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Morningstar | Continued Outflows Weigh on Janus Henderson; Expecting No End to Negative Organic Growth

We expect to lower our fair value estimate for narrow-moat rated Janus Henderson to USD 29 from USD 34 after updating our assumptions about AUM, revenue, and profitability following the release of third-quarter results from the firm. As part of our reassessment, we expect to incorporate the prospect of a bear market midway through our five-year forecast, as opposed to a mere correction in the equity markets, which is having an outsized influence on our fair value estimate.

Janus Henderson closed out September 2018 with $378.1 billion in AUM, up 2.2% sequentially and 4.9% on a year-over-year basis. Organic growth remained in negative territory, with the firm posting outflows of $4.3 billion during the third quarter, and $9.7 billion since the start of the year. Given the weakness in the equity markets since the start of the fourth quarter, with a lot of investors looking to derisk their portfolios in a bull market that seems to be on its last legs, we think it will be difficult for Janus Henderson to generate positive organic AUM growth the next several years (a period where we now forecast a bear-market decline), prolonging a recovery in the firm's flows much longer than our previous projection.

While average AUM was up 6.8% (10.0%) during the third quarter (first nine months) of 2018 when compared with the same period a year ago, third-quarter (year-to-date) revenue increased 2.5% (5.2%) as shifting product mix led to a decline in the firm's realization rate, and performance fee income remained down year over year. That said, we continue to forecast mid-single-digit top-line growth for all of 2018. As for profitability, year-to-date adjusted operating margins of 28.4% were at the lower end of our forecast of 28%-30% for the full year, in line with our expectations that revenue and cost headwinds in the back half of 2018 would push operating profitability (which at the half year stood at 29.8%) back down closer to (if not below) the midpoint of our range.