Formica repeats his New Star trick

AND so Henderson does it again, picking up a once-great rival on the cheap (or so it says). There’s no doubt that this deal will enhance earnings, although we think management’s expectations are somewhat over-optimistic.

Whether Andrew Formica has got himself a steal or simply paid fair value depends on whether Gartmore continues to shed assets. It’s true that assets under management (AUM) have held up pretty well considering the devastating blow dealt by the departure of Guillaume Rambourg and then Roger Guy; they stood at £16.5bn at the end of 2010, down from £19.9bn at the end of Gartmore’s first half.

That doesn’t mean more AUM won’t be lost, however, even if managers representing 84 per cent of funds are making the move to the combined group. Henderson knows this only too well: following the New Star acquisition, it lost around 20 per cent of that firm’s AUM.

Analysts at Numis think the enlarged group will lose 10 per cent of AUM from mutual funds and segregated mandates, and 20 per cent from alternatives. That would take AUM to £14.9bn, says Numis, which is still not a disaster when one considers that City whispers had the figure at £13bn at the tail-end of 2010.

Still, it does mean annual management fees will be lower than Henderson is predicting (Numis reckons £28m against management expectations of £43m).

That would mean total net operating profit after tax would be in the region of £48m, not the £59m to £70m range being pencilled in currently.

Nor does this deal solve the perennial problem of fund firms relying too heavily on star managers, leaving shareholders in the combined firm thinking carefully about eggs and baskets.