Janus Henderson: Adverse Risk/Reward (NYSE: JHG)

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August Karlsson

With Janus Henderson, the world’s largest asset manager (NYSE: JHG) new CEO, Ali Dibadj, at the helm, the company is entering a period of transition which will ultimately take time to bear fruit. The second quarter 2022 report highlighted the the extent of the underlying issues, particularly on flows, which continue to experience structural headwinds (probably much worse had it not been for a mandate win of around $3.7 billion in alternatives this quarter). Additionally, Janus is now also moving towards a much higher compensation expense ratio than before, offsetting any benefit from non-compensation expense growth in the low to mid single digits. Overall, I remain neutral on the stock, even taking into account Trian interest and the inexpensive valuation of around 11x FWD, as the uncertain macro outlook and structural industry headwinds could still drive further down from here.

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JHG data by YCharts

Flow Headwinds Cloud Janus Quarter

While the second quarter tends to be a seasonally favorable quarter for performance fees, the lackluster performance of JHG’s funds weighed on the latest figures. Not only were the flagship funds well below their high watermark, but the flagship open-ended fund Absolute Return was also unable to contribute fees at its annual measurement point. More broadly, performance over three, five and ten years was significantly down to 60% (-2% QoQ pts), 65% (-9% QoQ pts) and 76% (-7% QoQ pts), respectively. So it’s no surprise that it was a bad quarter for streams, with overall net outflows of around $7.8 billion. This was net of a major one-time gain of around $3.7 billion in alternatives, although – outside of this mandate, alternative flows would have been a disappointing -$1.5 billion for the trimester.

AUM performance overview

Janus Henderson

Of note, the quarter also saw ~$2B in redemptions from a sterling buy-and-hold credit strategy, with approximately $4B in additional capital to be redeemed from this longer term. late in the year. Taking into account this loss of mandate, the institutional channel is guided to generate net outflows for the remainder of 2022. That said, there is additional downside risk here – by management, in the likely event that investment performance continues to lag, overall performance fees are guided to reach -35 to $45 million for 2022. This implies an acceleration of the decline in performance fees in the second half of 2022, which, coupled with US fulcrum (currently at -$15 million on Q2 2022 performance fees of -$3.4 million), implies a likely negative performance fee for the full year.

Revise the guidelines on the rate of execution of expenditures

With revenues likely to remain under pressure for the foreseeable future, JHG may be forced to scale back some of its planned strategic investments, particularly in unpaid expenses. After previously guiding to a compensation ratio in the low 40% in the first quarter of 2022, management has since revised this ratio upwards to the 44-45% range – likely a response to the negative trend in performance fees. Similarly, JHG lowered its full-year out-of-competition growth forecast to “low to mid-digit” (from “weak teens” previously) – in stark contrast to the new CEO’s repeated intention to a “strategic investment” in the company. This decision makes sense, in my opinion, given this difficult market environment, and could be a first step towards further rationalizing its non-compensation cost base. On the other hand, the reliance on cost reductions without offsets suggests that funding for any future investment may not be revenue-funded alone, in my view.

Operating expense and revenue update

Janus Henderson

In the meantime, JHG will also have to deal with a sea of ​​management changes alongside the CEO transition – for example, its global head of distribution and marketing, Suzanne Cain, has just left (after a tenure of around 3 years) to be replaced by two senior members of its North American sales team. Suzanne’s departure follows that of the CIO at the start of the second quarter – despite incentives to retain senior executives. Given that the management reshuffle follows structurally challenged flow performance, this could be an indicator of broader internal streamlining to come. However, it is unclear whether this issue is ultimately fixable, given that JHG peers have faced similar headwinds amid lagging performance by active funds and the broader globalization of distribution these last years. Still, new CEO Ali Dibadj’s confidence in a turnaround is a positive sign – even if it came with the caveat that there was no quick fix to the short-term pressures of underperforming strategies and of a difficult macroeconomic environment. According to Dibadj, significant investments will be needed to begin a turnaround, with benefits likely in more than a year.

Return on venture capital in the face of EPS pressure

JHG’s emphasis on strategic investing could have significant implications for capital allocation, particularly if EPS approaches the ~$2 mark in 2023. Assuming H2 2022 headwinds continue and that the updated pay ratio guidance of 44-45% (vs. low 40% previously) remains intact, this could mean a potentially unsustainable dividend coverage of >70%. Not only could this lead to a reduction in the ability to buy back shares, but it could also threaten the sustainability of the dividend if the fund’s performance deteriorates further (for example, if a market downturn materializes). Additionally, reduced balance sheet capacity would impact JHG’s ability to deploy capital into major M&A and reinvestments (including executive hires), likely delaying the outcome of the new CEO’s strategic plan for the company. ‘company. Over the next few months, I would closely monitor the pace of outflows, especially given the continued macroeconomic uncertainties and leadership transition.

Janus Henderson Estimates of EPS coverage and return on capital

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Adverse Risk/Return

With the leadership change now complete and dusted off, JHG is about to enter an extended “transition” period, which involves significant strategic investment and the resulting benefits likely years from now. In the meantime, however, the lagging performance of the fund is a risk, as well as the prospect of market fluctuations affecting the financial merits of the strategy over the medium to long term. With the JHG compensation spend base also largely inflexible and no handy fruit available, a revaluation is likely a long way off (if it materializes at all). While the shares are trading at relatively inexpensive levels and could benefit from interest from Trian, it is difficult to look past the structurally contested outlook for flows as well as the industry backdrop. Net, I would stay on the sidelines for now.

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