AUM, and compares against an exposure of 4.8% at 2Q18. In dollar terms, at 1Q24 JHG reported Alternatives AUM of $8.6bn, which represents less than half of the reported 2Q18 Alternatives AUM of $17.6bn. I’m sure that JHG must be disappointed with their progress in Alternatives over the last five years, and this performance does not fill me with a great deal of confidence regarding the potential for the ‘Diversify’ plays of Privacore and NBK Capital to deliver meaningful shareholder value.
An acquisition by a large fund manager of a successful smaller businesses will almost always deliver handsome rewards for the owners and key staff of the acquired business. The results for shareholders of the acquiring entity are all too often rather disappointing. For this reason, I believe that JHG’s strategic pillars of Amplify and Diversify (in particular the latter) represent an area of concern and likely downside risk. That being said, I am somewhat comforted that the deals done to date have not been large. Further, with JHG announcing at 1Q24 that the share buyback program has been extended by a further $150m, the risk of JHG blowing up substantial shareholder value on unwise acquisitions appears to be relatively low.
Democratization Risk
When talking about the Privacore JV in the 2Q23 results management presentation, JHG referred to the ‘democratization of alternatives’, and the ‘broader democratization of sophisticated investment products’. The term ‘democratization’ sounds like something positive, worthwhile and to be encouraged; it’s therefore no surprise that JHG and many other investment houses are exuberantly throwing the term around in marketing materials and management presentations.
In truth, the investment industry’s push to ‘democratize’ complex and sophisticated assets by opening them up to retail clients has absolutely nothing to do with the positive connotations associated with the idea of democracy – the motivation is simply to drive AUM sales. Of course, fund managers applying a bit of spin in order to drive sales is nothing new – so why am I wasting words to highlight this issue?
My concern here is that fund managers and financial advisers are deliberately using the democratization label to gloss over the fact that they are striving to sell complex and high-risk investment products to retail clients who are not well-placed to properly understand the risk-reward profile that they are being encouraged to take on. Using private credit as an example – this is an opaque and high-risk investment segment, and one that retail investors have not historically been able to easily access (for good reason). The sales pitch to a potential retail client is very obvious – ‘look, with this newly packaged product, you can now get access to an attractive asset class that was only previously available to big institutions – the playing field has been levelled by innovation, and you too can now gain exposure to these attractive yields’.
I fear that sales-hungry retail-focused financial advisers will do a good job of promoting the democratization concept, and a bad job of communicating the level of investment risk associated with an asset class such as private credit. Financial regulators have a habit of missing obvious risks, and unless they take action on this issue soon, I worry that ‘investment product democratization’ will lead to a wave of mis-selling to retail investors that may ultimately result in fund managers such as JHG incurring material remediation costs and regulatory fines.
Rating Update
Using JHG’s 1Q24 reported AUM of $352.6bn as a starting point, my normalized valuation framework generates a base case P/E of 11.1x. Note that this valuation allows for a decline in the net management fee rate to 48.2bp (from 48.7bp reported in each of the last three quarters), and further net outflows in FY24E of -$6.0bn. Equity markets have been quite strong for the period 1Q24 to date – as of the time of writing, the average return QTD across the S&P500 and MSCI World accumulation indices is ~2.9%. Adjusting my valuation for the positive QTD influence of markets on JHG’s AUM, I currently arrive at a P/E of around 10.7x.
My fair-value benchmark for a fund manager is a P/E of around 12x. Given the wide range of economic and geo-political uncertainties that investors currently face, I am hesitant to bake in the benefits of strong equity markets post 1Q24, and so I lean towards the base case P/E of 11.1x as a measure of JHG’s value appeal.
From a fundamental perspective, I see little change in the investment case for JHG relative to my prior review of the company. The stock is not unreasonably expensive, nor is it obviously cheap. Management appear to be doing a fair job of managing the business, but headwinds on net flows do not show any sign of easing. Whilst I can understand the strategic rationale, I am not excited by JHG’s Diversify and Amplify deal-making. On the other hand, I am supportive of the continued policy to return capital to shareholders in the absence of attractive investment opportunities. For income-focused investors, given JHG’s price appreciation over recent months, the dividend yield has retreated further and is now coming in at 4.8%. On balance, I conclude this review with an unchanged rating of Hold.
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