MoneyBeat: Janus Deal Lifts Hopes for Copycats -- WSJ

By Chris Dieterich 

Will Monday's tie-up between U.K.-based asset manager Henderson Group PLC and Denver fund company Janus Capital Group spark a long-awaited deal spree within an industry struggling to sell mutual funds run by stock and bond pickers?

News of the all-stock deal on Monday pushed shares of Henderson up 17% in London, while Janus rose 12% in New York. A raft of other beaten-down asset-management industry stocks rose even as the broader U.S. market inched lower, a sign that investors suspect more deals are in the hopper.

Franklin Templeton parent Franklin Resources climbed 2%, while shares of Overland Park, Kan., fund company Waddell & Reed Financial rose 1.1%. The latter has seen its share price cut nearly in half this year as investors pull money from its funds.

Other asset manager stocks, including Eaton Vance, fell.

"The trend of M&A in this industry is going to increase as firms look to stay relevant in an increasingly challenging market to operate vs passive products and increased regulatory scrutiny," wrote Daniel Fannon, an analyst at Jefferies.

But there are reasons for investors to be cautious in betting on consolidation in the industry. While Monday's deal news "may spark M&A discussion," the terms of the transaction are modest enough to temper investors' expectations of big premiums, Citigroup Inc.'s William Katz says. Analysts also agree that more deals are likely but have mixed views on whether these will arrive sooner or later. Both potential time frames highlight issues facing asset managers.

Years of sluggish performance by stock pickers has helped boost demand for lower-cost, index-tracking mutual and exchange-traded funds. Just 14% of large-capitalization mutual funds had beaten the S&P 500 in 2016 through August, an all-time low, according to Bank of America Merrill Lynch. Net withdrawals from actively managed funds this year have exceeded $200 billion, a record. Meanwhile, nearly $150 billion in investor cash has moved to index funds, putting pressure on firms to do deals quickly.

Analysts also expect that rules that will require stockbrokers to act in the best interest of investors when providing guidance for individual retirement accounts will accelerate money flows into stock index funds. These so-called fiduciary rules are likely to lead to increased consolidation, but not until the industry fully understands the ramifications of the regulations, UBS analyst Brennan Hawken wrote.

"We do not expect to see a flurry of activity until the impact of the rule becomes more clear," he said.

A combined Henderson/Janus will oversee around $320 billion and have footprints in the U.S., Europe, Asia and Australia. The merger aims to save money and boost revenue by expanding global distribution for funds run by stock and bond managers.

"Active management is at the heart of what we both do," Andrew Formica, the chief of Henderson, told investors in a call on Monday. Mr. Formica will serve as co-CEO with Janus's Dick Weil.

Reaching new markets is critical for fund companies at a time when even star managers are losing traction with investors. Since Janus added legendary bond investor Bill Gross, the co-founder of Pacific Investment Management Co., in 2014, Mr. Gross's Janus Global Unconstrained Bond Fund has gathered just $1.5 billion in assets, a sliver of the nearly $300 billion once managed by Mr. Gross in his main fund during his run at Pimco.

Mr. Formica described the merger as "manna from heaven" for Mr. Gross because a combined company will have more marketing resources for his fund. The merger potentially means new beachheads for Janus ETFs, too. Janus acquired the parent company of VelocityShares, a $3.8 billion ETF issuer best known for its products tied to the CBOE Volatility Index, in 2014. Janus recently debuted ETFs tied to organic foods and fighting obesity, among other niche themes.

--Sarah Krouse contributed to this article

Write to Chris Dieterich at [e-mail]

(END) Dow Jones Newswires

October 04, 2016 02:47 ET (06:47 GMT)

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