In Voltaire’s Candide, Dr Pangloss, believes all is “for the best in the best of all possible worlds”. Sadly, Panglossian optimism rarely bears out in asset management M&A. Andrew Formica, co-CEO of Janus Henderson Investors since May 2017, is no misguided optimist. But the Australian cannot resist citing the benefits of the Janus Henderson tie-up. These derive from a remarkable similarity in revenues, AUM and headcount, and a lack of geographical, client and product overlap.
The Janus Henderson deal does, of course, create scale. But, as Formica explains, “it’s scale in a different sense; scale in distribution and client geography. A lot of people when they look at scale-type deals, they think about consolidation in a home market.”
He adds: “Here we had very little overlap in the investment team, so we never actually took up capacity in an individual product. What we did however do was improve our scale by jurisdiction. So Janus didn’t have scale in the UK and European marketplace. We did. Janus Henderson does. Henderson didn’t have scale in America. Janus did. Janus Henderson does. In Australia, both firms had a modicum of scale, but not sufficient. Now the combined firm definitely does.”
What little rationalisation work was needed was executed in 2017. Henderson’s mutual fund range was folded into Janus’s and rebranded, and Henderson’s emerging market team took prominence.
Speaking at an analysts’ conference last December, Formica said scale and geographical reach should allow the group to position itself as a solutions provider offering deeper client relationships. He also mentioned the opportunity to forge global products in areas like small cap and high yield.
According to the co-CEO, who admits he never expected to be the boss of Bill Gross, creating new fixed income products will fall to Jim Cielinski, the recently appointed global head of fixed income. He joined late last year from Columbia Threadneedle, where he integrated two bond teams. Janus Henderson already has various multi-asset and diversified credit strategies, which can now be enhanced; Janus had a large loans team, for instance which could be one area in which to expand the geographical focus in credit.
Traditional active equities will present a challenge, although the group is well positioned to meet demand for quant-driven approaches through its INTECH boutique, inherited from Janus and where Formica is a director.
“Janus had active fund management at its heart from the day it was set up by Tom Bailey. That was very much the Henderson approach. I think it’s really important that people focus on the value of active funds. The argument around passive has purely been on cost, not on value. And in a low interest rate world if we could add 200-300bps after fees to client portfolios, it’s a significant uplift. We haven’t been good enough at articulating how well we’ve done on that front.”
Like other industry CEOs, Formica is bullish about what artificial intelligence and big data can bring to active strategies. Applying AI to trading rules to rationalise decision making around news flow could give fund managers insights into their trading patterns, or help with portfolio optimisation. AI is complementary to algorithmic, rules-based quant, Formica says, precisely because it will soon be able to deliver its own insights and define rules.
Applying insights from big data can be done in-house, although data scientists are currently in high demand in finance and few understand asset management: “The only way to get them is to sit them with your PMs and build on that,” Formica says.
He is frank about tech related spending, where hedge funds are leading the charge. “I think if you don’t invest and understand it then your risk will be a challenge from potential new entrants. I think at the moment it’s a costly investment that you have to make with an uncertain payback. Bringing in any new technology, particularly given the pace of change, you’ve got to be prepared to adapt at a rapid pace.”
Regulatory expenditure is a mandatory cost that Formica fears could crowd out investment in desirable areas, including technology. He puts the one-off cost of MiFID II implementation at £10m (€11.4m), meaning Janus and Henderson would have spent £20m between them as seperate entities, underlining the benefits of scale: “We were able to free up the ‘other’ £10m…. and spend it in areas like data scientists.”
Ironically, or perhaps deliberately, Janus Henderson’s two-headed CEO-structure echoes Janus’ old two-headed logo representing the Roman god of transitions and new beginnings (among other things). As the other co-CEO, Dick Weil has relocated from Denver to London with his family and occupies an office next to Formica’s. Formica cites workload sharing as a clear advantage to the structure. “The burden on one individual bringing these firms together is enormous. Dick’s in Denver this week [December 2017]. A couple of weeks ago I was in Denver. It’s important that we are seen in all the jurisdictions.”
How long will the co-CEO roles last? “Those benefits do erode through time,” Formica concedes. “And the board will sit and evaluate that over the life of the integration, which is up to three years.” At some point, the board will evaluate the structure and the various options – keeping the two men, choosing one of them or getting rid of both of them. “There’s no commitment given to either of us. It’s purely about what’s right for the firm.”
Formica sums up his experience of the integration. “It’s a real sharing of ideas and knowledge, and collaboration not driven by leadership insisting on it and imposing it, because I’m not sure you can. [Staff] genuinely like and respect the quality of the work, and they see how to add value to the work they’re doing. There’s a real openness on both sides to share, and that’s been probably the best thing.”
The Janus and Henderson tie-up may or may not be among the best of all possible asset management mergers. In Candide, Pangloss’s optimism gave way to disillusionment, and Janus (the god) looks both forward and backwards. Time will tell whether Formica and Weil experience elation or disappointment when they look back on the merger.