For clients that have elected the “Growth” Australian equity option we have bought Henderson (HGG)

Henderson is an independent global asset manager with offices in 19 cities around the world and assets under management of approximately £92.7bn. It is dual-listed on the London Stock Exchange and the Australian Securities Exchange. Henderson’s clients range from global institutions to personal investors in a variety of domestic markets worldwide.

We are positive on the outlook for the company for the following reasons:

• The company is well diversified in terms of geographic exposure and product offering with a broad distribution footprint across key markets which should help bolster organic net inflows over the medium term

• Diversification of product offering helps to mitigate the risk of underperformance of any particular asset class or fund and provides for the possibility of performance fees in various market environments

• In recent years management have been building a scalable global platform which has been a drag on margin expansion despite increased funds under management (FUM) due to double digit fixed cost growth. With the capability build-out largely complete, an improvement in operating margins is expected going forward as FUM grows

• With little capital required to run the business, no debt and strong cash generation the business is well positioned to invest further in inorganic growth or return excess capital to shareholders

• With variable costs a large % of total expenses the company is able to reduce its expense base if required in the event of declining revenues to help mitigate the negative impact on margins

As for any asset manager the largest driver of revenue is the level of FUM. Notwithstanding the variable costs, the business has inherent operating leverage so margins and profits will be pressured during a period of sustained market weakness. With substantial offshore earnings domestic investors are also exposed to increased earnings volatility due to currency fluctuations and the dividend is unfranked.

To fund the purchase of Henderson we will be selling Perpetual (PPT), with the former expected to provide greater operating leverage going forward in the event of FUM growth, but potentially with increased volatility and a lower gross dividend yield.

If you have any queries, please contact your Elston adviser.