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Weekly Wrap: Google Takes on Apple with New Hardware

Alphabet's new Pixel phone is seen as a defensive move and not a game-changer. Plus, winding down the third quarter, and the Janus-Henderson merger.

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Jeremy Glaser: Alphabet looks to go head-to-head with Apple, Janus looks to bulk up, and the third quarter winds down. This time on the Morningstar Weekly Wrap.

Stocks continued moving higher during third quarter, with the S&P 500 rising around 3.9%. The index is now up 7.8% for the year and has gained over 16% a year over the last five.

Given the quarter started off with investors still trying to make sense of the Brexit vote and ended with worries about the Fed, it was a surprisingly placid quarter. Looking to the rest of the year, though, valuations remain high, central bank policy remains a wild card, and with an election coming up stocks could very well be choppier than we've grown accustomed to over the summer.

At an event this week, Alphabet rolled out new hardware including the Pixel phone meant to compete directly with Apple. Our Ali Mogharabi sees this as more of a defensive move to keep its dominance in search and not a game-changer for the firm.

Ali Mogharabi:  Google is going head-to-head versus Apple at the high end of the smartphone market, as it introduced its Pixel smartphones. In response to the success that Amazon has had with its virtual home assistant, Echo, Google also highlighted its voice-based, hands-free, Google Home. The Pixel and Google Home, include the Google Assistant, an AI-powered virtual assistant.

We view Google's focus on Google Assistant as somewhat of a defensive move, as Google may be fearing that its search dominance could be impacted by growth of in-home IoT products, such as Echo, which actually also provides voice search. Given Google's search engine and its access to significant amount of data, coupled with the advancements and investments made in machine learning technology, the company is hoping Google Assistant will outshine competition in the long run.

Google expects this hardware to bring in more users accompanied by more interaction such as voice searches, resulting in more user data, which can be actually utilized to drive more online ad revenue growth. While we agree with this approach, it remains to be seen whether it will bear fruit, as other companies such as Amazon, Samsung, and Apple are fierce competitors in the consumer hardware markets.

Glaser: Janus announced this week a merger with U.K. -based Henderson Group. Andrew Daniels thinks this move has clear business rationale, but it is less clear how fundholders will benefit.

Andrew Daniels: This week, U.K.-based Henderson and U.S.-based Janus agreed to a merger of equals. The deal's expected to close in the second quarter of 2017, with Henderson owning 57% of the combined company and Janus owning 43%. The deal makes clear business sense. Both firms have been trying to increase their distribution presence and diversify their product offerings. There's also an economies-of-scale benefit which should allow them to spread out their fixed costs over a larger pool of assets, and allow them to improve their financial results.

The benefits to fundholders, however, is less clear. If the added scale brings them operational efficiencies, that should allow them to reduce expense ratios. However, there are no plans to do that in the near future. There's also some cultural problems as well. Any time you're bringing together two different firms, the potential for culture clash exists, and manager and analyst turnover may increase as a result. All told, this deal makes clear business sense, but the benefits to fundholders is less clear.

Glaser: And if you are worried about low stock market returns in the future, Christine Benz created a guide this week on mistakes to avoid.

Jeremy Glaser does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.