Un­der­stand­ing weak­ness in Stan­dard Life Aberdeen shares

Merger with Aberdeen As­set Man­age­ment yet to de­liver the goods

Shares - - CONTENTS -

De­spite three quar­ters of the an­a­lysts which fol­low it lik­ing the stock, Stan­dard Life Aberdeen (SLA) shares are down more than 30% this year hit­ting re­cent lows be­low 290p.

It cer­tainly hasn’t been plain sail­ing for the ven­er­a­ble Ed­in­burgh firm since its tie-up with Aberdeen As­set Man­age­ment in 2017 and in­vestors should re­sist the temp­ta­tion to see cur­rent weak­ness as a buy­ing op­por­tu­nity.

In Fe­bru­ary 2018 the shares slumped 14% af­ter one of Aberdeen’s big­gest cus­tomers, Scot­tish Wi­d­ows, ter­mi­nated a con­tract on the ba­sis that Stan­dard Life was a ma­te­rial com­peti­tor. Wi­d­ows had £109bn of as­sets at Aberdeen.

The shares took an­other tum­ble in June when Lloyds Bank­ing (LLOY), which owns Scot­tish Wi­d­ows, an­nounced that it had dumped its en­tire stake in SLA.

Lloyds is now in talks to merge its wealth man­age­ment arm into a new joint ven­ture with Schroders (SDR) with the lat­ter ex­pected to win the Wi­d­ows man­date.

Stan­dard Life's as­sets un­der man­age­ment and ad­min­is­tra­tion (AUMA) are still above £600bn but first half re­sults showed net out­flows of £16.6bn, mostly from higher-mar­gin eq­uity prod­ucts like Stan­dard Life Global Ab­so­lute Re­turn Strat­egy (B7K3T22). That trans­lated di­rectly into a 7% fall in op­er­at­ing prof­its.

The GARS fund, seen as a ‘hedge fund for the masses’, was the big­gest in the UK in 2016 with as­sets of al­most £27bn. How­ever due to poor per­for­mance and out­flows, as­sets have since dwin­dled to £17bn.

A RACE TO THE BOT­TOM

Stan­dard Life is also caught in a ‘race to the bot­tom’ as in­dus­try ri­vals cut fees to try to grab a big­ger share of cus­tomer as­sets.

Firms like Van­guard and Fi­delity have of­fered low-cost in­dex funds for years. Now Fi­delity has launched a range of zero-fee in­dex prod­ucts with the first two funds cap­tur­ing over $1bn of as­sets within a month of launch­ing.

Added to these com­pet­i­tive pres­sures Stan­dard Life's bent to­wards emerg­ing mar­kets, which have suf­fered from bearish sen­ti­ment all year, hasn’t helped its share price.

On the plus side the com­pany is shed­ding its UK and Euro­pean in­sur­ance busi­nesses as it adopts an ‘as­set-light’ model. That will al­low it to re­turn up to £1.75bn of cap­i­tal or nearly 20% of its cur­rent mar­ket cap to share­hold­ers.

There is also a re­newed fo­cus on costs to try to off­set the im­pact of lower rev­enues and pro­tect prof­its, and this looks to be bear­ing fruit as first half pre-tax prof­its were up on the pre­vi­ous half.

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