The Energy of Redemption

This week, Henderson Group of the UK announced it would acquire Janus Capital Group of the US. It’s a logical deal that offers promise but is borne out of weakness.

The media has noted Henderson and Janus are active managers combining to shore up their defenses against the rise of passive, low cost investment options. This misses the point. Investors don’t care about active versus passive. They don’t even care about fees. They seek, demand and deserve performance. The passive vehicles are gaining traction because, over time, their performance beats active managers.

We can debate the reasons. Certainly, lower fees help. The passive managers can afford to offer low cost solutions as they don’t have to compensate portfolio managers. Whatever the drivers, investors focus on net performance. It is the only metric that matters. How much money is left for me in my account? On this critical and paramount measurement, the passive managers are winning. As a result, Janus and Henderson are losing assets. Merging into a bigger firm won’t solve this. Only improved investment performance can turn things around for the new firm.

The combined Janus Henderson will achieve material cost savings. Their press release identifies $110 million, equaling 16% of the new company’s EBITDA. They will eliminate duplicative back office efforts, delist in London and spread compliance costs across a broader asset base. The savings are significant but the ultimate question is whether the new company can grow.

One area of obvious savings not addressed is firing one of the two CEOs. The new Janus Henderson will have co-chief executives. This arrangement never works. Companies can’t operate effectively with two leaders. It won’t last long. Remember Citigroup. The bank was created by combining Citicorp and Travelers Group in 1998, with Sandy Weill and John Reed becoming co-CEOs. A few months later, Citi put out a press release updating investors on who would be doing what. Sandy would oversee investment banking, commercial banking, asset management, wealth management, insurance, underwriting and anything else involving risk and revenue. John Reed would focus on human resources, legal and janitorial services. This is only a slight exaggeration. Needless to say, Reed left not too much later – if only after the disastrous decision to fire Jamie Dimon. Not a good call. He runs another firm now.

The Janus Henderson merger was announced in two separate briefings. One was held by Henderson CEO Andrew Formica. The other was led by Janus CEO Dick Weil. This is an inauspicious beginning. Dick Weil is moving to London to co-lead the new firm. He should rent and not buy his flat; he’ll be out within 18 months. In any event, it’s strange logic for him to move to London when 54% of the combined AUM are in the Americas. Why not have one CEO in London and the other in the US? If Weil wants to move, let him go to Asia, which represents only 15% of their AUM and could use some leadership.

What does this mean for you if you’re running a firm? You need to perform over time for your investors. You can’t do it alone. Build a strong team around you with talented people who complement each other. Offer a variety of investment strategies so your firm can invest up and down the capital structure, across asset classes, around the world and throughout market, credit and economic cycles. Investors seek returns. You can give them what they want with the right team around you.

The Janus Henderson merger comes as the asset management business undergoes widespread change, consolidation and fee deflation. There is reason to be concerned if you’re managing an active fund. But we know that courage is not the absence of fear but taking action in the face of it. We cannot live in fear. We cannot lead in fear. You’re a money manager. You take calculated risks in your portfolio all the time, making decisions based on incomplete information. Now you need to do the same in your business to save your firm and prepare for the future. Not being bold will lead to defeat. There is risk in taking action but much more risk, if not certain loss, in not taking action.

The good news is it’s up to you. In your hands lies the future of your firm. If you take a risk and gain traction, the success will feed on itself. Everyone around you will be encouraged and emboldened. The new spirit will lead to better performance, which in turn will lead to asset growth. There is a new day just around the corner, filled with promise and the energy of redemption.