More than 1,000 pages of documents are stacked on Andrew Formica’s desk. The head of British fund Henderson is deep in a complex merger with U.S. fund Janus Capital, which has risen to prominence since snapping up PIMCO founder Bill Gross.
Henderson has long been focused on European equities, which means it already has plenty of staff outside of London. Yet Mr. Formica confirms that a hard Brexit, which would see Britain tumble out of the E.U.’s single market for goods and services, could force him to move more of his firm's operations to territory within the EU.
The threat of a hard Brexit is proving to be a particular headache for financial firms. It’s also a headache for regulators and governments, some of which are falling over themselves to draw banks to their countries (or, in U.K.'s case, to keep them from leaving).
In the event of a hard Brexit, Luxembourg is at the top of Henderson’s list to get more resources, Mr. Formica says. In the meantime, he’s much more focused on the Janus merger – a difficult process launched last fall and which, he acknowledges, has irked some clients. The goal is to close the deal by May.
“We are in the really bad place where we have announced the deal but have not closed yet,” he said.
Perhaps best to let him get back to work then.
Read the full interview with Andrew Henderson below.
Their strengths are our weaknesses and vice versa. 95 percent of our clients are unaffected by the merger.
Handelsblatt: Britain has officially launched the E.U. divorce process. That starts two years of complicated negotiations. Have you already made decisions on changes for when Britain departs? Where will your E.U. hub be?
Andrew Formica: We already have offices in many continental European cities, for example in Frankfurt and Madrid. And we already have a fund family in Luxembourg and one in Dublin.
But you will need to change your marketing structure in case of a “hard Brexit,” since you will not be able to do as many things from your London office for your clients on the continent as you are able to do now. So where are you planning to open up your hub inside the E.U.?
Luxembourg, most likely. We will need to move people there to do fund oversight, investment risks and governance – things which we do in London at the moment. But you are probably talking about a dozen people.
Why Luxembourg, not Dublin?
Janus has a fund family in Dublin, but it’s much smaller than what we have in Luxembourg. And we won’t merge those fund families because it would be hard without creating tax issues for the clients. We try to minimize that.
Some people in the industry are saying the regulator in Luxembourg is undercutting rival centers competing to host financial firms looking for an E.U. base outside London after Brexit. They are talking about regulatory arbitrage. What's your experience regarding this?
Actually I think it’s going the other way in a sense: Luxemburg as a regulator has got more stringent, more involved. They are beefing up, not just rubber stamping.
Even if Brexit is in the headlines, it’s more the merger with Janus keeping you busy these days. When we last spoke more than two years ago, you argued against big mergers and big acquisitions because they are too disruptive. What changed your mind?
Yes, big mergers are disruptive. Certainly when you look at deals such as Aberdeen and Standard Life. We would not have wanted to do this.
You’re referring to the two British competitors which announced their merger in early March…
They do not really take you forward. The overlap in U.K. and in Europe would be too big. It’s different with Janus. Their strengths are our weaknesses and vice versa. 95 percent of our clients are unaffected by the merger. And we have a similar investment approach, similar ethos, similar views and a similar culture.
And is it as disruptive as feared? Are clients for example holding back from making investment decisions as a result until the merger is complete?
With regard to new clients, there is definitely a slowdown, but that’s temporary. Existing clients are pretty much unaffected because of this little overlap. And it was quickly very clear there will not be any change. We told them, your manager is not going anywhere – apart from a few exceptions.
A few exceptions? You have lost more than a few fund managers.
It was pretty modest. One fund manager left before the deal was announced. Another one was a casualty of the merger; his team did not have the best track record. And one team we let go because Janus has a much bigger, deeper business in that particular field. But of course there is disruption – even when you have 90 percent of your business unaffected, but 100 percent of your business is worried.
…worries which you have not been able to rebut.
We are in the really bad place that we have announced the deal but have not closed yet. From the clients and the staff point of view it looks like it's done, but from a legal and a company’s business point of view you cannot do anything until the deal closes. We still have some time to go until the end of May and still have things to do. Therefore we cannot answer all the questions yet.
You announced synergies of more than $100 million per year when the merger is implemented. Will your clients see the merits of the merger by paying lower fees?
There is no reason to change our fees or lower them significantly. Client fees are coming down every year anyway. But we’ll improve our service, there will be new capabilities. Janus has Bill Gross for example, one of the best commentators on the fixed income market. And that will be available to our client base.
But where are you planning to invest the money you are saving?
Clients will get a business which has a stronger cash-generation and cash-flow and also the ability to innovate. One of the big drivers for the merger was to enable us to leverage regulatory costs. Regulatory requirements in each region have gone up dramatically. The costs to adapt the systems and processes are getting higher and higher….The reason for that is the unprecedented nature of change coming out from regulation. One advantage of the deal is: It gives us the ability to change that and it gives us more money to invest in the business, to innovate, to add new teams. We’d have difficulties to do this on our own.
The asset management industry is not only struggling with the regulatory costs but also with a disappointing performance – especially compared with passive products which are much cheaper for clients. The merger with Janus does not solve this problem.
Well, it does. The managers can get new views, new insights. There is no process to do that. But they can pick up the phone and get the insight directly from colleagues at Janus. Some of the best discoveries happen when you get scientists together and create an environment that encourages sharing of knowledge and exchanging views.
Isn't there an easier way to do it by just hiring the best talent?
That would be too expensive. And a merger does much more: Clients do not just buy the best product, they look for a relationship and Janus has an exceptional client relationship, which we can benefit from.
You forecast 2-3 percent faster growth in funds from this tie-up as clients of one side discover the products of the other and vice versa. Why haven’t Janus's customers who wanted exposure to Henderson's fund just bought them now?
Client relationships are important, they matter. That makes it easier to sell Janus's products to Henderson clients and vice versa. But it will take two to three years for this effect to come through.
But at the end the performance makes selling funds easier. How do you want to improve the performance?
What you see at the moment is very rare. Even if you are a top quartile fund manager you under perform the index. It has been two decades since that last happened. When you do see this happening it tends to reverse. This is unlikely to persist.
What’s your reason for that optimism?
A couple of things – for example the fact that in several economies such as the U.S. we are shifting from a monetary driven to a fiscally driven policy. You return to conditions which are less driven by some of the abnormalities. That’s not the case across the globe anyway. But you start to see that rates start to move up, distortion at the bond market starts to stabilize.
But you are not expecting the growth of passive products to slow down, are you?
No, it does not mean that the passive assault is going to abate, it will still grow possibly faster than the industry but it will not be as over-rapid as it was.
You said recently you do not want the passive world be part of your business. What could change your mind?
Look at Blackrock. Big manager. Great company. They have both. But every time you get a manager under performing, they move the money to a passive fund instead of defending him. It’s very hard to strive in the active world because of their own arguments for the passive world. Therefore I think it's better to be specialized and to be smaller.
What could change your mind?
I’d change my mind if every time I went to my client they would say to me: I could give you the mandate only if you offered active and passive. That has not happened yet.
The merged company will have a co-chief executive structure with Janus-CEO Dick Weil and you at the top. This is unusual and history suggests those structures rarely succeed. Will you be the only CEO after two or three years?
I don’t know. I hope, but that is a decision for the shareholders.
Katharina Slodczyk is a London correspondent for Handelsblatt. To contact the author: [email protected]