FEELING THE PINCH Even large investment companies are feeling the effects of adverse market conditions
With today’s market conditions, even large investment companies like Standard Life Aberdeen are suffering significant financial setbacks, discovers Bill Jamieson
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Two plus two equals four was the eternal wisdom we were taught at school. Two plus two equals five – this, we were assured, was the result when two companies merged. But when two plus two equals three and falling – what went wrong?
In August last year, two of Scotland’s largest financial services giants – Standard Life and Aberdeen Asset Management – signed an £11 billion merger deal to create the second largest fund manager in Europe.
This was the transformative deal that would project Scottish talent in asset management on the global stage. Its proponents talked of synergies, cost efficiencies, benefits from combined marketing and the gains that would cascade from that magic wand word in corporate finance: scale.
Standard Life’s Keith Skeoch, the mastermind behind the Global Absolute Return Strategies Fund (GARS), and Aberdeen’s hyper-acquisitive Martin Gilbert, who has more than 40 takeovers under his belt, would be joint chief executives – an introvert and an extrovert in a balance of personality and talents.
It was a logic that even the staid, paternalistic culture of Standard Life – formed in 1825 and survivor of 190 years of financial crashes, depressions, rises and panics – found hard to resist. It could no longer rely on its history and durability alone to progress in the competitive 21st century world of fund management. Household name though it may have been in Scotland, it needed greater presence and muscle to progress on the global stage. Scale was key.
With 8,000 employees, the joint Standard Life Aberdeen would pull business from its rivals, attract new investors, bear down on costs and, above all, staunch the exodus of clients to low-cost, indextracker funds. These have been enjoying explosive growth, devouring the business models of smaller, so-called boutique investment businesses. Why pay management charges when passive index-trackers could perform just as well, if not better?
But 15 months on, shareholders have suffered scale of a most painful sort – ever-rising losses. Prior to the merger, shares in Standard Life were changing hands at 499p. At the point of merger, the price was 420p. They have since plummeted. In the past few weeks they have been changing hands at 260p – a loss of 37%.
The market price-tag of the combined company has plunged from £11 billion to £8.5 billion – ‘an impressive destruction of value’, wrote the acerbic Financial Times columnist Neil Collins, ‘from a business that manages money’. Among market wags the moniker for the combined group has been shortened to ‘Staberdeen’.
As for the combined group pulling in more money, so far the reverse has proved the case. Investors have withdrawn £34.5 billion of net funds, reflecting scepticism over the claimed merger benefits, concerns over performance, and apprehension over the outlook for shares. After the longest period of rising share values on record, many fear a correction is at hand.
This figure does not include the loss of the £109 billion mandate enjoyed by Aberdeen for managing the Scottish Widows portfolio – currently under the Lloyds Banking Group umbrella. After the tie-up it did not much care to have Scottish Widows assets managed by a long-time direct rival.
And group results for the first six months of 2018 did not inspire – adjusted profit before tax at £478 million was down £43 million on the same period last year, while assets under management fell £17 billion to £610 billion, investor net outflows slightly cushioned by a rise in share values.
Now 15 months is hardly a fair period over which to pass judgement on a merger of this size. It takes time for cost savings to materialise. Enhanced market presence can’t be built overnight and market conditions have not been that favourable.
But searching questions are now being asked. How much further can the shares fall? Can these two distinct cultures and management personalities survive? Is the 7% plus yield on which the shares now
stand a not-to-be-missed bargain or a warning flare? How can the group pull out of this nose-dive?
The flight from ‘Stabardeen’ is in some part a reflection of weaknesses in the component parts prior to the merger. Much of Aberdeen’s presence in fund management has been centred in Far Eastern and ‘frontier’ developing country markets. But many of these have put on, at best, indifferent performances, falling short of the level of rewards investors expected.
Investor exodus was already underway before the merger was mooted. And over the past year emerging market funds generally have fallen out of favour.
A long trail of fund management acquisitions has enabled Aberdeen to shake off the legacy of the split capital trust debacle in 2002-03 that lost investors millions and almost crippled the company. But for all the take-overs it has been unable to hit on an investment fund winner to approach the stunning success of rival Scottish Mortgage Investment Trust. Its bet on high-tech ‘FANG’ stocks (Facebook, Amazon, Netflix, Google) has been spectacularly successful, propelling it to a fund size of £7 billion.
Standard Life has also suffered withdrawals, though not to quite the same extent. It, too, has had a turbulent history. Investor confidence was shaken by the de-mutualisation battle of 2000. It was later forced by the Financial Services Authority to offload £30 billion of shares to lift solvency ratios. No sooner were the shares sold than the stock market rebounded, with policyholders missing much of the gain.
The group’s traditional bestselling with profits endowment
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Enhanced market presence can’t be built overnight and market conditions have not been favourable
policies fell out of favour. And both groups have suffered from the explosive growth in low-cost, passive, index-tracker funds – cheap, simple to understand and easy to buy and sell.
To recover momentum, Standard Life disposed of non-core businesses like Standard Life Bank, its healthcare division and its Canadian business. Now has come the biggest sale of all – the traditional life business to Phoenix Group for £2.3 billion cash and a £1 billion equity stake, leaving SLA as a pure asset management company. How long will the word ‘life’ survive in the name?
The group can point to £5 billion of cash, with £350 million of costs taken out and more economies to follow. Some 20 new funds have been launched and Aberdeen has won the mandate to run the new Global Sustainability Trust which plans to raise £200 million through a placing and offer.
Still to be resolved is the issue of what values and investment style will prevail – what will make SLA different to, or better than, its competitors? Size alone is no substitute for persona – indeed, it can work to destroy it. Standard Life could claim a style and identity that appealed to many defensive investors. And the group’s standing and history helped to bind a distinctive culture. Companies in pursuit of size lose that at their peril.
‘Buy on the dips, sell on the rallies’ is the classic way investors have made two plus two equal five in their stock market nest eggs. That 7% dividend yield will certainly lure investors. Analysts at Barclays Capital, RBC Capital Markets, Numis, Citigroup and JP Morgan Cazenove all currently rate shares in Standard Life Aberdeen as a ‘Buy’ or ‘Overweight’. However, there may be more ‘settlement issues’ to contend with before investors are confident that ‘two plus two’ does not continue to lose them money.