Stock Focus Henderson Group PLC. (HGG)

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GLOBALLY DIVERSIFIED FUNDS MANAGER WITH RISING FUM OUTLOOK

RECOMMENDATION : POSITIVE We initiate with a Positive view and $2.17 blended valuation.

BROADLY DIVERSIFIED FUNDS MANAGER

HGG provides a differentiated exposure for Australian investors:

UK funds exposure. Second largest ASX-listed funds manager with ~A$100bn FUM ($123bn

AMP Capital Investors is largest).

Diversification (by product, asset class, investor base and geography).

IMPROVING FUM GROWTH OUTLOOK

Despite recent FUM decline, the outlook is for recovery given:

Switching driven by regulatory change (“UK RDR”) expected to abate in mid-2013.

FUM stabilisation of acquired businesses (New Star; Gartmore). Roll-out of new products including UK RDR compliant funds, fixed

income and USA funds.

Distribution focus with an Australasian strategy to be announced and

new distribution alliances in place. Cyclical recovery prospects.

KEY CATALYSTS

Catalysts for unwind of HGG’s 20-30% peer-relative valuation discount include:

Net funds flow growth turnaround. Performance fee increase. ~38% total FUM has performance fee

potential. Although we expect subdued performance fees in 2H12, we see upside as performance fees/total FUM normalises at ~6bp.

Resolution of litigation. A preliminary hearing decided in HGG’s favour and it is currently unclear whether the plaintiffs will appeal.

Trading Data

Last Price $1.75

12 month range $1.36 - $1.99

Market Cap $1,228m

Free Float $1,228m (100%)

Avg. Daily Volume 3.4m

Avg. Daily Value $6.0m

12 month return (historical) 5.5%

Our base case view is that ROIC peaks in

FY14, then declines in FY15 as the Phoenix

FUM Investment Management Agreement (IMA) rolls off.

Margins decline is driven by: (i) sector-

wide pressure on margins; and (ii)

changing business mix towards increased

lower-margin fixed income and property funds.

Earnings Forecasts

Yr to June 09A 10A 11A 12E 13E 14E

EBITDA (£m) 81.5 111.8 176.1 150.7 167.1 182.4

Rep NPAT (£m) 13.8 77.9 34.0 67.1 82.7 98.8

Adj NPAT (£m) 57.4 80.1 125.6 126.3 128.7 141.0

Underlying EPS (pence) 7.1 9.4 12.4 11.5 11.7 12.8

EPS Gth (%) N/A 33.0 31.5 (7.5) 1.6 9.6

PER (x) 16.1 12.1 9.2 9.9 9.8 8.9

DPS (p) 6.0 7.0 7.1 7.4 7.6 8.3

Yield (%) 3.4 4.0 4.0 4.2 4.4 4.8

Franking (%) 0% 0% 0% 0% 0% 0%

ROE (%) 20% 23% 16% 16% 17% 18%

EV/EBITDA (x) 10.6 7.2 4.7 5.3 4.4 3.7

Net Debt/EBITDA (x) 0.8 0.0 0.1 (0.1) (0.4) (0.7)

Int. Cover (x) 17.0 13.7 12.5 20.1 45.7 50.0

Valuation (blended) A$2.17

George Gabriel, CFA ggabriel@evansandpartners.com.au

November 20, 2012 +61 3 9631 9853

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CONTENTS

1. BUSINESS OVERVIEW 3

Description 4

History 4

Product Overview 4

2. INVESTMENT VIEW 4

The Five “Ps” of Funds Management:

o People 5

o Process 5

o Performance 6

o Price 7

o Parent 7

Funds Analysis:

o Investor Mix 7

o Phoenix Funds 7

o Funds Flows 8

o Distribution 9

Balance Sheet 9

Investment leverage 10

Currency 10

3. KEY RISKS 10

Phoenix FUM 11

UK Retail Distribution Review (RDR) 11

Litigation risk 12

Key person risk 12

4. VALUATION 12

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1. BUSINESS OVERVIEW

(i) Description Henderson Group plc (HGG) is an independent funds management group listed on both the London Stock Exchange and the ASX. It is the second largest Australian fund manager by FUM (AMP Capital Investors $123bn; AMP

Financial Services $114bn; Australian Super $46bn; and BTT $46bn) and one the UK’s leading asset managers (Table 10). It is well diversified across each of the following:

Asset classes – include equities, fixed income, property, infrastructure and private equity (Table 1). Products – the top 20 funds by FUM are summarised in Table 2 and Chart 1 summarises the product range.

Investment style – a mix of long-only and absolute return mandates implement a wide range of styles. Geographies –investors are from the UK (69%), Continental Europe (16%), USA (9%) and Australasia (6%)

(Table 6). Investor mix –include institutional and retail investors investing in funds, individually managed accounts,

through platforms or dedicated distribution arrangements (eg. JV with Sesame Bankhall Group, a dealership of ~11,000 advisors).

(ii) History Established in 1934, ASX-listed in 1983, acquired by AMP in 1998, then divested by AMP in 2003. AMP retained the Australian and New Zealand investment management operations, whilst HGG retained the UK, European, North American and Asian operations.

Its recent focus has been on integrating two substantial acquisitions: New Star Asset Management acquired for £115m in scrip and cash in April 2009. New Star had ~£10bn FUM

(vs. HGG’s £49.5bn at the time). New Star increased HGG’s UK retail scale and distribution, enhanced its funds range, strengthened investment capabilities and offered cost synergies.

Gartmore acquired for £365.4m in April 2011 in a scrip transaction (net cost). Gartmore:

o Provided FUM of ~£15.3bn and expanded HGG’s fund range to include absolute return funds, giving HGG ~$6bn of absolute return focused product.

o Increased its exposure to retail FUM. Prior to Gartmore, ~37% of Henderson's £61.6bn FUM was retail. Adding Gartmore's £11.1bn increased HGG’s total retail assets to 55% or £34bn.

o Added hedge fund capabilities including Japanese, European, UK, and financials long/short.

The acquisition was followed by product rationalisation, cost reduction, improving performance, selective product growth and investment in distribution.

(iii) Product overview

HGG is well diversified across asset classes, with 54% weighting in equities, 26% property, 19% in fixed income and 1% private equity (Table 1, Chart 1). HGG is targeting growth within the gaps in its business mix including US fixed income products and emerging market funds and is also expected to announce its strategy for the Australian funds management market in the next few months. TABLE 1: ASSET CLASS, FUM, MANAGEMENT FEES AND GEOGRPAHY

FUM Overview

Asset Class

Base MGMT

Fee FUM (£m) % FUM Channel

Base MGMT

Fee FUM (£m) % FUM Geography % FUM

Equities 0.71% 34,685 54% Retail 0.76% 29,079 45% UK 69%

Fixed income 0.27% 16,765 26% Institutional (ex Phoenix) 0.38% 28,921 45% Europe (ex UK) 16%

Property 0.46% 12,407 19% Phoenix Not Discl. 6,825 11% Americas 9%

Private equity N/A 968 1% Asia/Australasia 6%

HGG 0.54% 64,825 100% HGG 0.54% 64,825 100% HGG 100% Source: EAP, HGG. Phoenix FUM and private equity margins are not disclosed.

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TABLE 2: HGG TOP 20 FUNDS BY FUM AND THEIR PERFORMANCE

Fund FUM £m Asset Class 1 year 3 years 5 years

All Stocks Credit 1,891 Fixed Income

International Opportunities 1,471 Global Equity

Horizon Pan-European Equity 1,258 European Equity

European Selected Opportunities 1,116 European Equity

Global Technology 1,092 Global Equity

Long Dated Credit 1,053 Fixed Income

Strategic Bond 1,023 Fixed Income

Latin American 946 Emerging Mkts Equity

UK Enhanced 867 UK Equity

Cautiously Managed 818 UK Equity

European Growth 807 European Equity

Fixed Interest Monthly Income 771 Fixed Income

Global Equity Income (US) 695 Global Equity

Continental European 664 European Equity

Multi-Manager Income and Growth 663 Multi Asset

Preference and Bond 596 Fixed Income

Global Equity Income 526 Global Equity

Global Property 521 Property

Credit Alpha 516 Fixed Income

US Growth 495 US Equity

Total 17,789

Source: HGG

2. FUNDAMENTAL INVESTMENT VIEW

(i) Investment View We are Positive on HGG for the following reasons:

Broadly Diversified Asset Manager

HGG provides diversified exposure across asset classes, investment styles, geographies, investors

and distribution channels, which should mitigate the cyclical volatility inherent in funds management. Multiple diversification benefits include (i) reduced key person risk; (ii) increasing prospects of regular

performance fees; (iii) distribution synergies; and (iv) growth options. Re-rating catalysts exist HGG trades at a 20-30% discount to (global and domestic) peers; its discount relative to the ASX200 is approaching historical lows (Chart 13). The following are potential catalysts for unwinding HGG’s valuation discount:

FUM loss stabilises then turns around. We highlight that the rate of FUM decline is diminishing

(“negative second derivative”). FUM loss has been partly cyclical and partly structural driven by (i) Gartmore integration; and (ii) FUM re-allocation in advance of UK Retail Distribution Review (RDR) on 1 Jan

2013. We would expect these drivers of FUM loss to abate by mid-2013. The UK’s RDR is similar to Australia’s FOFA (ie. banning payment of commissions and rebates to financial advisers from funds managers) and is resulting in FUM re-allocations from advisers (and some consequent FUM loss for HGG) in advance of RDR’s

operative date from 1 Jan 2013. Refer “Funds Flow” section for discussion. Resolution of the PFI Secondary Fund II litigation. As at 16 Nov 2012, preliminary proceedings

considering an alleged breach of mandate by HGG in the PFI Secondary Fund II have been decided in HGG’s favour. At the time of writing, it is unclear whether the plaintiffs will appeal or continue their action. Refer “Key Risks” for further discussion.

Top 20 Funds

1st Quartile

2nd Quartile

3rd Quartile

4th Quartile

1Y % FUM

1st Q'tile 63.54%

2nd Q'tile 2.93%

3rd Q'tile 18.19%

4th Q'tile 15.35%

5Y % FUM

1st Q'tile 61.57%

2nd Q'tile 30.74%

3rd Q'tile 0%

4th Q'tile 7.68%

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Phoenix’s 10-year IMA expires (expected in June 2015) with minimal subsequent loss of its £6.7bn FUM or loss of margin to HGG. Refer “Key Risks” for discussion.

Investment Leverage For maximum leverage to rising markets, investors should seek funds managers with the highest cost-to-income ratio, equities market leverage and performance fee potential.

HGG’s equity markets leverage is in the middle of its peer group (Table 7), with every 10% increase

in its relevant equity index translating to ~12% FY13F EPS upside. Performance fee potential varies between periods, but given HGG’s diversified funds portfolio, we expect an

average of 6bp/total FUM in performance fee p.a.. For fund managers with a narrower product range, it is difficult to predict whether any performance fees are received in any particular year.

Funds Under Management (FUM) Growth Outlook

The FUM growth outlook is driven by: Distribution growth strategies include (i) a focus on Australasia, including the $1.3 trillion Australian market for

the first time; (ii) new US products; (iii) new distribution alliances to be announced. Cyclical FUM recovery, particularly UK retail. As negative macro newsflow abates, retail FUM historically

increases. Given that ~70% of retail FUM is UK-sourced and European equities performance has been strong

to date but not yet resulted in FUM flow, we expect HGG to benefit as Europe’s outlook improves. What is required is an absence of bad news as opposed to unequivocal good news.

Roll-out of new products including US domestic products, fixed income.

Strategic Acquisitions Acquisitions have complemented HGG’s existing product and distribution capabilities.

HGG does not currently anticipate any further significant acquisitions. The focus is more likely to be on small established teams from established funds management businesses and bolt-on acquisitions.

(ii) The “Five Ps” of funds management – People, Process, Performance, Price, Parent People

A key benefit of HGG’s diversification is that key person risk is diminished. Of 1,062 employees in Europe, US and Asia-Pacific, there are 276 investment professionals with an average 14 years’ investment experience.

HGG does not disclose details of employee compensation. However it commenced a wide culture of equity participation in 2004-05, with share schemes now available to all staff. Fully vested, staff would hold around ~13%

of total equity. Fund managers’ remuneration comprises: (i) fixed base salary; (ii) 1/3 share of performance fees (for long-only funds) or 50% (for absolute return funds); (iii) a gross equity bonus scheme where they share in growth of the HGG business; and (iv) a short-term incentive scheme. Process HGG’s investment process varies across its investment products and asset classes (equity, fixed income, absolute

return funds, property). Chart 1 summarises the range of products in each asset class. Table 2 lists the Top 20 funds by FUM, a total of GBP17.8bn or ~28% total FUM.

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CHART 1: HGG’s BROAD PRODUCT RANGE

Source: Company Presentation

Investment Performance HGG’s investment performance across its entire portfolio of funds has been strong. Table 3 summarises

performance as at 1H12: o 1-year performance trend is improving, with 64% of funds at or above benchmark vs 61% in FY11. o 3-year performance has been consistently strong, with 76% of funds at or above benchmark. Charts 2-3 summarise asset class performance as at 1H12. Property performance is improving dramatically,

from ~23% of funds with 3 year benchmark outperformance to ~48% with 1 year outperformance.

HGG recently provided an update for 3Q12, performance is strong in both fixed income and equities. o Equities performance is improving across both 1 and 3-years. Over 1 year, outperformance has

improved to 70% (58% in 1H12). Over 3 years, 73% of equities funds are at/above benchmark (66% 1H12). o HGG is particularly strong in fixed income. Over 1 year, 92% have outperformed (78% in 1H12). Over

3 years, 85% of funds outperformed (98% as at 1H12).

TABLE 3: FUNDS AS AT OR ABOVE BENCHMARK (%) AS AT 1H12

FY11 1H12 FY11 1H12

UK OEICs/Unit Trusts 35% 57 60 70 80

SICAVs 11% 75 71 94 88

US Mutuals 4% 24 28 18 19

Investment Trusts 6% 64 79 75 59

Offshore Absolute Return Funds 4% 52 22 89 73

Segregated Institutional Mandates 21% 71 81 97 83

Total 82% 61 64 76 76

Source: Company Reports. Note 'OEICs' are unique to the UK, open-ended investment companies.

SICAVs are similar to OEICs and US Mutual Funds, open-ended collective investment schemes.

One-Year Three-Year% FUM

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CHART 2: % FUNDS AT/ABOVE BENCHMARK (1Y) CHART 3: % FUNDS AT/ABOVE BENCHMARK (3Y)

0

20

40

60

80

100

FY09 1H10 FY10 1H11 FY11 1H12

Equities FI Property

0

20

40

60

80

100

FY09 1H10 FY10 1H11 FY11 1H12

Equities FI Property

Source: Company Reports Source: Company Reports

Price Total fees comprise the sum of Base Management and Performance Fees. Base Management fees comprise ~89% of 2H12 total funds management fees. Table 4 summarises historical FUM margins on both Base Management and Performance Fees. Note that given the April 2011 acquisition of Gartmore, only 2H11 and 1H12 fees are indicative of the current HGG Group FUM

mix. During 2H11 and 1H12: o Average Base Fee/FUM is 55bp. o Average Performance Fee/FUM is 6bp. Given HGG is well diversified across multiple products and its

performance remains strong, we believe it is reasonable to factor into our base case an average cross-cycle performance fee margin of 6bp/FUM.

TABLE 4: PERFORMANCE FEES DIVERSIFICATION AND BASE FEES

Fees (£m) 1H09 2H09 1H10 2H10 1H11 2H11 1H12 FY09 FY10 FY11

Institutional Clients 3.0 18.0 19.9 10.9 19.1 2.0 14.5 21.0 30.8 21.1

Property 1.0 0.6 0.3 0.2 0.5 1.3 3.1 1.6 0.5 1.8

SICAVs 0.1 0.1 1.2 0.1 13.8 0.1 2.1 0.2 1.3 13.9

Private Equity 0.0 0.0 0.0 4.8 0.3 -0.2 1.6 0.0 4.8 0.1

Abs Return Funds 1.1 6.7 3.0 1.5 17.4 5.1 0.8 7.8 4.5 22.5

Investment Trusts 0.0 1.0 0.2 0.7 1.6 2.6 0.1 1.0 0.9 4.2

UK OEICs 0.0 0.0 0.0 0.0 1.6 0.0 0.0 0.0 0.0 1.6

Performance Fees 5.2 26.4 24.6 18.2 54.3 10.9 22.2 31.6 42.8 65.2

Perf Fees/FUM 0.01% 0.05% 0.04% 0.03% 0.07% 0.02% 0.03% 0.05% 0.07% 0.10%

Base Fees 98.2 128.6 137.4 145.1 176.0 184.5 178.8 226.8 282.5 360.5

Base Fees/FUM (Ann'd) 0.38% 0.46% 0.48% 0.49% 0.52% 0.53% 0.56% 0.42% 0.47% 0.57%

Source: Company Reports Table 1 summarises the average net management fee per asset class and investor channel, whilst Table 4 summarises the Base and Performance Fees across key segments. Key points are:

o Retail FUM is a key element of HGG’s growth strategy, with an average net management fee of

76bps, double that of the margin on institutional funds (ex Phoenix) of 38bps. o Retail equities provide the highest average margin, and institutional fixed income the lowest. o Average net management fees for Private Equity or the Phoenix FUM are not disclosed.

Parent

The free float is ~100% with approx 1,113m shares on issues (on both the ASX and LSE). HGG provides monthly disclosures of the aggregate number of shares on issue.

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(iii) Funds Analysis In weak/flatter markets, the key driver of FUM is net funds flow, which in turn is driven by performance, distribution and fund maturity (with more mature fund managers likely to have net outflows). Investor mix

HGG’s investor mix is 45% retail and 55% institutional FUM (44% institutional funds and 11% Phoenix assurance funds). Retail FUM net funds flow is positively correlated with the UK FTSE index and the absence of negative macroeconomic newsflow.

TABLE 5: HGG FUM BY DISTRIBUTION CHANNEL

Retail 28,202 28,641 45% 29,079

Institutional (ex Phoenix) 29,601 29,261 45% 28,921

Phoenix 6,481 6,653 11% 6,825

Total 64,284 64,555 100% 64,825

Distribution channel

FUM Dec

2011

(£m)

Average

FY12

FUM

(£m)

% Total

FUM

FUM Sep

2012

(£m)

Source: EAP Research, Company Reports

Phoenix Funds

Phoenix Group is one of the largest providers of insurance services in the UK. In 2005, when AMP sold Phoenix

(formerly Pearl Group) to Sun Capital Partners, HGG entered into a 10-year Investment Management Agreement (IMA). During this period, HGG receives guaranteed fee income even if Phoenix withdraws this FUM. HGG does not disclose its Phoenix FUM margin. Our base case assumes the entire Phoenix FUM is withdrawn by June 2015, when the IMA’s term expires.

Fund flows

Recent trends in funds flow include:

o FUM outflows were largest in 1H11, following the April 2011 Gartmore acquisition, with most outflows in institutional equities (Charts 4-6).

o Retail FUM showed some signs of stabilisation as adverse macroeconomic newsflow subsided. In 1Q12, total retail FUM appeared to stabilise, down -0.4% (compared to -2.6% in 4Q11 and -2.8% in 3Q11). However, as adverse macro newsflow was released, retail FUM declined -2.7% in 2Q12 and then improved to -1.1% 3Q12.

The outlook for funds flows is:

o Re-allocation of FUM by clients of acquired funds (Gartmore and New Star) is expected to continue to abate. o FUM reallocation in anticipation of the commencement of the UK Retail Distribution Review (RDR) in Jan 2013 is

expected to slow and eventually cease some time in 2013. Financial advisers have already been redirecting FUM away from platforms which will no longer provide them with trail income to platforms which will (Chart 4).

CHART 4: FUM FLOWS BY CHANNEL CHART 5: FUM FLOWS BY BUSINESS

-3,000

-2,500

-2,000

-1,500

-1,000

-500

0

500

1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12

Insto Retail

-3,000

-2,500

-2,000

-1,500

-1,000

-500

0

500

1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12

Phoenix PE Prop IM

Source: Company Reports Source: Company Reports

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CHART 6: FUM FLOWS BY ASSET CLASS CHART 7: HGG FUM BY ASSET CLASS

-3,500

-3,000

-2,500

-2,000

-1,500

-1,000

-500

0

500

1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12

Private Equity Property

FI Equities

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12

Private Equity Property

Fixed Income Equities

Source: Company Reports Source: Company Reports

Distribution

HGG sources 69% of FUM in the UK, 16% in Europe, 9% in the Americas and 6% in Asia/Australasia (Table 6). It is targeting FUM growth in the US and Australasia.

Distribution will be HGG’s key focus in the next few years with the focus on retail, emerging markets and global fixed interest funds. HGG’s strategy is to drive FUM through a combination of new products (fixed income, USA exposures), new geographies (Australasia and USA), new distribution arrangements (eg. JV with

Sesame Bankhall Group, a dealership of ~11,000 advisors) and organic growth in existing products (improving UK retail offering including hedge funds).

TABLE 6: HGG FUM SOURCE BY GEOGRAPHY

% Total

FUM

FUM

June

2012

(£b) Comments

UK 69% 43.6 Significant retail FUM in the UK.

Europe (ex UK) 16% 10.2 Heavy weighting towards equities and continental Europe in particular. Performance has been

good (top quartile) but has not yet translated into higher flows. We expect that this will

translate into higher flows as markets improve over time

Americas 9% 6.0 US FUM is evenly split between insto and retail. Over the next 5-7 years, HGG hopes to

increase its US investor base from ~15% total to ~33%. One key constraint for US growth is a

narrow product range. Currently, most of the US product is international and European

equities, with potential to expand to credit products and domestic equity offerings.

Management is looking at medium-term strategies of increasing US-based FUM.

Asia/Australasia 6% 3.8 HGG hopes to increase its Asian investor base from ~5% to ~15-20%.

Total 100% 63.6 Source: EAP Research, Company Reports

(iv) Balance sheet Most listed funds managers have negative net debt as they generate large amounts of free cash flow (Chart 8). However, HGG has a higher level of gearing driven by its acquisition debt finance through a “2016 Note” of GBP150m senior, unrated, fixed 7.25% notes listed on the LSE of acquisitions. Nevertheless, HGG has a low level of net debt/equity and high levels of interest coverage (Charts 8-9).

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CHART 8: NET DEBT/EQUITY (%) CHART 9: EBIT/INTEREST EXPENSE

-50%

-40%

-30%

-20%

-10%

0%

10%

PPT TRG IFL PTM MFG HGG BTT

-20x

-10x

0x

10x

20x

30x

40x

BTT MFG IFL AMP TRG HGG PPT

Source: EAP Research Estimates Source: EAP Research Estimates

(v) Investment Leverage For maximum leverage to rising markets, investors should seek fund managers with the highest cost-to-income ratio, equities market leverage and performance fee potential. HGG is in the middle of its peer group on these metrics (Charts 10-11). o Cost-to-income ratio. The fixed cost base of a fund manager provides operating leverage to rising (and

falling) markets. HGG is in the middle of its peer group (Chart 10). o Equities market leverage. A 10% increase in the UK FTSE translates to ~12% EPS increase, the middle of

HGG’s peer group. (Table 7). o Performance fee potential. Given its diversified portfolio and strong 3 year performance record, HGG has

substantial potential for substantial performance fees.

CHART 10: COST TO INCOME RATIOS OF AUSTRALIAN LISTED FUNDS MANAGERS

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Source: EAP, Factset. AMP CWM = Contemporary Wealth Management segment. AMP CI = Capital Investors segment.

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TABLE 7: EQUITY MARKETS LEVERAGE

BTT PPT HGG MFG PTM IFL

Relevant IndexASX

200/FTSEASX 200 FTSE 100 MSCI World MSCI World ASX 200

Currency A$m A$m £m A$m A$m A$m

FY13F FUM 46,600 23,600 65,985 4,816 15,158 27,400

Equities % of total FUM 53% 73% 54% 100% 100% 50%

Total equities FUM 24,698 17,134 35,632 4,816 15,158 13,700

10% increase in equities FUM 2,470 1,713 3,563 482 1,516 1,370

Base management fee ratio 0.40% 0.77% 0.54% 0.65% 1.25% 0.41%

Additional base mgmt fees pre-tax 9.9 13.2 19.2 3.1 18.9 5.6

FY13F consensus NPAT 49.0 68.6 128.7 19.8 122.9 106.2

Additional fees/total FY13F earnings 14.1% 13.5% 12.0% 11.1% 10.8% 3.7%

Source: EAP Research Estimates. NB. MFG excludes impact of £1.5bn institutional mandate to be funded in CY13.

(vi) Currency HGG hedges most of its currency exposures. The majority of FUM, revenue and costs are denominated in Sterling with most clients located in UK. HGG’s primary foreign currency exposures are to hedge fund seed investments in property and private equity funds. However, these are hedged and rolled quarterly.

3. KEY RISKS

(i) Phoenix FUM

Our base case assumes all the £6.6bn (~11% total FUM) Phoenix FUM is withdrawn by June 2015, when the IMA’s term expires. However, there is an upside risk that HGG may retain some of this FUM (we have assumed 50% Phoenix FUM retention in our Bull Case scenario).

(ii) UK Retail Distribution Review (RDR) The UK’s regulatory reforms, called “Retail Distribution Review (RDR)”, will apply from 1 Jan 2013 in the UK. RDR is similar to Australia’s Future of Financial Advice (FOFA) reforms. Its key impact is to prohibit funds managers from paying advisors for distributing their products.

At the 1H12 result, HGG stated that RDR could have a “high single-digit” impact on its retail margin. However, HGG

has already launched a number of products which are “RDR compliant” together with its distribution partner Sesame Bankhall Group (largest restricted adviser network in the UK) which HGG believes positions it well for the adviser market and their clients.

(iii) Litigation risk Potential Impacts HGG is currently defending litigation initiated by institutional investors in its Henderson PFI Secondary Fund II. HGG closed its PFI Secondary Fund II at €859m after having raised £573.5m with a stated intention to focus on the secondary market for operating public infrastructure with private capital. In Dec 2006, the Fund acquired the John

Laing infrastructure business, a specialist owner, operator and manager of public sector infrastructure assets in the UK and internationally, after a “bidding war” with Allianz. The plaintiffs (a collection of UK pension funds) claim they invested based on misrepresentation and that the fund invested in breach of mandate.

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On 16 Nov 2012, HGG announced the trial judge ruled that HGG had NOT breached its investment mandate. It remains open to the plaintiffs to: (i) appeal this decision; and (ii) continue on the grounds of alleged

misrepresentation. At this stage, it is unclear whether the matter continues and what amount of damages could be sought.

(iv) Limited key person risk

Key person risk is limited by: Employee diversification. With 276 investment professionals, exposure to any individual “rock star” fund

manager is limited. Scale. We estimate that are ~400 funds in total. The largest fund by FUM is the Henderson All Stocks Credit

Fund, which comprises 3% of the total FUM. High level of staff ownership, with staff owning ~13% of the equity in the business.

4. VALUATION Our blended valuation of HGG is $2.18.

TABLE 8: BLENDED VALUATION

Methodology Key Inputs Value (GBP)

Discounted Cash Flow 11.2% WACC £1.39

PE ratio 12.5x PE multiple £1.43

Average valuation (GBP) £1.41

AUDGBP 12-mth forward rate 0.65

Blended Valation (A$) $2.17 Source: EAP Research Estimates

(i) Valuation discount

HGG’s discount relative to the ASX200 is approaching historical lows. Its existing FY13F PE of ~10x is: A ~33% discount to its 15x average PE since its 2003 re-listing (Chart 11).

A ~27% discount to the 14.1x average of its Australian peer group (Chart 12). A ~23% discount to the ASX200 industrials (Chart 13). A ~40% discount to UK peers (Table 9). The 3 key reasons for HGG’s valuation discount are:

FUM decline trend driven by Gartmore integration and the commencement of UK Retail Distribution Review in

Jan 2013. Refer “Funds Flow” section for discussion. Litigation risk of the Henderson PFI Secondary Fund II. Refer “Key Risks” for discussion. Phoenix Funds FUM decline. Refer “Key Risks” for discussion.

CHART 11: HGG Forward PE (x) CHART 12: DOMESTIC COMPARABLES

0

5

10

15

20

25

30PER FY1 (x) +1 Stdev

-1 Stdev Avg

Source: EAP, Factset Source: EAP, Factset

13

CHART 13: HGG PREM/DISC to ASX200 INDUST. CHART 14: EV/EBITDA

-60%

-40%

-20%

0%

20%

40%

60%

Prem/Disc Avg.

0x

1x

2x

3x

4x

5x

6x

7x

8x

9x

10x

Source: EAP, Factset, Bloomberg Source: EAP, Factset

CHART 15: AUS. PEERS’ ABSOLUTE PE MULTIPLE CHART 16: SECTOR PREM/(DISC) to ASX200

10x

12x

14x

16x

18x

20x

22xPEr Avg

+1 Stdev -1 Stdev

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%Prem/Disc Avg +1 Stdev -1 Stdev

Source: EAP, Factset, Bloomberg Source: EAP, Factset, Bloomberg

(ii) Discounted Cash Flow Valuation Scenarios

Table 9 summarises our bear, base and bull case scenarios. We have factor in margin decline driven by competition, changing business mix, increased demand for passive investment and regulatory focus on fees. Only the bull case assumes that some of the Phoenix FUM is retained. Performance fees vary from 5bp (bear case) to

7bp (bull case) of total FUM.

TABLE 9: SCENARIO ANALYSIS

Scenario Base Mgmt FeePerformance

FeeFUM

DCF Valuation

(£)

DCF Valuation

(A$)

Bear Declines to 38bp

(-16bp) by FY18

0.05%/FUM Loss of Phoenix (3Q15),

FUM growth +5% from

FY15F

£0.89 $1.37

Base Declines to 43bp

(-11bp) by FY18

0.06%/FUM Loss of Phoenix (3Q15),

FUM growth +6% from

FY15F

£1.39 $2.13

Bull Declines to 48bp

(-6bp) by FY18

0.07%/FUM Retain 25% Phoenix (3Q15),

Net funds flows +7% from

FY15

£1.79 $2.75

Source: EAP Research Estimates

14

TABLE 10: HGG V INTERNATIONAL PEERS

2012 2013 2014 2012 2013 2014 2012 2013 2014

AUS

AMP 14.1 13.1 12.0 5.6% 6.1% 6.6% 26.4 20.8 19.0 8.8%

BT IM 14.7 11.1 10.6 6.3% 7.7% 7.9% 11.7 8.5 7.6 1.2%

Henderson 9.8 9.9 9.0 6.5% 6.9% 7.3% 7.6 7.1 6.2 1.8%

IOOF 74.9 14.0 12.5 6.1% 6.5% 7.1% 12.3 10.8 9.3 5.1%

Magellan 52.0 381.0 216.7 1.0% 0.2% 0.4% 38.5 24.7 13.4 14.2%

Perpetual 49.1 17.3 13.9 3.1% 3.8% 6.0% 11.6 11.0 8.4 2.2%

Platinum 16.0 16.7 15.1 5.8% 6.1% 6.5% 10.9 11.1 9.9 11.8%

Average 32.9 66.2 41.4 4.9% 5.3% 6.0% 17.0 13.4 10.5 6.5%

Weighted Average 21.4 25.4 18.8 5.5% 5.9% 6.5% 21.3 17.1 15.1 7.8%

UK

Aberdeen 15.8 13.7 12.0 3.1% 3.6% 4.2% 11.7 9.6 7.9 2.1%

F&C 14.9 10.5 9.4 3.0% 3.1% 3.4% 8.7 6.4 5.7 0.1%

Hargreaves Lansdown 31.5 26.1 22.6 2.9% 3.4% 3.9% 22.9 19.5 17.0 13.1%

Henderson 9.9 10.0 9.0 6.4% 6.8% 7.3% 7.9 7.4 6.5 1.8%

Jupiter 13.3 11.8 10.5 3.1% 3.4% 3.6% 10.4 8.7 7.2 3.7%

Schroders 15.7 13.9 12.5 2.6% 2.8% 3.0% 6.2 4.7 3.7 1.0%

St James' Place 19.5 16.1 10.4 2.7% 3.2% 3.7% 9.0 7.8 7.1 6.0%

Average 16.9 14.2 11.6 5.3% 4.2% 4.8% 10.5 8.8 7.5 4.0%

Weighted Average 18.6 15.8 13.3 4.3% 3.8% 4.3% 11.5 9.6 8.2 4.3%

US

Affiliated Managers 16.6 13.9 12.2 0.0% 0.0% 0.0% 15.2 8.8 4.2 2.2%

Alliance Bernstein 18.2 11.9 10.2 6.6% 8.6% 9.8% 15.0 12.3 10.2 0.4%

BlackRock 14.3 12.7 11.4 3.1% 3.4% 3.7% 9.7 8.3 7.2 1.0%

Eaton Vance 16.5 14.7 13.3 2.5% 2.6% 2.8% 9.5 8.8 8.0 2.0%

Federated Investors 11.4 10.8 9.9 10.7% 5.1% 5.4% 7.3 6.5 5.8 0.7%

Fortress 9.9 7.2 6.1 5.8% 7.7% 10.7% 8.7 6.7 5.0 5.3%

Franklin Resources 14.6 13.3 11.9 2.4% 1.2% 1.0% 9.4 8.0 6.8 3.4%

Janus Capital 15.3 13.8 11.2 2.9% 3.2% 3.2% 8.2 7.0 5.5 1.1%

Legg Mason 16.3 11.3 9.4 1.8% 2.0% 1.7% 9.8 8.5 7.6 0.6%

Och Ziff 7.8 7.3 6.6 11.4% 11.7% 12.9% 5.1 4.0 3.4 10.4%

T. Rowe Price 19.2 16.9 15.0 2.1% 2.3% 2.5% 11.4 9.9 8.6 4.6%

Waddell & Reed 11.3 10.0 9.0 2.2% 2.3% 2.3% 11.6 9.6 8.6 2.3%

Average 14.1 11.9 10.4 4.1% 4.0% 4.5% 10.1 8.2 6.7 2.8%

Weighted Average 14.5 12.8 11.3 2.9% 2.8% 3.0% 8.4 6.9 5.8 2.3%

Source: FactSet

EV/EBIT (x)Forward PER (x) Dividend Yield (%)EV/FUM

15

FINANCIAL SUMMARY

Henderson Group PLC. HGG

As at: 20/11/2012 Recommendation: Positive Share Price $1.75

Year end June 2011A 2012E 2013E 2014E

INCOME STATEMENT

Sales Revenue £m 477 432 451 469 Consolidated EBITDA £m 176 151 167 182 D&A £m 3 3 3 3 Consolidated EBIT £m 173 148 164 180 Net Interest £m 14 7 4 4 Tax Expense £m (14) (8) (21) (25) Associates/Minorities £m 0 0 0 0

Adj NPAT £m 126 126 129 141

NRIs £m (34) 0 0 0 Reported NPAT £m 34 67 83 99

Shares on Issue (end period) m 1,098 1,104 1,104 1,104 EFPOWA m 1,013 1,101 1,104 1,104

EPS ¢ 12.4 11.5 11.7 12.8

DPS ¢ 7.1 7.4 7.6 8.3 Franking % 0% 0% 0% 0%

GROWTH/PROFITABILITY RATIOS

Sales Growth % 31.7% (9.5)% 4.4% 4.0% EBITDA Growth % 57.5% (14.4)% 10.9% 9.2% EBIT Growth % 59.4% (14.6)% 11.2% 9.4%

EPS Growth % 31.5% (7.5)% 1.6% 9.6%

EBITDA/Sales % 36.9% 34.9% 37.1% 38.9% EBIT/Sales % 36.3% 34.3% 36.5% 38.4% EBIT Interest Cover x 12.5 20.1 45.7 50.0 Tax Rate % 21.1% 10.1% 20.0% 20.0%

ROE % 16.0% 16.3% 16.7% 18.1% ROFE % 29.8% 18.9% 22.4% 26.6%

CASH FLOW

EBITDA £m 176 151 167 182 Change in Working Capital £m 55 (29) 5 4 Other £m (127) 0 0 0

Gross Operating Cash Flow £m 103 122 172 187

Net Interest Paid £m (16) (7) (4) (4) Tax Paid £m (13) (8) (21) (25)

Net Operating Cash Flow £m 75 107 148 159

Maintenance Capex £m (1) (1) (1) (1)

Free Cash Flow £m 74 106 146 157

Dividends Paid £m (70) (79) (92) (87) Expansionary Capex £m 0 0 0 0 Acquisitions £m 201 0 0 0 Asset Sales £m 6 0 0 0 Dividends Received £m 4 0 0 0 Shares Issues/Buybacks £m (22) 0 0 0 Other £m 34 0 0 0

Increase in Net Cash/(Debt) £m 227 27 54 70

GOCF/EBITDA % 59% 81% 103% 102% Total Capex/Sales % 0.3% 0.3% 0.3% 0.3% Total Capex/Depreciation x (0.5) (0.5) (0.5) (0.5)

Year end June 2011A 2012E 2013E 2014E

VALUATION METRICS PER x 9.2 9.9 9.8 8.9 P/EG (2YR) x Dividend Yield % 4.0% 4.2% 4.4% 4.8% EV/EBITDA x 4.7 5.3 4.4 3.7 EV/EBIT x 4.7 5.4 4.5 3.7 P/FCF x 10.9 7.6 5.5 5.1 P/BV x 1.6 1.6 1.6 1.6

BALANCE SHEET

Assets Cash £m 274 158 213 283 Working Capital £m 168 189 197 205 PP&E £m 20 20 20 20 Intangibles £m 765 716 665 613 Investments £m 69 69 69 69 Other £m 395 395 395 395

Total Assets £m 1,690 1,546 1,558 1,585

Liabilities Debt £m 291 149 149 149 Working Capital £m 343 356 368 388 Other £m 269 269 269 269

Total Liabilities £m 903 774 786 806 Equity £m 787 773 772 779 Capital Employed £m 805 763 708 645

Net Debt/(Cash) £m 18 (10) (64) (134) Net Debt/Equity % 2.2% (1.2%) (8.3%) (17.2%)

Net Debt/Debt+Equity % 2.2% (1.3)% (9.0)% (20.8)%

Net Debt/EBITDA x 0.1 (0.1) (0.4) (0.7) Working Capital/Sales % (36.6%) (38.7%) (37.9%) (39.0%) D&A/PP&E % (15.2%) (14.4%) (13.6%) (12.9%)

DCF VALUATION £m £/share

Risk Free Rate 6.5% Equity Value 1,531 £1.39 Market Risk Premium 6.0% (Net Debt)/Cash (35) £(0.03) Beta 1.15 Franking Credits £0.00

WACC 11.2% DCF Valuation £1.39

Group EBITDA £m 0 0 0 0

DIVISIONAL SUMMARY

28%

30%

32%

34%

36%

38%

40%

2010 2011 2012 2013 2014

Margin Trends

EBITDA/Sales EBIT/Sales

8

16

24

32

40

48

56

-24%

-19%

-14%

-9%

-4%

1%

6%

2010 2011 2012 2013 2014

Gearing & Interest Cover

Net Debt/Net Debt+Equity (%) EBIT Interest Cover (x)

8%

12%

16%

20%

24%

28%

32%

2010 2011 2012 2013 2014

Return Trends

ROE ROA ROFE - Reported

16

RESEARCH RECOMMENDATION DEFINITIONS Positive Stock is expected to outperform the S&P/ASX 200 over the coming 24 months

Neutral Stock expected to perform in line with the S&P/ASX 200 over the coming 24 months Negative Stock is expected to underperform the S&P/ASX 200 over the coming 24 months Speculative Stock has limited history from which to derive a fundamental investment view or its prospects

are highly dependent on event risk, eg. Successful exploration, scientific breakthrough, high commodity prices, regulatory change, etc.

Suspended Stock is temporarily suspended due to compliance with applicable regulatory and/or Evans & Partners policies in circumstances where Evans & Partners is acting in an advisory capacity.

Not Rated Stock is not included in our investment research universe. Research Criteria Definitions

Recommendations are primarily determined with reference to how a stock ranks relative to the S&P/ASX 200 on the following criteria: Valuation Rolling 12 month prospective multiples (composite of Price-to-Earnings Ratio, Dividend

Yield and EV/EBITDA), or long-term NPV for resource stocks.

Earnings Outlook Forecast 2 year EPS growth.

Earnings Momentum Percentage change in the current consensus EPS estimate for the stock (rolling 1 year forward basis) over the consensus EPS estimate for the stock 3 months ago.

Shareholder Returns Composite of forecast ROE (rolling 1 year forward basis) and the percentage change in

ROE over 2 years.

Debt Servicing Capacity Rolling 12 month EBIT Interest Cover ratio. Cyclical Risk Qualitative assessment of the 2 year outlook for a stock/industry’s profit cycle. Industry Quality Qualitative assessment of an industry’s growth/returns potential and company specific

management capability.

Financial Transparency If we don’t understand it, we won’t recommend it.

For stocks where Evans & Partners does not generate its own forecasts, Bloomberg consensus data is used. Analysts can introduce other factors when determining their recommendation, with any material factors stated in the written research where appropriate.

17

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