The history of fund company mergers isn't an especially pretty one. As Larry Fink said at the Morningstar Investment Conference in April, "Mergers suck. They're hard. They take years and years off your life.”.
Janus' global and international equity offerings have largely struggled
Too often they result in culture clashes and the departures of key personnel. It's even more difficult, it seems, to find fund company mergers that benefit fund shareholders in a clear and material way. The merger between US-based Janus Capital Group and U.K.-based asset manager Henderson Group that closed on May 30 doesn't appear to be one of those mergers, at least not yet.
According to a press release Janus and Henderson prepared on the deal, the Janus-Henderson merger, first announced last October, will result in an estimated cost savings of $110 million. And yet no long-term fee cuts for funds have been announced.
Indeed, previous fund company mergers in the past decade haven't always delivered on oft-promised cost savings in a meaningful way. BlackRock and JP Morgan, both of which have engaged in acquisitions, sport Below Average Morningstar Fee Levels on average, but AllianceBernstein, Columbia Threadneedle, Invesco, and WellsFargo who have all taken part in M&A in recent years, show merely middling Average fee levels.
Janus and Henderson may have a starting advantage, both firms' fund fees were modestly lower than their competitors' prior to the merger, but it remains to be seen whether investors will realise a cost benefit after the merger. The industry's record doesn't make a strong case.
That's unfortunate news, as Janus Henderson funds' results haven't stood out in aggregate. Janus Henderson Group's risk-adjusted success ratio, which measures the percentage of a firm's funds that have both survived and outperformed their Morningstar Category peers on a risk-adjusted basis in a given time period, was just 23% during the past 10 years through May 2017.
In comparison, the average success ratio of the 20 largest fund families in the United States by assets was recently 38%.
The current lineup's Morningstar Analyst Ratings reflect its unremarkable nature. Several Neutral-rated funds were recently merged away, but 16 of the 37 remaining funds that are rated earn Neutral ratings. Eleven earn Bronze ratings and 10 earn Silver ratings, but there are no Gold-rated funds in the combined line-up. And neither Janus nor Henderson has been a standout parent company, in our view, which is why both firms earned a Neutral Parent rating prior to the merger.
Fee cuts would benefit fund investors and help the combined firm compete in an industry where fees have been steadily declining in recent years. One prominent transaction that led to fee cuts was BlackRock's 2009 acquisition of Barclays Global Investors and its iShares ETF unit. Some iShares ETFs saw fee cuts in subsequent years, and the firm also launched a suite of cheaper ETFs to help it compete with Vanguard's low-cost ETF offerings, which had gained some market share.
Will the Fund Line-up Be Trimmed?
Janus and Henderson did pare their fund line-ups to a degree in the runup to the close of the deal in an attempt to put more assets in the hands of more-promising managers. Janus merged four funds into other funds managed by Janus and another into a Henderson-managed offering; it also liquidated one fund. In addition, two Janus-managed funds are now run by Henderson managers.
Meanwhile, Henderson merged one of its U.S.-sold funds into a Janus-managed offering while shutting down three other funds.
These kinds of fund consolidations and liquidations tend to be typical in fund-company mergers, and help explain why firms that have merged or made acquisitions tend to have lower success ratios, though they are often eliminating weaker performers to begin with. For Janus Henderson, we expect further consolidation given the extensive nature of the combined company's fund line-up and the question marks within it.
For example, Janus' global and international equity offerings have largely struggled. In some cases, they have seen manager departures in recent years. This year, Janus liquidated a small non-U.S. stock fund in early 2017, merged its emerging-markets funds into Henderson's, and had Henderson take over its Asia-focused equity fund. But Janus still manages sizable non-U.S. and world stock funds with uncertain prospects. Henderson has demonstrated particular expertise in developed Europe and emerging-markets equities and could take over those offerings in the future.
One important risk of fund-company mergers is the loss of investment talent. That's happened a number of times before following fund-company mergers, as veteran portfolio managers with ownership stakes cash out or leave owing to the distractions of integration, which can include culture clashes.
The Janus Henderson merger does make sense for the firm from a distribution perspective. Henderson had a very limited presence in both the U.S. and Japan compared with Janus, while Henderson has a much larger footprint in Europe than Janus.
But while the deal could result in wider distribution for the combined fund line-up and thus more scale, the product line-up doesn't appear compelling enough to attract substantially more investors in a highly competitive landscape for active managers. Lower fees would certainly help, however, and would represent at least one tangible benefit from the deal for fund investors.
