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Aberdeen and Standard Life merger: Complementary or questionable?

08 March 2017

Investment professionals discuss Monday’s announcement of the merger between Aberdeen and Standard Life and what ramifications this could have on both companies.

By Lauren Mason,

Senior reporter, FE Trustnet

The merger of established fund houses Aberdeen and Standard Life looks to be complementary, according to some investment professionals, although others warn that fund overlaps could lead to job losses and that now is bad timing, given heightened geopolitical tension.

This comes following Monday’s announcement that the Scottish investment firms will enter an £11bn merger, which would lead to a combined AUM of £660bn and make the combined group one of UK’s largest asset management firms.

While Standard Life is renowned for its behemoth GARS fund, MyFolio range and its unconstrained UK equity fund range, Aberdeen is better known for its Asia Pacific and emerging market equity funds.

The merger will mean that chief executives Martin Gilbert and Keith Skeoch will become joint CEOs of the combined group.

While this perhaps sounds like a well-matched merger on the surface, what could it mean for the health of the businesses over the medium to longer term?

Keith Baird, financial services analyst at Cantor Fitzgerald, says the fit between the two businesses looks reasonably complementary, but warns there will be a risk of revenue and staff attrition to offset savings on costs.

The rationale for the deal must be diversification for both Standard Life and Aberdeen,” he reasoned.

“Standard Life has had success in growing its institutional business but has problems with GARS and mature insurance books.

“Aberdeen has a large emerging markets business which has struggled. Given the headwinds faced by the asset management industry from passive investing, pricing and regulatory pressures, this looks like a defensive deal.”

Standard Life GARS has come under fire over recent months for losing money, despite aiming to beat cash over rolling three-year periods.

Performance of fund vs benchmark over 3yrs

 

Source: FE Analytics

According to data from FE Analytics, the £25.8bn fund has seen outflows of £914.95m over the last six months alone.

Meanwhile, Aberdeen’s significant client outflows have been well-documented, with £10.5bn of investors’ money being withdrawn from its funds over the last three months to the end of the year. This means the asset management firm has experienced outflows for the 15th quarter running.

Laith Khalaf, senior analyst at Hargreaves Lansdown, said: “Standard Life brings some stability to the table for Aberdeen, which has seen 15 quarters of consecutive outflows, and which will also now benefit from distribution through Standard Life’s workplace pension and wrap platform.

“Aberdeen meanwhile offers Standard Life a quick route to the big boy’s table by almost doubling assets under management.


“Active managers are feeling the pinch when it comes to fund charges, thanks to the gauntlet laid down by the passive price war, and by targeting £200m of annual cost savings, both companies will go some way to relieving some of that pressure on the bottom line.

“However that does unfortunately spell job losses for the combined group.”

According to the latest data from the Investment Association, tracker funds in the IA universe saw net retail inflows of £320m in January alone and, over the last year, the market area’s overall share of industry funds under management has increased by 220 basis points to 13.6 per cent.

Ketan Patel (pictured), fund manager at EdenTree Investment Management, says the merger of Aberdeen and Standard Life, both of which are struggling to stem outflows, only serves to underline the increasing strength of passive funds. 

“Active fund managers have come under greater scrutiny by investors who are being drawn to the low cost fee structure espoused by passive funds,” he explained.

“The proposed joint CEO role is one that is unlikely to work in the medium to long term, more so with such dominant personalities at the helm of both entities, and we view this as an unnecessary diversion and additional risk.

“Doing such a deal with the prospect of Article 50 being triggered this month and a second referendum for Scottish Independence will be questioned by shareholders, given the large amount of geopolitical risk that lies ahead.

“Shareholders of both Standard Life and Aberdeen will be looking for assets under management to stabilise and meaningful cost savings, but a merger based on this premise is hardly inspiring.”

Another potential risk for both companies is any overlaps when it comes to products, as both firms hold a wide variety of investment vehicles operating in similar areas of the market.

Darius McDermott, managing director of Chelsea Financial services, says this is indeed a risk but reasons that, overall, the merger makes sense from a corporate perspective. 

“Strong franchises are the ones that survive. Aberdeen's problems have been widely documented, but its Asian and emerging market equity franchises are particularly strong and performance has already started to turn around. SLI has very good absolute return, global, UK and European equity teams,” he pointed out.

“The three big overlaps in my view are emerging market debt, Japan and property. Both organisations also have multi-asset/multi-manager ranges, with SLI's MyFolio perhaps being the strongest brand.

“We will have to wait and see what happens should the merger get shareholder approval. The whole process could take a number of years.”

Generally speaking, McDermott says the move is logical given increasing costs, regulatory burden and fee compression in the industry.


He notes that Standard Life and Aberdeen aren’t the first asset management houses to announce a merger over the last few months either, with Henderson announcing plans to merge with Janus Capital in a £5bn deal last October.

“We could well see more merger and acquisition in the sector but with more than 100 fund management companies in the UK, there is room for it without impacting consumer choice,” the managing director added.

FE Alpha Manager Mike Clements (pictured), head of European equities at SYZ Asset Management, agrees that sector consolidation pressure is increasing across the industry and has further to play out.

As such, he warns the fear of being left behind in the rush for firms to “couple up” could force management teams into unwise transactions as we head through the year.

“Executing a deal is tough in a people business where cultures are strong and personalities forceful,” the manager said.

“For all its merits, some cracks are starting to emerge as Henderson and Janus begin to integrate the two businesses, triggering a recent spate of high profile departures. Nevertheless, we see the sector bifurcating between the large-scale, diversified players and the niche or boutique houses.”

When it comes to the Standard Life/Aberdeen merger, he believes the deal has come at the right time and is set to benefit both fund management houses.

What’s more, he says the news that Aberdeen is merging with another firm was unsurprising, given speculation has been rife that it has been looking out for another deal.

“After presumably having scoured the market for US-centric opportunities, Aberdeen has found what looks to be a great deal on its own doorstep. The cost synergies are clear given the operational and geographic overlaps,” Clements said.

“The products and distribution are complementary and with an AUM of £660bn, the deal will catapult the combined entity well ahead of the likes of Schroders or M&G to create a regional asset management powerhouse and globally relevant player.

“The one drawback for Aberdeen and Gilbert is that for the first time since it was founded, it finds itself as the junior party to a tie-up. Still, this is no time to be choosy, especially when the rationale stacks up so well.”

“With both asset managers under pressure and looking to diversify, this deal couldn’t come at a better time.”

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