IF ANYONE had any doubts about the impact of index funds on global fund managers, they don’t now. Two of the world’s leading independent asset managers, Janus Capital and Henderson, are merging in a $2.6bn all-share deal. They are not a natural fit culturally.
Henderson was started in London in 1934 to manage the estate of Alexander Henderson, the first Baron Faringdon. I wonder what the baron would have made of Tom Bailey, who founded Janus in Denver, Colorado, back in 1969. Forget the images of Dynasty that will pop into the minds of us baby boomers when we think of Denver. Instead of Joan Collins in shoulder pads, think tobacco-chewing cowboys. Bailey was notorious for a raucous golf weekend known as the Bob Dope Classic.
Janus was riding high in the 1980s and 1990s. It made a virtue of the remoteness of Denver from the noise of Wall Street, especially in the early years before e-mail. I don’t think its funds were ever registered in SA, but I did go to an underground presentation on Janus that proclaimed that no one at the shop even looked at Wall Street research. Janus seemed to be going from strength to strength. The US financial press couldn’t get enough of the funds, which seemed to walk on water, such as the main Janus Fund (a US large-cap fund), the small cap known as Janus Venture Fund and the Janus Worldwide Fund.
But the bust was as brutal as the boom was benign, and Janus has never recovered to the highs it reached in the previous century.
It hasn’t been getting any better, as Henderson saw withdrawals of £2bn in the first half of 2016 (Brexit didn’t help) and Janus $300m — although well over $1bn from equities.
Henderson does not have such a boom and bust history, nor such a colourful management team. In fact, for five years, it was owned by AMP, the Sanlam of Australia, which wouldn’t have encouraged Janus-style raucous behaviour. Henderson has benefited from the misfortune of others, swallowing up two high-profile but troubled UK asset managers: New Star in 2009 and Gartmore in 2011.
All these brands stand for active management and all, in some way, have failed to live up to their initial promise. Many investors are shifting to passively managed funds, which aim to match the returns from an index. It has been shown that active managers can’t beat the index consistently, particularly as markets become more efficient and human intuition can’t beat the increasingly sophisticated algorithms that drive index funds.
The combined Janus Henderson group still has its fans, as it has $320bn under management, or R4.3-trillion — about the same as the 10 largest managers in SA combined. But this is still less than the $330bn Janus alone managed at the height of the late 1990s dotcom boom.
Rising costs and regulatory burdens are squeezing margins. And according to Kyle Sanders, an analyst at US broker Edward Jones, active fund managers need to gain scale to lower costs and reach a wider client base to boost sales. One of the attractions for Henderson was access to the world’s best-known bond manager, Bill Gross, who joined Janus from Pimco two years ago. He is still beating the index, with a return of 6.2% over a year against 5.2% for the Barclays US Aggregate Bond Index.
But the trend is against the new business. The merger looks like the combination of two firms in a sunset industry such as fixed-line telephones or even railways. There will be real savings of $110m a year, and this is 16% of the combined operating profit. Of course, management is putting on a positive spin, saying that Janus gets 77% of sales from the US and Henderson 71% of sales from Europe, the Middle East and Africa (with a big chunk of the rest from Australia), and the new shop has the scale to build a global brand. Maybe the cycle will turn and active funds will come back into fashion, but they look about as fashionable as a Motorola brick cellphone right now.
The economics of the local fund managers remain solid. Coronation is going through a dip, but most companies will still be more than happy to live with their profit margins. Even among mid-sized firms, there seems to be little sign of mergers, and for now it is hard to imagine a marriage between, say, Foord and Prudential, even though I am sure a management consultant could find synergies. So, no confusing new brands for now, although you can expect a few briefcase carriers from the new Janus Henderson to land soon.
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IT HAS been hard to justify writing about hedge funds in the context of retail investments. They have been the preserve of some select institutions and a few wealthy angel investors. But that will change.
Retail hedge funds have been launched under the familiar wrapper of collective investment schemes. They are still outside the means of the mainstream retail investor, as the minimum investment is anything from R50,000 to R250,000, and you can forget about R500 a month debit orders. But it is no bad thing that South African hedge funds have had about 15 years to get some experience before opening to the public. I would be reluctant to suggest investing in hedge funds with only a two-year history to rely on.
The Novare Hedge Fund Survey was launched this week. Novare’s Eugene Visagie, also chairman of the hedge fund industry’s national committee, was a little defensive about the reputation of hedge funds as a cottage industry. I would have thought one of its attractions is that it is staffed by entrepreneurs working from their garages. In fact, well over two-thirds of assets are run by firms with assets of R5bn or more. And three-quarters of assets are run by people with at least eight years’ experience running hedge funds. It is definitely worth avoiding those run by people with less than eight years under their belt, but to be fair, this doesn’t take into account the highly relevant experience they might have gained in long-only management or the trading desk at an investment bank.
It is good to see the pressure on fees that is taking hold. Two-thirds of funds, up from about half the year before, are charging a base of 1%, well below the international norm of 2%. The vast majority of funds still take a 20% performance fee, but at least the hurdle is getting tougher. An increasing number of funds take a benchmark of cash plus 2% or cash plus 3%, which has to be achieved before the performance fee kicks in. The main pressure they have felt has come from funds-of-hedge-funds, which need to justify their layer of fees by pushing down fees from the underlying funds.
The size of funds seems to make a difference to returns. Funds of more than R2bn made a return of 5.9% in the year to June 30 2016, compared with 10.9% for funds with assets of R1bn-R2bn.
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