Peltz's Stakes in Invesco, Janus Henderson Boost Shares

We're unlikely to alter our fair value estimates for either narrow-moat rated Invesco IVZ or narrow-moat Janus Henderson Group JHG following news that activist investor Nelson Peltz has acquired 9.9% stakes in each of the two firms, encouraging the two asset managers to consider additional acquisitions (beyond the mergers they’ve both done the past five years) including a potential merger of the two firms. While we don't disagree with Peltz's general assessment of the asset management industry, as much like him we believe that the traditional asset managers, which have been beset by fee and margin compression in the face of an ongoing secular shift into low-cost passive products, need to consolidate both internally and externally to increase their scale (to help offset some of the fee compression), as well as offset underperforming offerings with newer products that have the potential for both growth and pricing stability, we think a combination of Invesco (which had $1.145 trillion in AUM at the end of June 2020) and Janus Henderson (with $337 billion in managed assets) would only make sense if Invesco were able to acquire Janus Henderson on the cheap. Although the two firms have comparable product profiles, Janus Henderson has a much heavier equity footprint, which raises the risk of elevated outflows in any sort of merger situation. And as we've noted in the past, from what we've seen from many of the deals that have been done in the industry over the past decade much of the cost savings that come from combinations are medium-term fixes at best, as market dislocations (like we saw in late 2018 or at the start of this year) and ongoing fee compression diminish the value created by these deals as we move further out the time horizon. That said, should we see any signs that either Invesco or Janus Henderson are moving forward with deals to enhance their scale (including a merger of the two firms) we would reassess our fair value estimates for the firms.

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