Honing in on Henderson

In Fair winds blow for Magellan, on 10 April 13 (Hold – $6.40), we concluded that funds manager Magellan Financial Group was a Hold, with $10.8bn in funds under management (FUM) and a market value of $1bn. By comparison, Henderson Group looks like a steal.

Translating Henderson’s £65bn-plus in FUM into Aussie dollars, the figure comes to more than $95bn against a market value of less than $2.4bn. To save you the maths, that’s nine times Magellan's FUM at just 2.4 times the price.

Compared to listed Australian funds managers like Platinum Asset Management, Perpetual, Hunter Hall International and Magellan, Henderson also has a much more diversified business.

For starters it has more than 200 funds, many of which have long track records. And as you can see in the accompanying charts, those funds are spread between different types of assets as well as a variety of geographic regions and economic sources, including institutional and retail funds, and life insurer Phoenix Group (formerly Pearl Group). The most Henderson has in a single fund is 3% of its total FUM.

Currency diversification

On top of its diversity and relatively attractive-looking share price, Henderson offers Australian investors access to different currency exposures.

The majority of Henderson’s FUM (£38.1bn) is sourced from the UK, which is understandable given the company’s origins in the 1930s when it was set up to administer the estates of British railway financier Alexander Henderson. You can see how the rest is split up in Chart 2.

In a scenario where China slows down without causing Europe or the UK any substantial shocks, Australian investors might be happy to have some exposure to a stock like Henderson which could benefit from the Aussie dollar falling.

Henderson also offers ‘pure’ exposure to a diversified funds manager. Other funds managers listed on the ASX are not very diversified: most are focused on equities. And more diversified Australian funds management businesses like AMP or Colonial First State are buried inside other huge enterprises.

Counting the cost

So, with such attractive qualities on offer, why are we only giving the stock a Hold recommendation? One negative is the company’s cost base. Table 1 stacks up our rough estimate of 2014 profits for Magellan Financial Group and Henderson. Looking simply at the first (FUM) and second-to-last (net profit) figures, you can see that pound-for-pound, Magellan is much more profitable.

That difference also accounts for the gap between the two in a FUM-based valuation versus a profit-based one. The detail of the table reveals that the disparity is mostly down to costs (though Magellan also manages to extract a higher fee on its average funds under management).

Henderson’s complex accounts and corporate structure are another negative. Here’s a description straight from the annual report: ‘Henderson Group plc is a public limited company incorporated in Jersey and tax resident in the Republic of Ireland. The Company’s ordinary shares are traded on the LSE and CDIs are traded on the ASX. The Group and Company financial statements have been prepared in accordance with IFRS and the provisions of the Companies (Jersey) Law 1991.’

Litany of writedowns

This complexity and a history of frequent ‘one-off’ items makes us wary. While the one-offs were positive overall in 2012, that’s been the exception rather than the rule since the company was spun out of AMP in 2003 amid a raft of writedowns (resulting in a stunning £864m pre-tax loss that year).

As an investor, your trust in a company and its management increases over time as it delivers predictable results – or, if not predictable, at least understandable and unsurprising. But in recent years Henderson has delivered a litany of left-field writedowns: an £11.7m ‘warranty claim from Pearl’ in 2006; a £68.8m ‘loss on part disposal and impairment of the equity holding in Banco Popolare Gruppo Bancario’ and a £7.2m ‘impairment of an investment in a Henderson structured product’ in 2008; £33.8m of ‘integration costs’ for an acquisition in 2009 on top of a £20.7m ‘Infrastructure fund charge’. The list goes on but you get the picture.

At some point, you’d think the group’s cupboard of nasty surprises should empty out. And perhaps 2012 marked a turning point with the one-offs providing a net benefit. But experience has taught us that it’s best not to give a company with this kind of record the benefit of any doubt.

This company and its management are new to us so, at this stage, we’re comfortable waiting and watching. We’ll revisit our neutral recommendation once we feel more comfortable with the accounts or if the price falls to provide a more attractive balance of risk and reward. For now, we’re initiating coverage with a HOLD.