What's going on?
Two big investment fund managers, one British and one American, agreed late last year to merge their operations. On Tuesday, the combined company, Janus Henderson, reported its first results – and the stock went up about 3%!
What does this mean?
We’ve written before that “active” investment management (firms that try to outperform the market by picking stocks or bonds that they think will perform above the average) are under pressure as they have struggled in recent years to outperform so-called “passive” funds that simply track the market (and charge lower fees). The merger between Janus and Henderson (which are both active managers) was widely seen as a defensive move: the idea was to bulk up in an attempt to cut costs and improve sales.
The first report of the combined company was, overall, a good one. Profits were higher than expected (largely due to cost-cutting) and investors withdrew less money from the firms’ funds than they did a year ago.
Why should I care?
For markets: “Active” investment managers have had a tough time – but these results offer some respite.
As low-fee “passive” investing has become more ubiquitous, there has been more pressure on “active” managers to reduce the fees they charge investors. This hurts the profit margins of investment managers – which isn’t good for their stock prices! Cost-cutting is one way to relieve this pressure, but firms like Janus Henderson will eventually need to have clients start giving them more money to manage (rather than just slowing withdrawals).
The bigger picture: The environment for active investing has improved this year.
So far this year, there has been a bigger difference than usual between the returns of individual stocks (i.e. they haven’t moved up and down together to the extent that they have in recent years). With more stocks moving in different directions, there are more opportunities for active managers to differentiate themselves by performing better than the market. Active managers that are unable to outperform in this more favorable environment will struggle even more to justify their higher fees.