Thursday, April 5th, 2018
Janus Henderson Group (ASX code: JHG) is a global asset management business with US$370 billion of assets under management. The performance of global equity markets is the largest single driver of company earnings and yet the stock is down 13% for the 2018 calendar year to date, in the context of a flat return from the MSCI World Accumulation Index in A$. Below, we analyse the drivers behind this recent performance and consider the outlook for the stock.
The first point is that although equity markets are flat year to date, we have seen bouts of volatility in early February and again in March. This impacts investor sentiment in regards to equity markets and the earnings multiple ascribed to asset management businesses.
Secondly, Janus reported modest outflows for the December quarter of 2017, equivalent to an annualised 3% of assets under management. This followed a recovering trend over previous quarters, including marginally positive flows in the September quarter. Flows are another key driver of valuation for fund managers and the recent market volatility is likely to extend the time frame for turning these flows around. Industry data confirm that retail outflows in the March quarter have been consistent with the previous quarter.
It is important to note that if equity markets resume an upward trend, the Janus stock price would be expected to closely follow. We saw this when equity markets corrected at the end of 2015 and recovered in early 2016.
Another potential area for upside surprise over the coming quarters is institutional flows. It is common for institutions to put asset managers in the “penalty box” following a merger, which was indeed the case for Janus during 2017. However, management has indicated that conversations with these investors have been getting more constructive. Janus has several funds with strong buy ratings, which could be well placed to win mandates. Management’s ambition is to return the overall business to above average net new money flows. While this should be considered a medium-term objective, it would likely drive a positive re-rating of the stock if achieved.
For patient investors, the investment case for Janus is well summed up by the below chart, which shows the stock’s forward PE since the first result post-merger. Over this period, the PE has averaged 13.3x, while it is currently trading at 11.2x. If Janus was to trade at the current mid-point of US and UK based asset managers of 13.0x, consistent with the longer-term history of Janus and Henderson, this would represent 16% upside to the stock price. Moreover, this scenario would likely also involve rising equity markets and global peers have traded at higher multiples in such environments.
Figure 1. JHG 1-year forward PE ratio
The Clime Group owns shares in JHG for and on behalf of various mandates for which it acts as investment manager, as does Vincent Cook.