Jake Moeller reviews highlights of a meeting with Martin Gilbert, Chief Executive Officer of Aberdeen Asset Management, on February 2, 2016.
Since Aberdeen Asset Management was founded in 1983, it has grown to become one of the U.K.’s most prominent and successful fund management houses. However, it currently finds itself sailing in choppy waters. Emerging markets (EM), to which much of Aberdeen’s fortunes have been tethered, have dramatically fallen out of favor with investors. Assets under management—as cited in its annual reports—show a decline from £324 billion in September 2014 to £284 billion in 2015. Subsequent pressure on revenues has led to an annual decline (as of February 3, 2016) of 46.0% in the share price (as opposed to a decline of 14.4% for the FTSE 100 over the same period) to 228 pence.
Martin Gilbert, Chief Executive Officer, Aberdeen Asset Management
Key staff locked in
The announcement on February 1, 2016, that Anne Richards, Aberdeen’s highly respected CIO, has resigned after 13 years at the company to become CEO of M&G may appear to have compounded Aberdeen’s difficulties. However, Mr. Gilbert appears genuinely supportive of Ms. Richards’ move. “It is a great opportunity for her,” he states, “and I believe that even if we were still riding the crest of the EM wave, it’s a career opportunity she could not have overlooked.” Mr. Gilbert points out that while Ms. Richards’ departure creates a vacuum in terms of the “externally facing” expertise she contributed, he feels the appointment of Andrew McCaffery to head Aberdeen’s Solutions Business (multi-asset, alternatives, and quant offerings) is a seamless internal transition for asset management. It is likely now that there will not be a like-for-like appointment of the CIO position, with Mr. Gilbert stating he is seeking somebody specifically for an ambassadorial role.
Senior staff departures are a key variable many fund analysts consider crucial to the assessment of a fund management business. Departures have the potential to lead to considerable disruption and distractions to day-to-day business and are a barometer of corporate morale. It appears the impact of Ms. Richards’ departure has been well quarantined. “We haven’t had any further resignations,” states Mr. Gilbert. “Bonuses have recently been paid, and normally that’s the time to go.” Indeed, Aberdeen’s bonus system in paid as only 25% in cash for the current year, with the rest deferred over the following five years, effectively ensuring investment talent is locked in.
Table 1. Aberdeen Asset Management 12 month share price
Source: Eikon
Diversified business helps revenues
In retrospect, Aberdeen’s acquisition of the SWIP assets in 2013 seems to have been a timely one. It has allowed Aberdeen to broaden its value proposition outside of EM with a valuable fixed income, property, and multi-asset capability just as the EM wave began to break. Not only have the ex-SWIP assets provided more scale, but they have helped reduce the effects of the turmoil through the profit and loss statement. “Our earnings per share in 2015 (on an underlying basis) was 30 pence,” states Mr. Gilbert. Without the ex-SWIP contribution, this would have been 24 pence.” Indeed, Aberdeen’s financial statements are in better shape than might be expected. There is still £555 million of cash reported on the balance sheet, which provides considerable ballast and possibly a war chest for further acquisitions. Total revenue at £1.2 billion for 2015 was higher than that of the previous four years, and net income for 2015 was £288 million, only moderately down from a peak of £307 million for 2013.
Mr. Gilbert conveys a surprisingly calm demeanour for what he readily recognises is a trying time for the firm. Even before Ms. Richards’ departure was thrown into the mix, outflows and falling market capitalization had led to speculation that Mr. Gilbert had been seeking a buyer for Aberdeen. He refutes this emphatically with some bemusement. “We have not approached anybody and are not seeking to be bought by anybody,” he states. “Obviously, we are a public company and there is always speculative interest, but nobody has tabled hard cash. We remain independent and intend to continue to be.”
With any fund group performance is the key to success. Aberdeen has not only suffered from the EM malaise but has been hit from the increasing interest-rate headwind in its fixed income exposure, which formed a considerable component of the acquired SWIP assets. According to Lipper data, for the one year ended January 2016, less than 20% of all Aberdeen’s funds across all Investment Association classifications (primary share classes only) had first-quartile performance. Some notable performers over that time were in the global and high-yield bond space, with previously reviewed Ben Pakenham’s European High Yield Fund holding up well.
Table 2. Aberdeen Fund Estimated Net Flows December 2014-December 2015
Source: Lipper, Lipper for Investment Management
Sticking to their style guns
Aberdeen is well known for its value process and team-based institutional style of management. “Our style is out of fashion,” states Mr. Gilbert, “and we have to ride through the cycle where other fund managers can be more flexible.” EM may well be a hard sell at the moment, but many analysts are beginning to see value in selected areas as a result of the shakeout.
The difficulty is with timing. Mr. Gilbert admits it is the one question he faces most from investors. He remains sanguine on EM but concedes it is a medium- to long-term outlook. “We don’t think China changes things by moving from an export-led economy to an internal-consumption economy, and I’m certain we will see very strong performance as the markets return to fundamental stock picking from liquidity-driven markets,” he states. There are some investors who clearly share this view. Aberdeen has recently won a near £1 billion mandate from a U.S. life insurance company.
Mr. Gilbert and Aberdeen investors could well be heartened by the latest upgrade of Aberdeen shares by a broker to a BUY on January 27, 2016, “not because we are calling the absolute bottom to EM and/or a cessation of negative news flow, but because we believe that more bad news than we believe justified has now been priced in.” *
* David McCann, James Hamilton & Jonathan Goslin, January 27, 2016 ‘Aberdeen Asset Management – Upgrade to BUY on Weakness’, Numis Securities Ltd
