The fund manager who swallowed New Star and is looking for more

We are at the beginning of the end of the financial crisis, according to the chief executive of Henderson Global Investors.

“It will be a very slow recovery throughout 2010,” says Andrew Formica, the 38-year-old boss of the UK’s third-largest listed fund manager, which boasts assets under management of £58.1bn.

The confident Australian is sat deep into his seat in a spacious 12th floor meeting room at the FTSE 250 firm’s impressive new steel and glass London base on Bishopsgate in the City.

He continues: “Profit and loss accounts of companies are good. And equity markets are generally positive. But improvements so far has come through cost cutting. However, now we will have to look for real growth to boost bottom lines, and that will take until next year.”

But he says institutional and retail investors have recognised this and have not been slow to venture back into the market since the financial crisis eased.

Formica says: “Business is going quite well for us. Investors have not waited for a sustained recovery period of typically around 12 to 18 months before getting back into the market.”

But the relaxed fund manager cautions that 2010 will nevertheless be a “volatile” year. He says that while “stocks are positive” other data such as recent US unemployment figures “will continue to be mixed throughout the year.” His advice: “You need to buy on the dips. And if the market runs away from you don’t be too concerned, wait for it to come back.”

So far this straightforward approach seems to have worked for Henderson. The firm’s full-year profits before exceptional costs fell from £80.3m to £63m in February; however, its bottom line swung to a pre-tax profit of £15.5m from a £17m loss in 2008. The firm, which employs 1,000, has a market value of £1.2bn.

Henderson’s assets under management, the lifeblood of a fund manager because the firm makes its cash by charging fees to invest other people’s money, rose 17 per cent over the year to £58.1bn. Inflows were encouraging, with institutional investors handing Henderson £600m to manage and retail investors a further £700m.

Formica says 40 per cent of Henderson’s business is derived from equities, 40 per cent from fixed income investments, and 20 per cent from property investments. He adds “this feels about right” and has no plans to change the mix.

Favourable market and exchange rate movements added £5.1bn to Henderson’s assets last year, although this benefit was offset substantially by the loss of £4.2bn of assets withdrawn by Pearl Assurance. Henderson has a historic contract (that dates back to when Henderson, Pearl and others were spun off from their Australian parent AMP in 2003) to manage Pearl funds until 2015 and is guaranteed an annual fee, with the assets — effectively life policies — falling over time as they mature.

But the biggest addition to Henderson’s balance sheet this year was its £94.2m acquisition last April of debt-laden rival New Star Asset Management, founded by City veteran John Duffield in 2000, which added £8.1bn of assets to the group.

Formica, who had only taken the helm of the group from respected long-serving boss Roger Yates in November 2008, moved quickly to take New Star from under the nose of larger rival Schroders.

Schroders was believed to have offered more for New Star, but UBS, which conducted the auction on behalf of the banks that took control of the business after it could no longer pay its debts, wanted a quick sale. Formica says: “It was an opportunistic buy. New Star was strong in the UK retail market, and that is an area we want to grow in. This acquisition accelerated our plans in this area by three to five years.”

Henderson retained 85 – out of 300 – New Star staff and because of the speedy purchase managed to limit investor outflows from its new acquisition to £1.1bn.

Henderson’s move for New Star capped a frantic six months for Formica, who was only 36 when he took over the business, which has been registered in Ireland since 2008 for tax purposes.

During that time he got rid of around 45 staff worldwide to cut costs, bought a 30 per cent stake in Australian hedge fund Attunga Capital for an undisclosed fee, poached a five-strong currency team from beleaguered Belgian bank Fortis, and oversaw the move of its main London office – with over 650 staff – to new offices in Bishopsgate. Formica says: “When I took over it was clear that we knew we needed to do more and take advantage of opportunities that were out there.”

However, a glance at Formica’s career and CV makes it clear that he does not like to see the grass grow under his feet. He joined Australian fund manager AMP after graduating from Macquarie University with a degree in economics at 21 in 1993. Three years later, he moved to London as an analyst with the firm. After AMP bought Henderson for £830m in 1998, he became a director of the derivatives division of the enlarged firm. At 32, he joined the firm’s senior management team, and two years later in 2006 he was promoted to joint managing director, putting him in a prime position to take over from Yates as chief executive should the board opt for an internal candidate. It did indeed decide to do so – and the rest is history.

Yates spent almost a decade in charge; Formica says he would be happy to spend a similar period in the hot seat. He says: “This industry is a long-term business. A lot of our managers have been here for 20 to 25 years. It is not good to change the strategy of a firm of this size every two or three years. This post is not a stepping-stone to another job. That is not the right attitude to have. If the board are happy to have me I am happy to stay.”

Formica believes that “there is no reason why this group can’t become one of the top ten fund managers in the world.”

He says he is happy with his New Star buy in the UK, but that he wants to add scale in Europe, which represents 12 per cent of the group’s business, the USA, which accounts for 14 per cent, and Asia, where he says he is “underwhelmed” by the firm’s growth. Formica says the company needs to buy other businesses or teams to build scale in these regions; he keeps a careful eye on the market.

One does not imagine that many things keep Formica awake at night, but global regulation might come close. He worries rules that are being aimed at banks will eventually be “rolled out” over the whole of the financial services industry.

He says: “The big challenge is increased regulatory oversight. But we are unclear what this will look like. We want rules to be as unified across the world as much as possible. We would not want lots of countrywide agreements, which would put us in a position of playing regulatory arbitrage with different national regulators.”

He adds that bonus deferrals and capital ratio requirements are areas where regulators might look to make changes at fund management firms – even though the industry is very different from banking and has long since imposed long-term compensation structures. Henderson operates hedge funds, which are being hit by new rules from Brussels.

He warns London should not push ahead on its own with legislation that will damage its standing as a financial capital in the wake of the crisis. He says: “London has been badly damaged. But it can recover. It has a good location, and a breadth of talent. But it needs support from government and regulators. It needs clarity on tax and regulation. I hope that will happen after the coming general election.”

Henderson’s shareholders will be hoping that he can continue to grow the business as quickly as he has done since taking the helm, despite the economic and regulatory uncertainty. But one thing is clear: given that Formica is a man in a hurry, we can expect plenty more bold moves from Henderson in the near future.

Age: 38

Work: 1993, joined AMP Asset Management; 1996, moved to London with AMP as an
analyst and fund manager; 1999, director of core funds at Henderson; 2000, deputy chief investment officer; 2002, co-head of equities; 2004, joined senior management team; 2006, joint managing director; 2008, appointed chief executive

Education: Macquarie University, where he read economics

Lives: Blackheath, South East London

Family: Married, three children

Hobbies: Tennis, golf, cycles to work