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Categorized | Financial

Aberdeen’s effort to diversify falls short


Posted on November 30, 2015

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Little more than 18 months ago Aberdeen Asset Management bought the UK investment arm of Lloyds Banking Group transforming it into the biggest listed investment company in Europe. On Monday it suffered its 10th consecutive quarter of net fund outflows.

The aim of the Scottish Widows Investment Partnership (Swip) deal with Lloyds was to diversify Aberdeen’s asset mix and reduce the threat of outflows in the event of an emerging market downturn. Doubts are now being raised, however, about the efficacy of that strategy.

    The Scottish-based investment group reported almost £13bn of outflows from its funds in the three months to the end of September as investors fret over the company’s exposure to turmoil in emerging markets.

    Net outflows for the full year ran close to £34bn and the concern for shareholders and for Martin Gilbert, the co-founder and chief executive of the 32-year-old fund company, is that next year will be worse.

    One large shareholder in the company says: “Aberdeen is in the middle of a storm. They are in the wrong place at a bad time and I have to assume 2016 will also be a rough year for them. We are planning for that.”

    Darius McDermott, managing director of Chelsea Financial Services, the fund research group, agrees: “Emerging markets have been very much out of favour and Aberdeen’s style [of value investing] is also out of favour. It’s been a perfect storm for them.

    “If emerging markets continue to be weak and unloved, there will continue to be outflows.”

    The consensus among analysts is another £13bn is likely to be wiped off the assets of Aberdeen’s funds in the next three months.

    Justin Bates, a financial sector analyst at London stockbroker Liberum, says: “Based on the latest outflows, we will have to downgrade the number we have for net redemptions at Aberdeen for the next quarter. They have a real battle on their hands in 2016.”

    Although Aberdeen has made a flurry of small bolt-on acquisitions with the aim of diversifying, it remains heavily reliant on its blockbuster products. Global equities, emerging market equities and Asia-Pacific equities make up more than half of group revenues.

    Chart: Aberdeen outflows

    The asset manager’s attempt to broaden its expertise has also failed to impress some investors.

    Mr McDermott says: “[Aberdeen’s] flagship emerging market fund has had a difficult time. Other areas like global, UK and European equities are also not performing well. We have never [recommended] Aberdeen in [those asset classes].”

    One shareholder is particularly critical of Aberdeen’s efforts to push into multi-strategy funds following the Swip acquisition, where it already faces strong competition from rival asset managers Standard Life and Schroders.

    He is concerned that Aberdeen’s failure to attract assets towards other parts of its business could jeopardise its dividend payments next year.

    He says: “Aberdeen acquired a bunch of multi-strategy assets from Swip, but I think [the company] might be a bit late to the party. If there is another £15bn of outflows from equities, what would that mean in terms of the dividend?

    Chart: Hedge funds going short (funds and their Aberdeen holdings)

    “Unless multi-strategy picks up the slack — and I don’t think it will — [the company is] on a bit of a collision course in terms of its cash flow coverage.”

    A number of hedge fund companies, including Odey Asset Management and GLG, a division of Man Group, have begun shorting Aberdeen amid these difficulties.

    Mr Gilbert admits he would like to make another purchase similar to that of Swip.

    Those deals, however, are few and far between, he says.

    “I wish there was another Swip deal to do but there isn’t. We just have to do what we can in the meantime,” says Mr Gilbert, who has seen his company fall behind French rival Amundi and Schroders this year to become Europe’s third-largest listed fund house.

    Lex: Swips and chains

    Lex

    Asset management group has changed. The market has not noticed

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    For Mr Gilbert, a more achievable goal in the meantime is cutting costs. The company’s full results detailed a programme to “reduce annual operating costs by approximately £50m”.

    Questions have been raised about the chief executive’s ability to steer Aberdeen out of the current storm, although the consensus in the industry is that Mr Gilbert’s job remains safe for the time being.

    Mr McDermott of Chelsea Financial says: “Aberdeen is Martin Gilbert. He built it and led all these acquisitions. I’m very comfortable with him in charge.”

    But the Aberdeen shareholder strikes a more cautious note: “Martin is fine, for now.”