The research analysts at Macquarie Group Ltd (ASX: MQG) have run the ruler over the newly merged Janus Henderson Group (ASX: JHG) and delivered a favourable verdict on the US$6.6 billion asset manager's outlook.
The combined group is expected to have funds under management (FUM) of around US$330 billion across fixed income, equities, and other alternative asset classes, with leverage to the US, UK and European debt and capital markets in particular.
Henderson has a decent reputation as an asset manager in the UK and for Australian investors it represents a rare opportunity to get exposure to a fully integrated global asset manager with scale. The only alternatives are Macquarie Global Ltd (ASX: MQG), or Sydney-based Magellan Financial Group Ltd (ASX: MFG) that also both have a focus on European and US capital markets.
JHG expects to achieve around US$110 million in cost savings as a result of the merger, and controlling costs will be critical to the bottom line and shareholder returns.
The top line challenge for large-scale asset managers remains investment performance, which powers institutional business development via new mandate wins. JHG has a decent track record in this regard, as a classically integrated asset manager, with in-house sales and client services teams to win and serve institutional clients.
Retail FUM flows for groups like JHG tend to be more leveraged to overall investor confidence as flows into (higher fee) emerging market or absolute return (hedge) funds for example will tend to follow the cycles of private investor confidence in the wider economic outlook.
It's also notable that although JHG is listed on the S&P/ASX 200 (Index: ^AJXO) (ASX: XJO) (as a result of its former ownership under AMP Limited (ASX: AMP)) it only has relatively small asset management functions across Australasia.
It does though have ambitions to grow in the region and the combined group's financial firepower mean it may eventually make an offer to acquire the likes of independent Australian equities fund manager Perpetual Limited (ASX: PPT).
Outlook
According to financial news wires Macquarie is forecasting that JHG will earn an FX-adjusted dividend of 81.3 cents per share in FY 2017 on earnings of $1.98. That means it trades on around 22x estimated FX-adjusted forward earnings, which is expensive and goes to show how well regarded the business is by analysts.
It also goes to show how cost savings are expected to help deliver FX-adjusted earnings per share of $2.27 in FY 2018, which would place the group on 19x FY 2018's estimated earnings and a dividend yield around 2%.
Macquarie has a bullish $49.89 share price target on the stock as a result of its earnings estimates, but to me the elephant in the room remains the unknown impact of the coming Brexit on UK investor confidence.
JHG (like others including Macquarie) will have to navigate UK domiciled asset mangers' departure from the EU's Markets in Financial Instruments Directive (MiFID) and the subsequent lack of passporting rights could have a detrimental impact on FUM flows in more ways than one. Moreover, rising costs, falling confidence, and regulatory uncertainty associated with Brexit could mean a perfect storm is brewing for the UK's financial services industry.
In investing it's better to be six months too early than six minutes too late, and I'm giving Janus Henderson shares a miss for now, although they may do well over the short term at least.
