Henderson Group

Originally published in the May 2011 issue

The completion of the £370 million takeover of Gartmore by Henderson Group has moved the combined investment fund operator into the sought after reaches of Europe’s top 10 operators of hedge funds by assets under management. Henderson is now running around $10 billion in hedge fund assets with the bulk of that coming from funds that it landed with the Gartmore acquisition. The deal takes Henderson’s total assets across all of its investment funds, including long only, to over $120 billion – making it one of the biggest players in the UK.

The most notable change with the acquisition is that the Gartmore brand will be wound down. Though no time line is firmly in place for this to occur, it is one of the earliest decisions that Henderson, led by CEO Andrew Formica, has made since completing the deal on 4th April.

Encouragingly for Henderson the net outflow of investor funds from Gartmore fell to just £100 million in April compared with £1.2 billion during the period from 1st January when the takeover was still in offer form. This would seem to bode well for Henderson retaining most of Gartmore’s investors and dampen the concerns aired in some quarters that asset leakage would be substantial.

In early May, Henderson updated investors on the acquisition, noting that the integration process had proceeded more quickly than expected. It noted that Gartmore’s staff had moved to Henderson’s offices at the Broadgate development in the City and had been migrated to the new parent’s systems and processes.

“I am pleased with the pace of the integration which is both ahead of our plans and our previous experience from New Star,” said Formica in a statement to the market. “The acquisition has also been well received by Gartmore’s clients. Our goals for the remainder of this year are to continue delivering strong investment performance for all our clients, completing the integration of the Gartmore business and capitalising on the strengths of the combined group.” He added that despite volatility the combined group had attracted good net inflows into its range of absolute return and retail funds.

Deal boosts scale
A key rationale for such take-overs is the added scale that the Gartmore deal and the earlier New Star acquisition give Henderson in climbing the league table of UK asset managers. That should boost margins on new business and burnish the brand with existing and potential investors. Perhaps one of the biggest consequences of the acquisition is that on the hedge fund and absolute return side, Henderson will now have a much bigger product set. This will set it up as a leader in the alternatives segment just as this area is beginning to show solid growth again.

Among investors, however, there is likely to be further scrutiny of how the integration process proceeds. This is the case because the majority of fund mergers aren’t expected to be complete until the end of the third quarter. It is also by this time that the integration of different third party administrators is expected to be largely completed.

Analysts at J.P. Morgan and UBS both have neutral ratings on the stock with the latter indicating a 12 month price target of 170 pence, or 15% above the 148 pence Henderson closed at on 16th May. J.P. Morgan, for its part, noted that the stock will look attractive to Australasian investors because asset managers trade at premium multiples in Australia, but less attractive to UK investors where asset managers trade at a lower price/earnings rating of 11; Henderson is already on a multiple of about 11.5.

Goldman Sachs, which advised Gartmore on its strategic options and its sale to Henderson, has a much more bullish scenario for the shares. Ryan Fisher, the bank’s insurance and diversified financials analyst, has a buy rating on the stock with an A$3.40 target (£2.18) compared with a closing price A$2.29 price on 16th May.

With the combined hedge fund business running about $10 billion in assets under management, the unit will account for about 8% of firm-wide assets. It is likely, however, that the hedge fund business will account for a disproportionate amount of Henderson’s earnings owing to the higher management and performance fees that such funds generally earn.

However, the much bigger scale that Henderson has means that its reliance on a few star managers will be much less pronounced than the dependence Gartmore had on Roger Guy and Guillaume Rambourg, whose hedge funds in some years accounted for over a quarter of the firm’s total fee income.

Rising in Europe50
The takeover means a big move up for the combined hedge fund operation in The Hedge Fund Journal’s Europe 50 table of Europe’s largest single managers ranked by AUM. Had the merger been in place a year ago, the combined hedge fund arm would have ranked eighth, trailing GAM (which ranked seventh with assets of $13.18 billion), but slotting in ahead of Sweden’s Brummer & Partners which ranked ninth (with assets of $8.64 billion).

Excluding the leading European global macro players (Brevan Howard, BlueCrest Capital) and systematic fund operators (Winton Capital, Man Group’s AHL and BlueCrest) shows that among long/short equity firms Henderson is in some elite company. Indeed, among the single manager long/short equity giants led by BlackRock (with estimated AUM of $22 billion) and Lansdowne Partners (with estimated AUM of $15 billion), Henderson may be in a nip and tuck battle third position with Man GLG and GAM.

Gartmore, of course, was a pure equities house in terms of its hedge fund offering. Henderson’s range of hedge funds is much broader. In addition to several equity long/short funds, Henderson also runs a number of multi-strategy funds including a global multi-strategy bond fund, a currency hedge fund and a credit hedge fund.

Uncertainty easing
With the integration of Gartmore proceeding smoothly, investors in its funds will be breathing a sigh of relief that the uncertainty attached to the asset manager over the past year is now over. It is true that investors in Gartmore shares, who subscribed to the initial public offering in December 2009, have crystallised a 60% loss. But if the investment analysis of Goldman Sachs’s Fisher is on the money, the upside for shareholders sticking with Henderson for the medium terms could be quite attractive. Already Henderson’s shares are above the price paid to Gartmore shareholders and rising.

Meanwhile, investors in Gartmore funds can take confidence from the fact that fund managers responsible for over 80% of its assets moved over to Henderson to continue managing money. In this respect, the portfolio management performance of John Bennett (who left GAM in 2010 to succeed Roger Guy in running Gartmore’s European equities hedge and long only funds) will be an important barometer for the combined hedge fund business.

It is not just the scale of the combined hedge fund operation that looks encouraging. It is clear that investor choice has expanded as the Gartmore and Henderson hedge funds are, in the main, complimentary rather than overlapping. Thus Gartmore’s large cap European equities hedge funds differ fundamentally from Henderson’s key Asia Pacific, Japan and Global Equity Multi-Strategy offerings.

In addition, putting together the two wings should see best practice prevail in risk management, investor communication and regulatory compliance. Overall, the end product should be positive for investor choice and investment performance.