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Janus Henderson backs rivals despite FCA pressure

David Smith says he is happy to buy asset managers in spite of ongoing regulatory scrutiny

David Smith manages the Henderson High Income Trust at Janus Henderson

Janus Henderson fund manager David Smith has joined his peers in holding asset management firms despite mounting pressures on the sector.

Smith says there were good buying opportunities for financial services stocks after the FCA published its damning interim report into the investment industry in November. The regulator found a large number active funds underperform while charging high fees unfairly.

Smith, who manages the £300m High Income investment trust at Janus Henderson, took up his holding in Schroders in March.

Schroders, which manages £416bn assets and is valued at £7.5bn, currently makes up 1 per cent in Smith’s portfolio of 98 holdings.

Speaking to Money Marketing Smith says: “I am happy to buy asset managers. Schroders is a very good business and very well diversified both in terms of products and geography.

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“It has a very strong balance sheet a good dividend yield, attractive valuations, a good performance track record and a very strong brand.”

He says one of the reasons to hold Schroders is due to the diversity of its business model, which also provides private banking and wealth management.

Smith had been at Henderson for 15 years before it merged with Janus Capital, and owns the non-voting shares of Schroders, which he says trade at a discount to the main listed shares.

The price paid in March for Schroders was similar to where the firm currently trades at 11.5 times price per earnings with a 4.5 per cent dividend yield.

But Smith points out the stock has traded as high as 16 times in the last five years, and says the current valuation is “definitely cheap” for a business like Schroders and relative to peers.

Well-known fears

High profile managers such as Nick Train, who runs the £3.9bn CF Lindsell Train UK Equity fund, have said profitability at some asset management firms will not necessarily fall with fees following the regulator’s ongoing scrutiny into the sector.

In its report on the asset management industry, the FCA called for an all-in fee, restrictions on risk-free box profits, and a requirement for authorised fund managers to appoint a minimum of two independent directors to their board.

But Smith says fears around the fund industry were well known before the FCA market study, including Janus Henderson itself.

He says: “Clearly, there is pressure on fees. Our underlying clients can do a fair deal and actually the likes of Schroders and Janus Henderson and others have been dealing with that for some time.”

He adds: “Schroders’ share price came under a bit of weakness because of the FCA study but as a long as a fund manager is trying to use short-term weaknesses for the long term, that is fine.

“Schroders’ dividend yield it is still yielding 4.5 per cent and that dividend is growing by 10 per cent so your total return is 15 per cent just for the dividend growth not to mention if you do still have further re-rating from the shareholders.”

A month before the release of the FCA interim report last year, BlackRock was reportedly betting against London-listed Jupiter as it believed Jupiter could be a potential casualty of the regulator’s crackdown on high profit margins.

Yet Jupiter is a 1.4 per cent position in Smith’s trust and has been “a strong performer” over the number of years he has held it.

Smith says: “The company has a strong brand, robust balance sheet and an attractive 6 per cent dividend yield. “

The fund manager also bets on other financial services firms, such as discretionary fund managers, which he says have seen a boost since the pensions freedom reforms. One of these is Brewin Dolphin.

Smith says: “Brewin Dolphin is seeing inflows from people that need professionals to invest their money, especially now you have auto-enrolment and pensions freedoms.

“It is also very well run, it is moving to more to discretionary fund management. It probably has too many offices scattered around and is consolidating those, and you get obviously cost synergies through improving margins and profitability.

“It is still going to lose some assets but even through that period of consolidation it grew assets by 5 per cent. Now that process is over it can focus on growth and that 5 per cent can probably go up more from here.”

As of May, the Henderson High Income trust has returned 109.9 per cent, versus the 70.3 per cent of the composite benchmark of 80% FTSE All-Share and 20% Merrill Lynch Sterling Non-Gilts indices.


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