Janus Henderson Group PLC

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 4/5

Janus Henderson Group PLC is a global asset manager offering a range of investment products and services to institutional and retail clients. The company generates income primarily through management fees and performance-based fees.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview: Janus Henderson Group PLC (JHG) is a global asset manager that provides a broad array of investment solutions across various asset classes and investment styles. The company serves institutional and retail clients. JHG’s revenue primarily stems from management fees based on the value of assets under management (AUM) and performance fees. Key aspects of JHG’s business model include:

  • Diversified Investment Strategies: JHG offers a wide variety of investment strategies, spanning equities, fixed income, real estate, infrastructure, multi-asset, and alternative investments, allowing clients a broad range of choice. This diversification contributes to stability by catering to different investor risk profiles and preferences.
  • Client Segments: The client base is diverse, including both institutional clients, such as pension funds, sovereign wealth funds, and endowments, and retail investors through various distribution partners, like banks and wealth management platforms.
  • Global Presence: JHG has a significant presence across North America, Europe, and Asia, enabling the business to tap into various economic regions, but it makes the company more susceptible to various economical risk factors.
  • Fees as Income Source: Revenue is primarily earned through management fees tied to the market value of its assets under management, and performance-based fees generated if its investments perform well.

Industry Trends and Competitive Landscape:

The asset management industry is intensely competitive, with numerous players ranging from global giants to smaller niche managers. Key industry trends include:

  • Shift towards Passive Investing: An increasing preference for passive investment vehicles, like ETFs and index funds, has created pressure on traditional active managers.
  • Fee Compression: Growing price sensitivity among investors and fee-conscious clients continues to put downward pressure on management fees.
  • Technological Innovation: Companies are racing to innovate in their technology and create a more streamlined process, as most investors are moving towards robo-advisers.
  • Consolidation: The sector has seen a growing trend of mergers and acquisitions, and is likely to see more in the future, due to increased regulations.
  • Growing demand in Emerging markets: Growing middle classes in emerging economies is fueling the demand for investment products and services, which will have a great impact on international players.

JHG’s Differentiation:

JHG differentiates itself through:

  • Investment Expertise and Performance: Although performance has been a weakness for the company in the past couple of years, in the past JHG’s diverse lineup of investment strategies and its global reach has allowed it to show relatively competitive results.
  • Global Presence and Distribution: Its ability to distribute its products across global markets.
  • Strong Client Relationships: The ability to generate recurring revenue and develop more stable relationships with clients.

Financial Analysis:

JHG’s latest quarterly and annual financial statements show the following trends:

  • Assets Under Management (AUM): JHG’s AUM was impacted by market volatility, global events, and currency fluctuations. It went down 16.2% during the first nine months of 2022. Management commentary states that, while AUM is trending down, they are focused on preserving assets and attracting new investment through their strategic transformation and expanded investments in private markets.
  • Revenues: JHG’s revenue is tied to its AUM and the rate of its performance fees. Lower AUM and negative market returns during the period of 2022 have created lower revenues for the company. In the Q3 call, management has said they have a high revenue base going into 2023 thanks to their expanded product offerings and a greater demand for global equity.
  • Expenses: Expenses in 2022 increased with inflation, which increased compensation and other operating costs, and restructuring and severance costs relating to their global simplification program. These expense issues are continuing to put pressure on the net earnings of the company.
  • Profitability: Net Income has drastically reduced, mainly driven by lower AUM, declining revenue, and high expenses.
  • Cash Flows: Cash flow from operations are very volatile, and the company is focusing on managing expenses and other outflows.
  • Debt: The company has a conservative leverage profile, but it is worth noting that it has recently increased its debt to make acquisitions and manage its operations.

Moat Analysis: 3/5

  • Intangible Assets (Narrow): The company’s reputation, research insights and client relationships provide a base for a narrow moat.
  • Switching Costs (Narrow): Clients, both institutional and retail, develop a reliance on the business for their specific investment strategies and financial insights. Many clients do not easily leave for competitors, as it can be tedious to change to new investment strategies and processes.
  • Network Effects (None): The company doesn’t benefit greatly from any type of network effect, which is rare for a company in this sector.
  • Cost Advantage (None): They do not have a notable cost advantage over its peers.

Moat Rating Rationale: The company has a few sources of competitive advantage (such as an established reputation, and certain switching costs), but it faces high competition from other companies in the sector, and has to constantly battle price pressures in order to maintain its business. It has also performed relatively poorly over the last couple of years which has created a more uncertain outlook and weakened its potential advantages.

Legitimate Risks to the Moat and Business Resilience:

  • Market Volatility: Downturns in the financial markets and negative volatility can significantly erode AUM and therefore revenues. Management acknowledged in the Q3 earnings call that market volatility will continue to remain a large factor.
  • Competition: The intensely competitive landscape from both large-scale asset managers and niche players can lower profits and returns.
  • Technological Disruption: Innovation in technology is continually disrupting the financial sector, and the company will need to continue to innovate to compete with new entrants.
  • Poor Execution: Bad allocation decisions, misjudgment of client needs or a failure in expanding into new profitable markets could quickly erode the company’s reputation and therefore its economic moat.
  • Regulatory Change: New laws can quickly change the way the company operates, especially in terms of fees and client disclosures. The company must have the operational flexibility to address new regulatory frameworks.
  • Dependency of Key Personnel: The company is highly dependent on its key talent in order to perform well and deliver high profits, high turnover of managers and high-profile analysts can quickly erode the company’s reputation.
  • Currency Fluctuations: The volatility of the dollar relative to other currencies can have an impact on profits, and revenues, as they are heavily exposed to the Euro and other European currencies.
  • Reputational Risks: Loss of client trust, scandals, and other issues will severely impact the reputation of the company, which can lower AUM and therefore profitability.
  • Global Crisis: Economic and financial crises can severely impact the revenue of the company, as people tend to be more risk averse in times of uncertainty.

Understandability Rating: 3/5

While the core business of JHG as an asset manager is easy to grasp, their detailed structure and product offerings can be complex. Their global nature and different business lines make the overall company a bit more difficult to understand. The accounting also tends to be a bit complicated to understand because of the nature of their business model.

Balance Sheet Health: 4/5 JHG’s balance sheet is reasonably healthy. The company has low liabilities and high assets, which shows good solvency and little risk of bankruptcy. It does have a higher than usual debt profile, due to recent acquisitions.

Recent Concerns and Management Response:

  • Lower AUM and Profitability: Management has repeatedly mentioned that market conditions are the main reason behind recent struggles. Their plan in the future is to expand into private and emerging market assets and reduce expenses to improve profits.
  • Global Simplification Program: Management is focused on streamlining the business, which will involve a reduction in expenses and resources. It will help management to focus on core strengths.

Conclusion

JHG is in a fiercely competitive sector that is experiencing intense change due to technological advancement and macro economical events. Although it has some sources of competitive advantage, these advantages are easily erodible and the company must carefully address its issues to protect its market position and profits. The company’s current low profits, increased risk and uncertainty make this business only suitable for experienced investors, with long time horizons who can stomach the uncertainty associated with high market volatility.