Aberdeen keeps DeAM bond clients, but loses in equity

ABERDEEN, Scotland — Most of the fixed-income clients Aberdeen Asset Management PLC gained from buying London-based Deutsche Asset Management Ltd. have remained loyal to the buyer, but a steady exodus of business continues on the equity front.

Gary Marshall, group sales and marketing director, and the key person overseeing the integration of the two units, admits AAM executives fully expect an ongoing "flow of clients leaving." So far, retention has been predictably more difficult on the U.K. equities and multiasset, or balanced, front because of personnel departures and poor investment performance over the past several years. Mr. Marshall declined to comment on net outflows since the acquisition of the U.K.-based fixed-income, institutional equity, global equity, multiasset and DWS retail operation was completed Sept. 30. As of June 30, the units accounted for £34.3 billion ($59.8 billion).

The takeover of the U.S. fixed-income division, which has £12 billion in assets, should be completed at the end of this month.

Mr. Marshall would not say how many clients, or how much in assets, the firm has lost since the deal was announced in July.

The final price tag for acquisition — with an estimated maximum of £270 million — hinges upon the amount of equity and multiasset business DeAM retains by June 30, 2006.

The acquisition, described by analysts and others in the wealth management industry as one of the most "prestigious block of assets" to go up for sale in Europe this year, could boost assets managed by Scotland-based AAM to £74.4 billion from about £28.1 billion, according to estimated figures based on DeAM's assets under management as of June 30.

About 60% of the £46.3 billion AAM is picking up from DeAM is fixed income.

"We're hoping to gain a much more balanced business between equities and bonds," Mr. Marshall said. "We're currently very much on the equities side, and (DeAM) has reasonable exposure in the fixed-interest side, so this will tilt the balance back."

"It is not expected that (AAM) will lose a significant volume" in fixed income, said Katrina Preston, analyst at brokerage Bridgewell Securities Ltd. who advised Aberdeen on the deal. "We factored in 10% on the pessimistic side, but I'd be surprised if it's any more than 5%."

"Deutsche was suffering outflows before Aberdeen came on the scene; that's one of the reasons it was up for sale," Mr. Marshall said. "We had made it clear that the lead role (of the acquisition) is the fixed-interest business, and that side has remained very positive."

As of June 30, net outflows for the entire DeAM division — not all of which was sold to AAM — totaled €12 billion ($14 billion), according to parent Deutsche Bank AG's interim report for the first half of 2005. (DeAM retained real estate investment manager RREEF, the Philadelphia-based high-yield team, its hedge fund arm, its absolute-return strategy and a portion of its institutional equity strategy business.)

The outflow of DeAM clients has been largely confined to the U.K. equities division and "what was paid reflects that expectation," Ms. Preston said. "In a base-case scenario, Aberdeen could lose 50% of the equities business," and a pessimistic outlook would be a loss of as much as 75% by next June, she added.

AAM expects to retain almost all of the bond fund managers in the U.K. and U.S. fixed-income divisions — about 100 people — but it expects to keep only 24 of about 60 equity fund managers, Mr. Marshall said. And the overwhelming majority of the equities staff staying with Aberdeen is in "fund manager assistant roles, not necessarily senior positions," he said.

Among the managers who have left the company is Peter Lees, who led the U.K. equities team at DeAM, and this month joined rival F&C Asset Management PLC, Edinburgh. Mr. Lees brought four members of his team with him: Phil Doel, Luke Newman, Makis Kaketsis and Michael Ulrich.

Graham Ashby, Ruth Keattch, Richard Curling and Nick Evans will also not be joining Aberdeen, though details of their plans could not be learned. Mr. Ashby was DeAM's top fund manager for U.K. equity income and equity income-plus funds; Ms. Keattch and Mr. Curling were senior-level small-cap fund managers, and Mr. Evans was a senior-level fund manager of U.K. equity growth.

The only London-based senior equity manager to join Aberdeen is Sanjiv Tumkur, who specializes in European small-cap stocks.

The personnel outflow is not helping the firm with clients already concerned by performance and management change issues.

"We didn't consider Aberdeen (as a manager after the DeAM deal was announced) because the fund manager we had been working with left," said one former client who asked not to be named. "So we ended up going with someone else."

One of the latest clients to drop DeAM as an asset manager is the £1.4 billion Aberdeen City Council Superannuation Fund, which restructured its portfolio after a strategic review earlier this year, said Peter Lloyd, the plan's assistant director of finance. DeAM, which had managed £391 million for the fund in a balanced portfolio, was not retained. The change was largely because of the overall market and how DeAM has performed within that market.

"We looked at the best practices in the market and decided to go from a balanced to a specialist structure," Mr. Lloyd said, adding that this is part of a larger overall market trend rather than anything specific to AAM's takeover.

According to Bridgewell's Ms. Preston, the U.K. asset management industry "has suffered from a sectorwide decline in demand for the balanced mandate product, as well as weak equity performance affecting the product's track record." As of May 31, DeAM's multiasset business in the U.K. totaled £13.5 billion in assets under management.

Other substantial departures include the £14.5 billion Railways Pensions Management Ltd., Darlington, England, and the £6.4 billion British Broadcasting Corp. Pension Trust Ltd., London.

Chris Hitchin, Railpen's executive chairman, said Railpen decided against moving a £700 million active U.K. equity mandate to Aberdeen from DeAM. It has not been decided where that money will be reallocated or how, though Mr. Hitchin added that overall, the defined benefit pension plan intends to reduce its equity exposure to 45% of the entire portfolio from about 58%. The pension plan has kept Aberdeen to manage a £400 million global bond portfolio, previously managed by DeAM.

"It has been clear for quite a while that (DeAM's U.K. equity team) is not conducive to happy clients and happy employers," Mr. Hitchen said. "But the Philadelphia and London bond teams remain intact and they seem pretty fired up about the takeover."

Analysts said as long as Aberdeen maintains the fixed-income business and the exodus of clients does not continue past next June 30, the company would not have paid too much for its portion of DeAM. However, to make the acquisition succeed in the long run, it must find ways to slim down the business' cost base and take advantage of existing capabilities.

"They've got a pretty clever deal out of this one," said Julia Hobart, director of Mercer Oliver Wyman, a strategy and risk consultant to asset managers. "They've got a springboard from which to make a go at the U.K. market. It's entirely up to Aberdeen to seize the opportunity."