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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