2023-07-11 03:42:05 ET
Summary
- Janus Henderson's 1Q23 result showed an unexpected return to positive net flows, driven by strong sales and lower redemptions.
- Investment product performance metrics have improved, reducing the risk of outflows and improving sales prospects.
- JHG's low valuation multiple and improved operational metrics provide confidence to upgrade to a Buy rating.
Introduction
In this note I will take a look at the Janus Henderson Group ( JHG ) 1Q23 results released on 03 May 2023. I downgraded JHG to hold in mid-November 2022, and maintained that rating in my most recent review in February 2023 . Since the downgrade, JHG has slightly underperformed the S&P 500, and so I was curious to see whether or not a value opportunity had once again opened up.
Net Flows - Good News, But One Swallow Does Not A Summer Make
After a disappointing and gradually deteriorating performance on net flows throughout FY22, the sudden bounce back to positive net flows in 1Q23 was unexpected. The positive net inflow was driven by a solid sales result and a much-improved redemptions outflow. Sales in the Institutional channel were particularly strong. Exhibit 1 below shows recent trends in net flows expressed in dollar terms. If I take a longer-term perspective, tracking flows back to 4Q18, and also consider the sales and redemption results as a percentage of each quarter's opening AUM, the 1Q23 sales performance of +6.8% (of opening AUM) is the strongest quarter in the data set. Similarly, 1Q23's redemption rate of -4.9% (of opening AUM) is the best outcome over the period under analysis. To provide a little more context: for the quarters 4Q18 to 4Q22, the average sales/redemption rates (as a percentage of opening AUM) were 4.8% (sales) and -6.7% (redemptions).
Exhibit 1:
Exhibit 2 plots JHG's net flow performance by quarter, both including and excluding Intech, expressed as a percentage of each quarter's opening AUM (with corresponding AUM including and excluding Intech AUM). Note that these percentages are quarterly rates, not annualized rates. The big question for investors to consider now, is whether or not 1Q23's result can be taken as a sign that the group will start to generate consistent positive quarterly net flows.
Exhibit 2:
Analyst and investor sentiment towards fund managers tends to be closely linked to net flow momentum, and my sense is that another quarter or two of positive net flows could lead to a material upward re-rating for JHG. Whilst the 1Q23 net flow improvement is a promising sign, it is too early to factor in consistent future net inflows. Indeed, CEO Ali Dibadj made this very point in the 1Q23 management speech:
Last earnings call, I said that we would expect to deliver intermittent quarters of neutral to positive net flows as an indication that our strategic plan is taking hold, which is what would happen this quarter. And while we are encouraged by the net inflows, one quarter does not make a trend. We are not at a point where we can consistently deliver positive flow results from quarter-to-quarter yet.
Source: JHG 1Q23 Transcript , page 3, Seeking Alpha.
Improving Investment Performance Metrics
Delivery of strong investment performance for clients is vital for long-term success in the funds management industry. Peer-relative metrics and benchmark-relative metrics are both important. My sense is that peer-relative performance matters most when selling in to the retail market through financial advisers and other third parties, and that institutional investors tend to focus more upon benchmark-relative and absolute performance. In the charts below, I track JHG's product investment performance relative to peers and benchmarks. The underlying data has been extracted from JHG's quarterly reports . The data is split into Equity, Fixed Income and Total AUM. Note that the 10-year data only started to be provided from 4Q20 onwards.
Peer-relative analysis:
Observations:
- For Equity, broadly speaking, peer-relative performance drifted lower from 2018/2019, but the numbers have improved recently. A nice bounce in the 1-year metric at 1Q23 to 74% represents the best quarterly outcome since 4Q19. The 10-years metric has been very solid since late 2021. At 1Q23, with no time-period ranking below 50% and 1-,3- and 5-year metrics above 70%, I conclude that on a peer-relative basis, JHG's Equity franchise is in good shape.
- JHG's Fixed Income franchise was not in good shape in late 2018, but performance metrics versus peers improved and were in good shape through 2020 and 2021. The slide in 1-year and 3-years metrics during 2022 was disappointing, and although both improved in 1Q23, shorter-term performance metrics are not yet in healthy territory. Longer-term peer-relative metrics are better. Overall, Fixed Income performance looks slightly soft versus the peer group.
- On a Total AUM basis, to feel positive about the ability of investment performance to support AUM growth, I like to see peer-relative metrics above 60%. At 1Q23, JHG is above this mark for all timeframes, with the 10-years and 5-years rankings in very good shape.
Benchmark-relative analysis:
Observations:
- For Equity, broadly speaking, benchmark-relative performance drifted lower from late 2018 until late 2022. The slide in the 1-year metrics during 2022 was concerning, but this has shown material improvement in 4Q22 and 1Q23. With the 10-years numbers looking consistently solid, I conclude that JHG's Equity franchise is in reasonably good shape at present on a benchmark-relative view.
- Fixed Income performance versus benchmark is somewhat confusing, with a sharp downturn in the 1-year metric since early 2022, offset by very solid longer-term metrics. To the extent that longer-term performance matters most, I'm inclined to say that the franchise is in good shape - but the extent of the drop-off in the 1-year metric leads me to conclude that on a benchmark-relative view, JHG's Fixed Income business is satisfactory.
- On a Total AUM basis, benchmark-relative performance as at 1Q23 is solid, with all time-period metrics above 60%, and a strong 10-years outcome of 84%.
Given the improvements delivered in 1Q23, I conclude that JHG's investment performance statistics can be regarded as solidly positive. Based on this analysis, I do not expect JHG to see high rates of AUM redemption due to performance concerns, and there is sufficient strength to support a modest level of confidence that positive net flows (as already seen in 1Q23) can be maintained.
Weak Performance Fees
Performance fees were very soft in 1Q23, coming in at -$14.9m, driven by weakness in US mutual funds, which have a 36-month rolling performance fee calculation period. The long-term nature of the US mutual fund performance fee calculation methodology gives management an ability to make reasonable estimates regarding future performance fee contributions from such products, and as at 1Q23, JHG guided to a disappointing FY23E result of -$35m to -$45m.
Performance fees averaged about +2.6bp pa over 2020 and 2021, but have averaged around -0.6bp pa over the last five quarters. I have tracked this line item since 3Q18, and the average performance fee contribution over the nineteen quarterly observations is close to +1bp pa. Based on JHG's 1Q23 AUM of $310.5bn, 1bp pa of performance fees equates to revenue of ~$31m pa. Despite the negative near-term outlook for performance fees, I regard an annual contribution for this line item of around 1bp of AUM as being a reasonable estimate for a sustainable (or 'through-the-cycle') outcome.
Risks
Contrary to many expectations, equity markets have performed well so far in 2023. JHG's AUM and earnings are highly sensitive to movements in equity markets, and whilst this represents both an upside and downside risk, at present I feel that the tilt is toward the downside. However, this factor represents a short-term risk, and it does not materially influence my fundamental assessment of the company.
JHG's CEO has made it clear that the company will consider acquisitions in order to diversify and deepen the group's product offerings. As with equity market risk, acquisition risk can be seen as both an upside and a downside factor. I do not have any particular concern regarding JHG's capacity to execute well on an acquisition, however I also think that when a company openly talks about doing deals, it puts pressure on itself to follow through, and that this pressure increases the likelihood that financial and strategic discipline when assessing potential targets may be softened. I therefore see acquisition risk as a downside risk factor for JHG at present.
As discussed above, JHG's investment product performance has recently shown signs of improvement. A reversal of this improvement represents a negative risk factor for the JHG investment case.
Valuation and Conclusion
My fair-value benchmark for a fund manager is a P/E of around 12x. At $27.23 per share (market close 10 July 2023), using JHG's 1Q23 reported AUM, my normalized valuation framework generates a base case P/E of 10.9x. Markets have been strong since 31 March 2023, and this ought to have pushed JHG's AUM above the reported 1Q23 levels. At $27.23 per share (market close 10 July 2023), using an estimated mark-to-market of JHG's AUM, my normalized valuation framework generates a base case P/E of 10.1x. On this mark-to-market basis, JHG looks to be materially cheap.
As discussed above in the Risks section, I see equity market leverage as a near-term downside risk factor, so I am inclined to think about JHG's current risk-adjusted P/E as sitting slightly above 10.1x, and certainly being less than 10.9x. This low multiple valuation, combined with 1Q23's improvement in operational metrics for net flows and investment product performance, provides sufficient confidence for me to upgrade JHG to a BUY rating.
For further details see:
Janus Henderson: Upgrading To Buy, Operational Improvements And Attractive Valuation