Active Manager M&A to Increase, Say Ratings Agencies

The continued swing towards passive investment strategies will see more deals emerge along the lines of Janus-Henderson, Moody’s and Fitch say.

The proposed merger of Janus Group and Henderson Global Investors could be the “opening bell for more consolidation” among large active asset management groups, according to Moody’s.

“It remains to be seen whether the combined entity will be able to counter asset flow and fee pressure as a result of increasing investor preference for passively managed funds.”The merger, announced last week, has been widely welcomed by market analysts. The new entity, to be named Janus Henderson Global Investors, will be responsible for more than $320 billion in assets.

However, with increased competitive pressures on investment costs and a growing investor preference for passive strategies, Moody’s argued in a research note that the deal was “largely defensive in nature.”

“Strategically, the integration of two active asset managers, while positive, does little to address investor flight from active funds, and the corresponding reduction in asset management fees,” Moody’s said. “This merger highlights building stresses in the industry, even within the investment-grade space, and is likely the opening bell for more consolidation among the larger asset management firms.”

Fellow ratings agency Fitch Ratings expressed a similar concern regarding the groups’ overwhelming bias to active strategies. Janus in particular has suffered from the switch to passive investment, recording average outflows of 6.2% of assets over the last four years, Fitch said in a research note. However, Henderson—which has stuck with active strategies—experienced inflows of 4.1% a year over the same period.

“It remains to be seen whether the combined entity will be able to counter asset flow and fee pressure experienced by active investment managers as a result of increasing investor preference for passively managed funds,” Fitch said.

These concerns came despite the deal’s several positive elements, according to Fitch, which included increased scale, diversity across geographies and products, cost savings, and less debt. The support of major shareholder Dai-ichi, a Japanese insurance company, was also praised.

Janus Group took its first step into the exchange-traded fund (ETF) sector in 2014 with the purchase of ETF provider VelocityShares. As of June 30, 2016, Janus’ ETP managed roughly $300 million—less than 0.1% of the total assets under management of the combined Janus Henderson group.

“Fitch also notes the general integration and execution risks associated with mergers, particularly ones which cross geographic regions, entail co-CEO roles, and involve broader reorganization of executive management,” the ratings agency added.

“In our view, this transaction could create a combined company with stronger business and financial risk profiles compared with Janus’ as a standalone entity,” said Olga Roman, credit analyst at Standard & Poor’s Global Ratings.

According to a report on financial services mergers and acquisition published by Deloitte earlier this year, a certain level of scale is “critical to deliver profitability” for asset managers.

“Securing new inflows to drive AUM growth requires strong investment performance and capability in popular asset classes or investment strategies,” Deloitte Director Baber Din wrote. “This will increasingly be reflected in focused acquisitions that inorganically build product capability or extend geographic reach, rather than simply adding scale to realize cost synergies.”

Related: Janus Group to Merge With Henderson & LSE and Deutsche Börse Confirm Merger