Light-touch group embraces merger
Henderson Global Investors is set to take over another firm, which excites the head of equities because of the potential to expand and strengthen the group’s range, writes Shaun Cumming.
Henderson has experienced a turbulent two years. The group merged with New Star in April 2009 and is in the process of acquiring Gartmore.
As details of the New Star takeover emerged, fears grew over the group’s ability to complete the transition smoothly. Henderson updated investors as the merger progressed and assured them that standards would be maintained. Despite this initiative, uncertainty followed as fund managers changed position within the organisation and overlapping funds merged. It was difficult to see how the two styles could successfully merge.
Many New Star funds had performed poorly before Henderson bought the group, but two years on from the merger, results are improving.
Graham Kitchen, Henderson’s head of equities, says that commentators voiced doubts about the merger.
“Looking back, we were nervous about the New Star merger but it worked out as we had planned. We had good retention of staff and were able to revamp our distribution team,” he says. (Focus continues below)
Henderson and Gartmore are similar but there is an overlap within the product ranges. Mark Dampier, Hargreaves Landsdown’s head of research, says that European equities will be the main overlap: “Henderson’s European team is already strong and is also extremely well known in the marketplace.
“I’m not sure how many European funds a group can have.
“Gartmore’s Ben Wallace has done a good job in the UK on absolute return. “He has slaughtered the competition over the last couple of years, so I can see how his fund would be a good addition.
“Henderson is clearly capable of performing the takeover in an intelligent way,” he adds.
Kitchen says that where funds clash in terms of geography, the different management styles will complement each other.
This implies that clients want more than one style of British or European equity fund. Henderson could have several funds in each sector, each with different styles of management. The group allows managers to take responsibility for each fund, meaning that no two will be the same, regardless of geography.
Last year Bill McQuaker, Henderson’s head of multi-manager, said that the group was in need of an emerging markets team (Fund Strategy, April 19, 2010). The absence, thus far, of such a team could be addressed soon. Chris Palmer, Gartmore’s head of global emerging markets, has indicated that he will be joining the group.
Henderson officials declined to comment further on the deal for legal reasons. However, Mark Skinner, Henderson’s director of European retail, is willing to give a general explanation of the takeover.
“Broadly speaking, what we are looking for is more retail products, and more absolute return funds - both of which are high up on my wish-list.
“Gartmore have some excellent funds, and equally excellent managers working within these areas,” he says.
Client and staff retention was high, and this was a contributing factor in making the New Star takeover a success.
Another advantage resulting from the merger was a revamped distribution team bolstered by new staff members, many of whom came in from New Star.
The Gartmore merger will result in Henderson’s already wide array of funds expanding further. However, Skinner is conscious that the likely market reaction is to stay put with what they have. Investors will probably review holdings after a few months, which is a cautious approach that guards against surprises.
Henderson multi-manager funds have proved particularly popular over the past 18 months. According to Skinner, this is because of the “superstar management” of Bill McQuaker.
The upsides of a merger are highlighted in the case of the multi-manager team, because Henderson was able to marry New Star distribution with Henderson management to achieve the desired results.
Fund of fund managers from various groups regard the takeover with optimism. Ryan Hughes, Skandia’s senior fund manager on its multi-manager team, says that the takeover will provide Henderson with the diversity and traction to perform well.
“Naturally, there will be some overlap because both are big firms with broad fund ranges.
“Equally, Gartmore have some interesting capabilities that will add to Henderson’s range. I can certainly see the attraction,” he says.
One likely outcome of the merger is that Henderson will expand and strengthen in areas where it was weak before. Hughes declines to judge until the end of 2011, after which time the merger will have had time to mature.
Skandia has segregated mandates run by both Henderson and Gartmore. Hughes says that although they will be following the merger’s progress, he is comfortable with how it is going.
For investment firms that are involved in the technology sector, the past 10 years have proved turbulent. This has also been the situation with Henderson.
More than a decade ago, the company was a prominent name in the technology area. After the bubble burst, technology investors lost confidence - an emotion that still eludes the sector.
However, Henderson was able to maintain reasonable performance even when the sector was unloved and the firm established a new technology team in 2002.
Lower valuations boost the allure of the technology sector. Furthermore, tech companies are enjoying profits, strong sales and have a healthy cash flow. These three basics, according to Kitchen, were the missing ingredients that led to the technology bubble.
Henderson does not have a house view. Andrew Formica became the group’s chief executive in November 2008. Following his appointment, managers were encouraged to make key decisions about the direction of their own fund.
Mark Skinner, who has a New Star background, says that this has played a crucial role in the firm’s development and highlights the success of that merger when considering Gartmore. “Clients want stability, and they want to know what changes will be made to their investments.
“We employ an experienced team who are capable of handling the situation. There are clear challenges ahead, but we are comfortable because it is a strong team,” he says.
The launch of the European Special Situations fund displays this individual manager ownership. Managed by Richard Pease, the fund has flourished since October 2009. Against the sector average, the European Special Situations fund has consistently outperformed its sector average over the past two years to February 2011.
After the Gartmore takeover has been completed, Britain and Europe will remain key markets for Henderson.
Despite inflationary pressures showing in Britain, Henderson managers working in British, European and American equities are bullish. Kitchen says that valuations within these areas are “quite cheap”.
“I am bullish about the economy in general, and not only from a British and European perspective, but also when looking at America, which is showing good signs of recovery,” he says.
Raising interest rates would probably have a minimal impact on inflation in Britain because, in his view, it is driven largely by external factors such as oil and food prices.
As Henderson confirmed the Gartmore takeover in January, the deal was announced to be worth £335m, which equals 92.1p a share. When Gartmore listed in December 2009, investors paid 220p a share, which is a loss of 60%. This means that although Henderson insiders, and indeed clients of the company are happy with the merger, there are also those who have lost out.
Gartmore was a prime candidate for takeover. The company had endured a disappointing year before the deal was negotiated. In addition, prominent fund managers departed, and the company was also defending itself against an investigation by the Financial Services Authority .
Small wonder then, that despite some Gartmore investors losing on the share price, overall the takeover was well received. Henderson is regarded as an established, stable house, and the managers aim to communicate this into clients’ investments.
Industry players will continue to speculate, regardless of Henderson’s strong reputation. Confidence is only likely to grow once the process is complete and managers and funds have had time to adjust.
Henderson Global Investors has £61.6 billion of assets under management. The firm completed a merger with New Star in April 2009 and announced the takeover of Gartmore in January 2011.
* This article was changed on March 21, 2011. The manager of the Gartmore UK Absolute Return fund is Ben Wallace, not Graham Wallace as originally stated.