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Morningstar | Continued Outflows Weigh on Janus Henderson's First-Half Results; Lowered FVE to USD 34 per Share

We've lowered our fair value estimate for narrow-moat rated Janus Henderson to USD 34 (AUD 46) from USD 36 (AUD 47) after updating our assumptions about AUM, revenue and profitability following the release of weaker than expected results from the firm during the first half of 2018. We use a 9% cost of equity and a 0.74 USD/AUD foreign currency exchange rate in our valuation. All discussions of Janus Henderson's operating results are in U.S. dollars.

The company closed out the June 2018 with $370.1 billion in AUM, down 0.5% sequentially, but up 7.3% on a year-over-year basis. Organic growth remained in negative territory, with the firm posting outflows of $2.7 billion in both the first and second quarters of 2018. As this merely continues the negative organic growth trajectory we've seen from Janus Henderson the past couple of years, our expectations for a recovery in flows has been pushed out further (leading to most of the reduction in our fair value estimate).

While average AUM was up 8.6% when compared with the prior year on a pro forma basis, first-half revenue increased just 6.7% as shifting product mix and overall fee compression in the industry led to a decline in the firm's realization rate. We continue to forecast mid-single-digit top-line growth for all of 2018. As for profitability, year-to-date adjusted operating margins of 29.8% were at the upper end of our forecast of 28%-30% for the full year. We expect revenue and cost headwinds in the back half of the year to push profitability back down closer to the midpoint of that range.

The company also announced that Dick Weil (who was formerly the CEO of Janus Capital Group) has become the sole CEO of Janus Henderson Group, having served as co-CEO of the firm with Andrew Formica (who had been Henderson's top executive before the merger) following the close of the deal to combine the two firms in back at the end of May 2017.

While we understood some of the reasoning behind the co-CEO structure--with each manager more intimately aware of strengths, weaknesses, and opportunities in each of his operating segments--we've never been big fans of this type of management arrangement, especially coming out of a merger, so we're glad to see Janus Henderson leave this by the wayside. We've seen it create more friction than it's worth in the long run, and with the asset-management business inherently being a people (and, therefore, a culture) business, and the landscape filled with acquisitions and mergers that have failed to live up to expectations due to a clash of cultures that occurred following a combination, we had grave concerns about the co-CEO structure.

Although it is easy to dismiss culture as something that cannot be measured, we believe that over the long run asset managers with a single corporate culture dedicated to a common purpose that's ultimately reflected in the consistency of their investment performance, their rate of organic growth, the focus and importance placed on risk management, and the amount of employee turnover they experience tend to perform better than companies that are operating with less cohesive and/or inconsistent organizations. That said, there is also the risk now that with a more centralized management structure in place at Janus Henderson, with one chief executive overseeing the strategy for the whole firm, we could see an acceleration of departures of key personnel (which generally happens when two firms combine).