Regime change heralds turnaround

Henderson Global Investors has taken on new managers and made better use of those it already employs. Head of wholesale Phil Jefferson is pleased with the results. Sarah Godfrey reports.

It is easy to spot a new regime. There is no touchiness about poor past performance, no defensiveness about departed managers, only a zeal to get on with the job and emerge fitter, happier and more productive.

When Henderson Global Investors’ head of wholesale, Phil Jefferson, was interviewed in Fund Strategy a year ago, he was candid about the need to improve both performance and access to distribution. So how have things turned out one year on?

Performance has improved, though there is still a way to go. Over three years to March 27, 2006, 14 of the 30 funds with a long enough track record were above the median performance for their sector, compared with 10 a year ago. Over one year, the results show even more clearly, with more than half the funds in the top half of their respective sectors.

Jefferson ascribes the improvement to a two-pronged strategy: make better use of the people you have, and find new ones where needed. “For example, we now have some of our investment trust managers running Oeics, with considerable success,” he says. “Job Curtis has been successful with City of London; now he is running the UK Extra Income Oeic [which is 80% equities and 20% bonds] alongside John Pattullo and it is doing better than ever.

“Similarly, James Henderson, who has been running the Lowland trust for years, is now also doing well with our UK Equity Income Oeic. The discretionary belt has latched on to these funds because it feels comfortable with the investment trust managers.”

New managers include Bill McQuaker, who took on the multi-manager range when John Husselbee left to form boutique firm North in association with Neptune. “Bill McQuaker has had top-quartile performance over his short time here, and I can’t remember the last time his predecessor did that,” says Jefferson. Paul Casson from SVM has joined on the European side. But the highest profile is Graham Kitchen, former head of equities at Threadneedle and before that ber-fund manager at Invesco, who arrived in July.

Henderson is a big company with a complicated history. It is only just emerging from the process that saw it cast off its parent, AMP, and divest itself of all but its investment business. And as with many big companies – particularly, it seems, in life and pensions – there were parts of the company that had become hidebound and complacent.

“There were a lot of ring-fenced silos doing their own thing in isolation,” Jefferson explains. “Now it is much more interactive: people trade information, the research teams are geared to serve the whole business, and there is more interaction in the investment management floor. You might say that just sounds normal, but we didn’t have it.”

In common with most big fund management companies, Henderson has a big fund range. Some of the funds are legacies of past mergers – the Global Care range of socially responsible funds, for example, which were set up by NPI. But Jefferson does not foresee a wave of consolidation, instead defending the firm’s four UK All Companies funds as having quite distinct mandates. “Going back to the people who were already here, our UK Capital Growth fund had Richard Prew, who was at home in an isolationist silo,” says Jefferson. “Unfortunately, the performance figures marked him out as too isolationist, and while we were struggling to improve we found a young man called Mileen Rash who had been picking stocks in Prew’s top-down model. Attribution analysis showed us that his stockpicking was very effective, albeit in the wrong sectors. So we said goodbye to Richard Prew, scrapped the top-down model and decided to support the manager and give him a bit of space, alongside some old heads like Stephen Peak.”

Jefferson adds that Rash’s numbers since October 2004 have been stunning, though they have been quite volatile. “He is working hard to constrain the volatility, but he is good. When you think how mundane that fund was, he now has stunning numbers, and once we get the volatility under wraps it is a shoot-the-lights-out retail fund.”

Elsewhere in the range, Kitchen and his Invesco Perpetual colleague Andy Jones are transforming the Henderson UK All Companies fund, which has distinguished itself with stunningly bad performance, 269th out of 288 funds in the UK All Companies sector over one year and 250th out of 259 over three years.

“Graham and Andy are replaying their Invesco experience in an area with bottom-of-the-barrel performance,” says Jefferson. “You could argue it could only go up, but it is. Our UK All Companies fund will be rebranded Income & Growth in the next couple of months and will become more like the fund they ran at Invesco Perpetual. It’s an improving story and for the right reasons: good processes and structures, and bottom-up research.”

He adds that he expects quite visible positive signs from the fund by the third quarter of this year, “and we will see then who the astute guys are that have already bought in before the herd comes galloping over the hill. The fund has been 98th percentile, and you would have to be astute and well connected to make a decision to buy that in such a crowded space”.

Richard Philbin, head of funds of funds at F&C Asset Management, does not yet number himself among those “astute guys” but says he is seeing evidence of a turnaround. “We have started to notice consistency coming through in some of Henderson’s numbers,” he says. “Bringing in Andy Jones and Graham Kitchen is a good thing. And although he is in competition with us, Bill McQuaker is doing a good job too. Even just in things like marketing, they are getting out a lot more and I am getting more information.

“You also have John Pattullo [manager of the Preference & Bond and Strategic High Yield Bond funds], who has been there for ages and is now bringing through Jenna Barnard, who is working with him.”

On the marketing side, Henderson has been forging links in areas where it had steered clear, such as fund supermarkets, banks and life companies. “We have dragged Henderson kicking and screaming into the modern era of third-party distribution,” says Jefferson. “There is nothing wrong with playing direct into the core IFA market, but there are many ways to get to IFAs and the landscape has changed so much that choosing not to put your funds in, say, life links is outdated.”

Jefferson’s vision is for Henderson once again to be one of the first fund management companies investors would think of – a position that it occupied in the 1980s but where it has now lost ground to the likes of New Star, Invesco Perpetual and Jupiter. “I can’t remember the last time Henderson would have been in a list of the top six fund groups if you asked an IFA or a competitor, but that is changing,” he says. “Last year was a transitionary one for us – we are just an investment house now, not life and pensions. It is a lot of change for a group.”

He points out that Henderson does not just have a lot of funds but a lot of products, with investment trusts, Oeics, institutional, property, structured products, hedge funds and so on. “On occasion it can be quite distracting. We have lots of things to sell and can only concentrate on a few,” he says, adding that at least now the sales teams work together rather than in isolation.

Justin Modray, an investment adviser at BestInvest, can see improvements at Henderson but is not yet convinced Jefferson’s new regime has done enough to recapture the glory days. “They are going in the right direction but they have some way to go,” he says. “The European Capital Growth fund, managed by John Botham, is the only Henderson fund on our buy list at the moment. We don’t promote it heavily but our clients can buy it if they wish.”

Modray adds: “I have produced some figures on Henderson and there has been some improvement but they have some way to go before advisers will seriously consider them again.”

He also voices disappointment with the firm’s decision to raise the annual management fee on some of its funds. “They are not yet out of the woods in terms of better long-term performance, so I think raising the charges is premature,” he says. “It might give them more money for research but clients want to see good performance before they will swallow an increased AMC.”

Jefferson sums up the challenges that Henderson still faces with the typical candour of the “new broom”. He says: “This is a defining year for us. The business has been improving since the beginning of last year, but from a pretty modest level. We have been quite rubbish for some time. We can’t expect big volumes yet, but business doubled in the last year and we hope it will again this year. It’s all down to wider distribution, coupled with better performance.”

Philbin points out that Jefferson has a history of shaking up some pretty big operations, from Fidelity to First State. On the Richter scale of his career, Henderson may turn out to be the biggest challenge yet.

Henderson Global Investors was founded in 1934 and manages 67.7bn in assets (as at December 31, 2005). It employs 900 people around the world and provides a broad range of actively managed investment products for institutional and retail investors across multiple asset classes, including equities, fixed income, private equity and property. It has packaged these into products and services including Oeics, unit trusts and investment trusts, funds of funds, alternative assets and hedge funds.