Finance & economics | Asset management

Active defence

A merger reflects how the fund-management industry is changing

WHEN firms merge, their bosses gush Panglossian jargon. So it was with the tie-up announced this week of Henderson Global Investors, an Anglo-Australian asset manager, and Janus Capital, an American one. Janus Henderson, as the combined business will be known, will become a “truly global” asset manager that will deliver “compelling value creation”, boasted its American half. Yet behind the boosterism lie the real fears of active fund managers: of losing business to passive ones—ie, those offering funds that simply track a market index. It is hard not to see the merger as, more than anything, a defensive move.

To be fair, the companies do have a strong business case for merging. Janus is deeply established in America and Japan. It is famous for having in 2014 hired Bill Gross, the “bond king”, when he abruptly left Pacific Investment Management Co, PIMCO, the firm he co-founded and turned into a giant. Henderson’s sales network is centred on Europe. The firms stand to gain more from selling each other’s products in new markets than they will lose from stepping on each other’s toes.

Moreover, the combined firm will have around $320 billion in assets under management. This is enough to propel it into the ranks of the world’s 60 largest asset managers, up from 90th place for Janus and 116th for Henderson, according to Willis Towers Watson, a consultancy. The increased size should create economies of scale: they have the ambitious aim of cutting $110m a year in costs. They also hope the much greater choice the combined firm can offer will help broaden their customer base.

Yet in the background to the merger is the onslaught on active fund managers from research showing they tend not to outperform benchmarks. For example, a recent study by Standard & Poor’s, a credit-rating agency, showed that nearly 99% of active managers in American equities underperformed the S&P 500 index over ten years while in Europe, 86% lagged behind their benchmark over the same period.

According to Morningstar, a data provider, since December 2007 passive assets under management have tripled to $5.7 trillion, while assets in active funds have increased by only 54%, to $23.2 trillion (see chart). In the first eight months of this year, investors drew down $166.2 billion from actively managed funds specialising in American equities alone. In contrast, passive funds attracted almost $110 billion in new investment. Henderson and Janus have not been spared, with both experiencing net outflows in the first half of 2016.

The shareholders of both Janus and Henderson have reacted positively to the deal, with share prices of Janus jumping by 12.2% and Henderson by 16.7% on the day it was announced. If the switch to passive investing continues at such a breakneck pace, other asset managers will surely follow their lead.

This article appeared in the Finance & economics section of the print edition under the headline "Active defence"

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