Improving Markets Have Lifted Janus Henderson's AUM, but Headwinds to Flows Persist

Strategist

Greggory Warren

A confluence of several issues—poor relative active investment performance, the growth and acceptance of low-cost index-based products, and the expanding power of the retail-advised channel—has made it increasingly difficult for active asset managers to generate organic growth, leaving them more dependent on market gains to increase their assets under management. While we believe there will always be room for active management, the advantage when it comes to getting and maintaining placement on distribution platforms will probably go to asset managers that have greater scale, established brands, solid long-term performance, and reasonable fees—with Janus Henderson falling short in most of these categories.

With $334.9 billion in AUM at the end of December 2023, Janus Henderson has the size and scale necessary to be competitive in the industry and is structurally set up to hold on to assets regardless of market conditions, being somewhat diversified across its four main asset class segments—equities (61% of managed assets), fixed income (21%), multiasset (15%) and alternatives (3%). However, this has not always translated into solid organic growth or above-average profitability. While the firm's adjusted non-GAAP operating margins of 36.4% on average during 2017-23 were on par with the peer group average of 36%, they have been as high as 43% (in 2021) and as low as 30% (last year). We have margins staying at the lower end of that range in future.

Although management has embarked on yet another turnaround plan, aimed at upgrading the company's leadership team, cutting $45 million from annual expenses, increasing the focus on alternative investments, and investing in its U.S. intermediary business, we think these efforts will merely allow the firm to continue treading water as it faces ongoing fee and margin compression in its core operations. With the industry continuing to face such stiff cyclical and secular headwinds, we envision Janus Henderson's organic AUM growth to be in a negative 5% to 1% range during 2024-28, with revenue growth and operating margins affected by industry fee compression and the need to spend more to be competitive.

Business Strategy & Outlook

We believe the asset-management business can be conducive to the creation of economic moats, with switching costs and intangible assets being the most durable sources of competitive advantage for firms in the industry. Although the switching costs might not be explicitly large, inertia and the uncertainty of achieving better results by moving from one asset manager to another tend to keep many investors invested with the same funds for extended periods. As a result, money that flows into asset-management firms tends to stay there. For the U.S. fund industry, the average narrow redemption (retention) rate, which does not include exchange redemptions, has been 25% or less (75% or greater) annually during the past 5-, 10-, 15-, 20-, 25-, and 30-year time frames. Including exchange redemptions, the rate has been less than 30% (greater than 70%). Firms offering niche products with significantly higher switching costs—such as retirement accounts, funds with lockup periods, and tax-managed strategies—have tended to hold on to assets longer.

While the U.K. market has a lower redemption rate than the U.S. historically, it also has had a greater reliance on financial advisors to distribute mutual funds and is required to adhere to the 2013 Retail Distribution Review, a set of regulatory changes aimed at improving standards of financial advice and consumers' investing comprehension. The U.K. market also faces the recently implemented MiFID II, which sets new rules in Europe for the structure of markets and the trading of financial instruments and prescribes conduct of business standards for the provision of investment products and services. These factors are expected to move overall redemption rates closer to what we've seen in the U.S. One clear differentiator for U.K.-based asset managers, though, is that British fund companies have the right to halt redemptions under "extraordinary circumstances" to protect the interests of investors with a longer-term investment horizon. 

In Janus Henderson's case, the firm's average annual redemption (retention) rate (based mostly on Janus Capital Group historical data) was 25% (75%) during 2019-23 and 26% (74%) during 2014-23, more or less in line with the industry averages (when including exchange redemptions). That said, the firm's organic AUM growth rate of negative 5.6% (negative 5.1%), with a standard deviation of 3.4% (2.9%), during 2019-23 (2017-23) was worse than the average of its publicly traded peers, which meant the firm was doing a poorer job of selling its wares and taking advantage of its average redemption (retention) rate relative to the industry, overall. Our current forecast has Janus Henderson generating negative 2.2% (negative 1.8%) average annual organic growth during 2024-28 (2024-33), with a standard deviation of 2.8% (2.6%).

We believe more traditional asset managers like Janus Henderson can improve on the switching cost advantage inherent in their business models with organizational attributes (such as product mix, distribution channel concentration, and geographic reach) and intangible assets (such as strong and respected brands and manager reputations derived from successful and repeatable records of investment performance) that can provide them with a degree of differentiation from their peers. While the barriers to entry are not significant for the industry, the barriers to success are extremely high—as it takes time and skill to not only put together a long enough record of investment performance to start gathering assets but to build the scale necessary to be competitive. This has meant the larger, more established asset managers have tended to have an advantage over smaller players, especially when it comes to gaining cost-effective access to distribution platforms. 

That said, we do not think cost advantage applies to the asset managers, as scale does not always confer better-than-average operating profitability or the ability to undercut competition on price (given that the industry tends to behave as an oligopoly when it comes to pricing). Competition for investor inflows can be stiff and has traditionally centered on investment performance, especially in the retail channel. Although institutional investors and retail gatekeepers are exerting pressure on pricing, competition based on price has been rare, aside from what we've seen in the U.S. market for exchange-traded funds. While compensation remains the single-largest expense for most asset managers, supplier power has been manageable as many firms have reduced their reliance on star managers and have tied manager and analyst pay to both portfolio and overall firm performance. 

Asset stickiness (the degree to which assets remain with a manager over time) tends to be a differentiator between wide- and narrow-moat firms, as those asset managers that have demonstrated an ability to gather and retain investor assets during different market cycles have tended to produce more stable levels of profitability, with returns exceeding their cost of capital for longer periods. While the more broadly diversified asset managers are structurally set up to hold on to assets regardless of market conditions, it has been firms with solid product sets across asset classes (built on repeatable investment processes), charging reasonable fees, and with singular corporate cultures dedicated to a common purpose that have done a better job of gathering and retaining assets. 

In our view, Janus Henderson has struggled to maintain a narrow economic moat. With $334.9 billion in AUM at the end of December 2023, the company has the size and scale necessary to be competitive in the industry and is structurally set up to hold on to assets regardless of market conditions, being somewhat diversified across its four main asset class segments—equities (61% of managed assets), fixed income (21%), multiasset (15%) and alternatives (3%). But this has not always translated into solid organic growth or above-average profitability. While the firm's adjusted non-GAAP operating margins of 36.4% on average during 2017-23 were on par with the peer group average of 36%, they have been as high as 43% (in 2021) and as low as 30% (last year). We have margins staying at the lower end of that range in future. 

The company does have some diversification in its AUM by distribution channel, providing investment management services to retail intermediary (55% of managed assets), self-directed (23%), and institutional (22%) clients. While Janus Henderson remains heavily dependent on North American investors, which accounted for 59% of the company's AUM at the end of last year, clients in the EMEA and Latin American regions account for 31% of managed assets, with the remainder coming from the Asia-Pacific region (most of which comes from the Daiichi Life Holdings relationship in Japan).

We continue to expect all the asset managers operating in the U.S. to be under the microscope as the gatekeepers of platforms in the retail intermediary channel look to keep their platforms clear of products that they perceive to be too costly or too risky. We think Janus' lower fee structure will probably compensate for its middle-of-the road fund performance, limiting the overall impact of the changes we've seen in retail fund distribution the last five-plus years. 

In the U.K., the 2013 implementation of the Retail Distribution Review has shaken up retail intermediary distribution by banning trailer fees, which has led to a greater focus on fees and performance, and in some cases led to the merger of manufacturing and distribution assets. The impact of MiFID II, which set new rules in Europe for the structure of markets and the trading of financial instruments and prescribes conduct of business standards for the provision of investment products and services, is harder to quantify, especially as Brexit is likely to add a layer of costs for U.K.-based asset managers operating on the continent.

Narrow

Economic Moat

Janus Henderson Group

Janus Henderson Group Plc is a holding company, which engages in the provision of asset management services. It offers investment solutions including equities, quantitative equities, fixed income, multi-asset and alternative asset class strategies. The company was founded on Jan 23, 1998, is headquartered in London, the United Kingdom.

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Janus Henderson Group Plc is a global active asset manager offering investment solutions including equities, fixed income, multi-asset and alternative asset class strategies. The company was founded in 1934 and is headquartered in London, the United Kingdom.

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