RIP Henderson SRI, but what now?
The closure of Henderson’s successful socially responsible investment research team has surprised many, but is this evidence of a wider trend?
Henderson Global Investors recently decided to close its in-house sustainability research team and buy expertise in from EIRIS, an external agency.
In the world of SRI, this is a significant event. Henderson has been a standard bearer and an innovator for SRI globally over the past 15 years. I have followed their progress as student, competitor, supplier and customer throughout that time. I have loved some of their work; I have hated other parts of it. I have never been able to ignore it.
Even in closure, however, Henderson has sent out significant challenges for the industry that it leaves behind.
Why, Henderson?
Almost every conversation, at present, within the UK SRI industry begins (and usually continues!) with discussion of Henderson’s decision. There is total bemusement at why Henderson should have decided to cut a profitable, highly-cohesive, investment-focused team with stable and growing funds under management and a public profile that enhances the company’s brand, SRI’s reputation and provides valuable counter argument to protests about the short-termism of the City.
Explanations will doubtless emerge in time, once the company and the team move through the legal processes and begin to talk. For those watching from the outside, it is another reminder. We have learned not to underestimate the greed of financiers on the way up; we should not underestimate their fear on the way down.
In the long-term, however, I don’t think it matters that much.
I feel sorry for the team – but not too much. They are highly talented individuals with extensive experience of this industry. They will all find new employment soon.
I feel sorry for the investors that bought the promise of high-quality SRI from Henderson – but not that much. Markets are liquid, they can move their money from Henderson to another fund manager quickly and cheaply.
In a funny way, I feel sorry for EIRIS. They are one of the other leading brands in SRI and have only done what their business demands. But it will be hard for them to be linked to the destruction of one of the other great brands in SRI. (EIRIS will do a solid job for Henderson but they cannot claim to match the capabilities of a fully integrated analysis and fund management team.)
What’s next? Five challenges
As an industry watcher, I am less interested in the rants or recriminations circulating through the industry (although many of these do have substance). These are human responses and residual symptoms of the days when SRI was a “movement” rather than an “industry”.
I am much more interested in the response of the wider SRI industry to the challenges that Henderson has inadvertently presented.
Challenge 1: Where will the retail assets go?
Although it cannot admit as much publicly, Henderson should be expecting to lose the vast majority of its retail SRI assets. EIRIS’s appointment may delay the run-off for long enough to avoid mass redemptions in falling markets but the Henderson SRI brand has always been a superior product.
EIRIS-screened products have been on the market for as long as Henderson has run SRI funds. Investors have always been able to buy EIRIS-screened funds from a wide range of asset managers.
Investors that chose Henderson’s funds did so because they wanted an alternative; because they are more sophisticated; because they believe that the ‘Industries of the Future’ themes and ‘Best-in-Class’ approach will deliver investment outperformance; because they value the corporate governance and engagement activities; and because they support the innovative investment-thinking that has emerged from the team.
By withdrawing from the high-value-add end of the market, Henderson has underpinned growth for 2012, 2013 and beyond for others supplying similar high-end options.
Jupiter, RCM, Wheb, Aviva, Impax (etc) will be licking their lips and attacking the retail investor base fiercely. The challenge is: who will be most effective? Who can most quickly replicate the Henderson offer? Who can attract most of the transfers? Game on!
Challenge 2: What will institutional asset owners do?
Institutional asset owners with dedicated SRI mandates at Henderson are likely to behave in a similar way to the retail investors, and the investment consultants with SRI specialism will be updating their manager appraisals to facilitate this.
The more interesting question is whether there will be a broader read-across to other institutional clients and, in particular, those asset owners that have signed the UN Principles for Responsible Investment (PRI).
It appears to me that Henderson’s decision to reduce its engagement and integration activity puts it so far at odds with the spirit, letter and expected direction of travel outlined in the Principles for Responsible Investment that the company will have to resign its membership of the initiative.
But how will PRI signatories with (mainstream) funds under management at Henderson react? Will they also resign their PRI membership? Will they remove their assets from Henderson? Will they put pressure on the company to reverse its decision?
All outcomes are credible. The “do-nothing” option is not.
Challenge 3: To the PRI
The corollary of the challenge facing PRI signatories with assets at Henderson is a challenge to the PRI itself. If PRI-signatory institutions do not withdraw their funds from Henderson, will the PRI expel them from membership? Come to that, will the PRI expel Henderson itself?
It is perhaps a little too early in the organisation’s development for the PRI to receive such an overt challenge and requirement to show its teeth. However, you don’t get to choose your timing in these markets.
Challenge 4: For shareholders in Henderson plc
Fund managers that have offered “engagement” services on environmental, social and governance issues to their asset owner clients will be scrutinising their shareholding in Henderson plc and wondering whether this decision is desirable cost-cutting or whether it is short-termism with negative long-term consequences.
These investors should not, of course, concern themselves with the specifics of the decision; to do so would be micro-management and could give rise to significant conflicts of interest.
They will, however, need to assure themselves that the decision is consistent with the strategic framework and risk guidelines established by the board.
They are likely to focus on the reputation impacts for Henderson as a company and as a fund manager. The SRI team provided an excellent buffer (for Henderson) against the charge (by many in wider society) that capital markets are short-termist and do not consider the wider social and environmental implications of their activity.
With the SRI team disbanded, the Henderson board will need to present an alternative strategy for its public positioning on this critical issue for our time.
Challenge 5: For companies
In recent years, a number of companies (Unilever and GSK spring to mind) have made a stand against the short-termism of investors and capital markets. They have argued that a long-term attitude by shareholders is essential to support long-term behaviour by companies and that investors need to look beyond the quarterly numbers and value the broader range of factors required to run successful enterprises.
Henderson’s SRI team were high-profile supporters of this (politically-resonant) agenda and it will therefore be interesting to see whether the firm’s relationships with companies championing the long-termism agenda changes.
Have any of the long-termism arguments rubbed off on the analysts and managers that remain at Henderson? Or will these people now find it an uphill struggle to convince companies about the long-term nature of their strategies?
Thank you, Henderson
It is tempting for the SRI industry to see the Henderson decision as a direct attack. It isn’t. It shouldn’t be taken personally. The industry will not be judged on Henderson’s decision – this is simply one fund manager responding to its specific positioning in highly troubled markets.
The SRI industry will, however, be judged by how it responds. This is why the unfolding story will be fascinating: the final chapter of Henderson SRI.
In so many ways, this is a litmus test, by which we can all judge the current health of SRI.
Before it moves on, however, the industry should take a moment to thank Henderson for everything it has contributed to SRI. It has seen the industry from its birth in the UK, through to a point of maturity where SRI can be said to be one of the few secular growth areas in global financial markets.
We should thank Henderson for their innovation and for constantly pushing the bar higher, we should thank them for training so many of today’s SRI rainmakers, we should thank them for doing this in public so others can learn from their leadership…
…and then, we should let the markets take over and determine who the winners and losers will be.
Mike Tyrrell is editor of www.SRI-connect.com and a strategic SRI consultant with Sustainable Investor.
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Henderson Global-not Investors
Dear Mike
Thanks for great starter thoughts and Raj for challenging the 'it's OK' conclusion some readers may have drawn from them..
I'm not sure what facts Penny knows to make the following comment: "First, there is no suggestion of change to Henderson's cross-cutting support for responsible investment including as a signatory to both the UK Stewardship Code and the Principles for Responsible Investment, or to Henderson's committment to responsible investment for their property portfolio. Most importantly, the associated staff remain in place in both areas".
If you go to Henderson's home page (19.12.2011) and click on the Responsible Investment button and then on 'Team', three of the five staff have just been sacked - and this at a time when you, Penny, are suggesting it's OK to ditch the SRI team because the company has signed up to Responsible Investment... er... surely the RI team should be getting bigger as a consequence.. their brief has surely just become larger?
However, the more serious issue is that Henderson made a promise to people about their funds.. and have run a commentary ever since which constantly re-affirms their active SRI approach and engagement with companies and the issues. Penny, as ED of the UK's Social Investment Forum, isn't it more appropriate to your role to raise concerns about Henderson's accountability to the investors in its funds. Without any consultation with them or their advisers, they have switched to a strategy which no existing investors (myself included) signed up to. This is the travesty, and the company deserves to lose every penny of it's SRI portfolios as a consequence.. more fool them for not selling the business when they still had the assets.
Mike, this was well written
Mike, this was well written and your observations are interesting. Thanks for posting this.
So what do we want to happen?
Mike, well done! You ask some really important questions. I’d add 2 more:
1) What does it mean about the previous statements by Henderson’s leadership about being committed to mainstreaming ESG? Not surprisingly, I remember in particular its winning entry to the USS/Hewitt/FTfm “Managing Pension Funds As If The Long-Term Matters” competition which positioned its SRI function as critical to its long-term approach. I can see 2 possible answers to my question. Either management didn’t really mean what they said. Or they learnt through experience that doing “it” didn’t deliver value, either in terms of performance and or clients. This leads to questions which go much beyond events at Henderson. For example, should a SRI fund be considered credible when the manager offering the fund doesn’t have a real commitment to active ownership in its core approach? Are SRI funds any more long-term than non SRI funds? If they are why don’t these fund managers report routinely on data which would evidence this? And why doesn’t PRI ask its members to report on portfolio turnover, which even the Bank of England highlights as a serious problem? Some might argue that the Henderson decision is a reflection of the way they chose to do ESG, i.e. largely as a stand-alone project. But the reality is this is often the case, even when specialists and management say it is not (and Henderson were no different here). Put simply, the big question this event raises is it possible for an investment manager that has multiple clients, that is listed/part of a listed entity and that is jumping to meet the hurdles set by investment consultant gate-keepers, to be as long-term as many/most of its clients really need it to be?
2) What were the cost savings, compared to say the bonuses paid to senior management and total expenses? Or even if you take the SRI function simply as a branding project, how do the savings compare to the fees for José Mourinho? http://www.henderson.com/sites/henderson/media_centre/PostDetail.aspx?xp... These figures – which hopefully at least the board will choose to ask for – will indicate management’s real priorities.
And whilst I really salute the timing and intellectual content of this blog, I see an unresolved dilemma at the heart of it. You raise some really good - and troubling - questions. But the overall tone is things are more or less ok: you are a bit worried, but not too much.
For example, you make a good challenge to PRI, but then suggest it may be too soon to have a quality control mechanism of the kind that even the UN Global Compact has. It is true that PRI does not any such formal mechanism and it certainly does not report on who has left (but this can be gleaned by careful web research). I have heard from well informed sources over the years that several South African fund managers, one small US foundation and perhaps others have “chosen” not to re-apply for membership. So why can’t independent commentators like you and I expect PRI to do at least the same with Henderson?
You are clearer about clients doing something but do you really think a company would do a U turn on the basis of some tummy tickling engagement from some SRI clients? So the real question is what do we think clients should do when the outcome is clear, if it isn’t already? The danger of course is that tummy-tickling engagement, i.e. what clients are largely happy with from their fund managers, buys time and allows BAU. Other fund managers will certainly be watching closely to see if there are serious costs to getting rid of the in-house staff team. And if there aren’t, why not just out-source the screening and the engagement work? That would leave fund managers, in the words of one engagement overlay provider, free to get on with what they are good at?
Put simply, do you think what has happened is a big problem or is it not? If it’s more or less the latter, then the silence of the ESG community - just one other response to this good blog - is quite logical. As you say there will be winners from Henderson’s loss. And we aren’t here to save the world, right?
To put my cards on the table, I think the ESG community needs a lot more backbone, to think much more like “Churchill” and much less like “Chamberlain” on this and many other issues relating to investing sustainably. And related, at the technical level, we need to be thinking about market health and ESG beta as much (perhaps more?) than ESG alpha. The notion that mainstreaming is happening because PRI now accounts for $30 trillion is part and parcel of the mistake we are making today. This is a clever blog but, emotionally at least, I could see it leaving readers feeling as if the best place to be is on the fence and just watch what happens.
Knowing how much you like a good debate, Mike, my question to you is this: what specifically would you like the different actors in the ESG/SRI ecosystem to do when they read this blog?
Responding to Mike Tyrrell on Henderson
Thanks to Mike for an interesting perspective. However, I think he would be the first to agree that he is looking at this through a lens that is very focused on the Henderson SRI funds research team and their market. There are - at least - two other important perspectives - one is the further responsible investment support within Henderson Global Investors and the other is wider changes within the retail funds industry.
First, there is no suggestion of change to Henderson's cross-cutting support for responsible investment including as a signatory to both the UK Stewardship Code and the Principles for Responsible Investment, or to Henderson's committment to responsible investment for their property portfolio. Most importantly, the associated staff remain in place in both areas. So this change affects specific funds and mandates rather than the broader responsible investment agendas of integration, responsible ownership and alternative asset classes.
This leads one to the interesting question of why Henderson chose to streamline its support for its SRI funds. Of course, this follows its integration of New Star and Gartmore, neither of which has specialised in SRI, but there are also wider industry trends. There is strong industry speculation that the coming demise of commission-based financial advice will lead to a reduction in the overall number of retail funds available. Meanwhile, it would not be surprising if turbulence in financial markets is causing retail fund providers to consider ways to focus strategically on areas of specialism. This introduces an opportunity as well as a challenge for retail SRI funds. There is plenty of evidence that sustainable investment can be a successful modern strategic specialisation, particularly although not exclusively when delivered as a thematic investment approach. Henderson's decision to streamline rather than specialise was a business decision made in the light of their particular circumstances but one that might easily have gone the other way.
There are strong arguments for why others should make different choices. The potential for value creation from sustainability themes is, of course, one. Another is to consider where consumers will seek investments following RDR. Some see a growing role for products available via the workplace such as "corporate ISAs". Responsible companies should be particularly attracted to offering products with strengths in managing sustainability opportunities and risks. There is a real opportunity today for corporate responsibility specialists to encourage leadership in this area by making the case internally for a modern sustainability-based approach to workplace savings.
As Mike says, many Henderson competitors will see this decision as a short-term business opportunity. But if we look to the long-term then it is an indicator of changing times ahead. Corporate responsibility specialists have an important role to play to ensure that the investment sector responds to those changing times with a greater focus on moderm approaches to sustainability. There are already strong business arguments for investment houses to specialise in SRI. Corporate responsibility specialists can make those arguments even stronger.