Hopes of merger and acquisition activity among fund management groups hurt by a year of falling revenues are fading as the rally in equity markets has lifted share prices.

Shares in the asset management sector have risen 48.4 per cent in the past six months, compared with a 29 per cent rise in the FTSE All-Share index.

As a result, talks with previously hard-pressed vendors had become “protracted” as their expectations on price rose, said Andrew Formica, chief executive of Henderson.

The group bought New Star Asset Management in April and is on the lookout for more share-based acquisitions.

Henderson is also reaping the benefits of rising stock markets and improving client confidence. Its shares have risen 52 per cent since March and fund outflows are slowing.

Net fund outflows reached £2.9bn in the six months to June 30, taking assets under management to £53bn. While UK fund flows are still “subdued”, said Mr Formica, flows into US funds have been positive since May. But, he cautioned, “although markets have recently improved, they are still well below the levels of 2007 and 2008 and therefore 2009 will be more challenging for earnings”.

The company reported a pre-tax loss of £2.9m in the first six months, against a profit of £47m last year, after non-recurring costs of £26.5m associated with restructuring and integrating New Star.

Excluding those costs, profits halved to £23.6m and earnings per share fell from 6.2p to 2.7p. A 23 per cent fall in revenue from £150.7m last year to £115.5m more than offset the £10m drop in operating costs to £79.2m. The group’s cost-to-income rose to 70 per cent compared with 59.8 per cent a year ago. Performance fees, at £5.2m, were a third of those in June 2008.

Mr Formica said performance had improved but most funds were still below the high-water mark set two years ago and it might be another two years before assets recovered sufficiently to start paying performance fees again. But the company is maintaining its interim dividend at 1.85p “in the light of the improving outlook for markets”.

Henderson shares fell 2.7p to 121p.

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