Road turns a bit rocky for Aberdeen Standard

Two years on since an all-share merger of Aberdeen Asset Management PLC and Standard Life PLC, the combined company's money management arm is seeing assets slip and a change in duties for a top executive, despite declarations at the time of the complementary nature of the firms' business lines.

The deal, announced March 6, 2017, was touted by executives as a way to create "scale across asset classes and geographies," aimed at boosting Standard Life's money management offerings in the U.K. and in emerging markets, where Aberdeen Asset Management had an edge.

But as of Dec. 31, Aberdeen Standard Investments has seen its assets under management drop to £505.1 billion ($641 billion), down from £583 billion in June 2017.

Its net institutional outflows totaled £27.7 billion in 2018 — another decline from net outflows of £19.7 billion the previous year, according to the firm's annual report. Some £16.5 billion in outflows from Aberdeen Standard's abso- lute-return strategies — primarily its Global Absolute Return Strategies Fund — accounted for more than a third of the firm's overall outflows of £40.9 billion in 2018.

Still another potential blow to the investment manager's AUM remains: Lloyd's Banking Group and its subsidiary Scottish Widows said they plan to start the transfer of a £100 billion mandate with Aberdeen Standard to new partners BlackRock Inc. and Schroders PLC. The current contract with Aberdeen Standard runs through March 2022. Lloyds and Scottish Widows had sought to terminate the deal earlier, saying they considered Aberdeen Standard a material competitor, but were overruled in March by an arbitral tribunal.

In an April 17 interview with Pensions & Investments, Aberdeen Standard Investments Chairman Martin Gilbert acknowledged challenges facing the firm, but said the Edinburgh-based active manager has identified a path for growth.

"I often say (money managers) have got three big headwinds: fee compression, public markets to private markets (transition) and then the active to passive (shift). It's a tough time for managers and (they) need to figure what to do about the headwinds," he said. "We are trying to build the private markets capability. We have got to show that active has a future," he added.

To position the company for growth, Mr. Gilbert stepped back from his role as co-CEO of parent company Standard Life Aberdeen in March to become chairman of the money management arm, a transition he said will enable him to focus on business development. The leadership change left the reins of Standard Life Aberdeen with Keith Skeoch, who had also been co-CEO.

In regard to the potential loss of the Lloyd's business, Mr. Gilbert was circumspect: "This is not a dispute with a client. This is a contractual dispute. We went to arbitration on this contractual dispute and the arbitrators have given their opinion. Who knows what's going to happen after that. We'll just have to wait and see."

Among Mr. Gilbert's priorities are bolstering private markets strategies, with £16 billion in assets under management as of Dec. 31, and addressing a slide in equity strategies, which fell 25% to £72.9 billion in the year ended Dec. 31, down from £97.5 billion in 2017.

The equity drop was fueled by a 32.4% decline in emerging markets equity strategies, which fell to £25 billion from £37 billion a year earlier. Developed markets equity strategies and Asia-Pacific equity strategies were also down, respectively, 20.8% to £12.9 billion and 18.8% to £22.5 billion.

Mr. Gilbert said he is now focused on making sure Aberdeen Standard's regional heads are driving the business forward in four main regions. The U.K. market constitutes 50% of Aberdeen Standard Investments' business, with the rest split between Europe, Middle East and Africa at 23%, Americas at 20% and Asia-Pacific at 7%.

The firm has been bolstering its international strategies to capitalize on an improving outlook for active manager opportunities emerging from the macroeconomic environment, including Aberdeen Standard's China onshore bond strategy, which launched in May 2018, and has $31 million in assets under management.

One of Aberdeen Standard's emerging markets funds, Aberdeen Standard Sicav I – China A Share Equity Fund, launched in March 2015, has delivered a return of 9.8% per year on annualized basis, providing investors with access to the $5.6 trillion onshore Chinese equity market. The fund has $2.4 billion in assets under management.

In February, Aberdeen Standard also expanded its Asia-Pacific real estate capability with the acquisition of an Asia real estate investment management firm, Orion Partners, boosting global real estate assets to $56.3 billion.

Despite having announced 800 job cuts at the time of the merger, Aberdeen Standard Investments continues to hire staff.

"We are adding in China and the Middle East where there is opportunity. You have got to grow your business," Mr. Gilbert said. He didn't provide the exact number of additional hires that have been made or specify the types of roles.

Meanwhile, Aberdeen Standard has lost two senior executives in the last two months: Andrew McCaffery, global head of strategic client investments, is leaving the firm in July to join Fidelity International as global CIO, alternatives and solutions. Also, Alex Barr, global head of private markets and real estate investment oversight, in July will join Janus Henderson Investors as senior portfolio manager for multiasset alternatives. Both roles will not be directly replaced.

Mr. Gilbert added the overall drop in research in the European small-cap equities sector due to Markets in Financial Instruments Directive II regulation has also created an opportunity for bottom-up managers including Aberdeen, which manages about $15 billion via its small-cap fund family.

"You make your money in inefficient markets. The ideal (scenario) is there is no research apart from your own internal research," he said.

Analysts who follow the firm are split in their interpretation of the drop in AUM since the merger was announced.

David Holder, senior analyst, manager research at Morningstar Inc., in London, said the AUM is "disappointing."

And uncertainty remains about the investment process after the merger, Mr. Holder added.

"It is a problem for the group, but will become clearer when funds start to be merged in quarter one or two next year. Fundamentally this was a megamerger, which was always going to take a while to resolve."

Another analyst, Marina Cremonese, vice president, senior analyst at Moody's Investors Service in London, said the firm's outlook on the money manager was "stable."

"We think outflows are a weakness, but we see some strength in the overall credit profile. They have a strong balance sheet," she said. "They have a broad product set and distribution (capabilities) and are a profitable group," she added.

Dick Tol, senior portfolio manager at one of Aberdeen Standard's newest client, the €27 billion ($30.5 billion) Pensioenfonds PGB, Amsterdam, which selected the firm for a €500 million private equity allocation in February, said he is aware from news reports that the integration of the two companies remains a work in progress.

"However, we do not consider this as detrimental to the private equity business," he said.

"(The) former Standard Life team had the best performance in their fund selection capabilities and was considered the best partner to execute our program in the close cooperation model that we have envisioned," Mr. Tol said.

"We considered them the best player with a predominantly small and medium buyout focus, while being part of a large organization with all institutional-class risk management (policy) and environmental, social and governance policy in place. That helped to win the confidence of our board," he added.

Mr. Gilbert, too, noted that the merger work was ongoing."It's the usual issues, the front office gets done really quickly and very seamlessly, and where there is duplication, people move on and then really hard work is always the back office and integrating the systems. That's been the case here so quite a lot of work still (remains) to be done on system integration," Mr. Gilbert said.

Reflecting on the outflows from the Global Absolute Return Strategies Fund in 2018, Mr. Gilbert said a "liquidity-fueled markets" environment has been tough for the asset class.

In the last five years, GARS' cumulative performance has been mixed. The fund delivered -6% in 12 months to Dec. 31, -6.3% in three years and 1.6% in five years.

As of Dec. 31, 2018, the £11 billion GARS sterling-denominated fund's target benchmark is 6-month LIBOR (which was 0.94% as of April 18) +5 percentage points on an annual basis.

Mr. Gilbert explained: "It's an industry trend … certainly for the first three months and a half this year we have almost made our target of LIBOR +5 percentage points and Global Absolute Return Strategies Fund is up 4%. We are seeing a reduction in outflows since the last quarter of last year."

"I think the issue is it's been the wrong asset class to be in. It was great in the global financial crisis and was borne out of the GFC. It's good in tough times and the last quarter of last year really proved it. It's more of an industry issue rather than just GARS," he said.