The early returns are meager.
"Mergers suck. They're hard. They take years and years off your life."--Larry Fink, CEO of BlackRock
The history of fund company mergers isn't an especially pretty one. As Larry Fink said at the Morningstar Investment Conference in April, they're tough to pull off. 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 Janus Capital Group and U.K.-based asset manager Henderson Group that closed on May 30 (the combined entity is known as Janus Henderson Group) 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. (There will be one short-term cut involving the calculation of the performance-adjusted management fee of large-growth fund Janus Henderson Forty JDCAX, which absorbed Janus Twenty.) Indeed, previous fund company mergers in the past decade haven't always delivered on oft-promised cost savings in a meaningful way. BlackRock and JPMorgan, both of which have engaged in acquisitions, sport Below Average Morningstar Fee Levels on average, but AllianceBernstein, Columbia Threadneedle, Invesco, and WellsFargo--other acquisitors--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 fundholders will realize 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--Janus was 24th--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 lineup. 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 fundholders 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 (on Fink's watch) 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. (Competition on fees has been especially fierce among passive vehicles.)
Will the Fund Lineup Be Trimmed Further?
Janus and Henderson did pare their fund lineups 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 lineup 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.
A Potential Negative
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. For example, less than three years after Liberty Financial acquired Wanger Asset Management in late 2000, the portfolio managers of its flagship funds--firm founder Ralph Wanger of what is now called Columbia Acorn ACRNX and Leah Zell of Columbia Acorn International ACINX--stepped down from their charges. While the latter fund currently earns a Bronze rating, Neutral-rated Columbia Acorn has seen several manager changes and posted middling performance during the past decade. Overall, a number of firms that have engaged in mergers and acquisitions during the past decade have lower five-year manager retention rates than their peers, including AllianceBernstein, BlackRock, and Columbia.
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 lineup and thus more scale, the product lineup 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.