Bill Jamieson: Questions mount over Standard Life Aberdeen mega-merger
For more than 150 years, Scotland has prided itself on its expertise in savings and investment. It boasted outstanding life assurance companies, investment trusts and an array of specialist asset managers.
It became one of the largest financial centres in Europe and its capital city was host to a thriving financial centre.
But, in recent years, this Scottish expertise has come under assault. And today its largest fund management giant, Standard Life Aberdeen, is struggling against a marked investor exodus, falling profits, shrinking funds under management and a weakening share price.
The promise of a hyper-efficient, competitive global colossus is facing a formidable challenge to gain credibility and reverse the outflow of funds.
The hope had been that the merger of Standard Life and Aberdeen Asset Management would create a force greater than the sum of its parts. The corporate ground shook once more to the stampeding cult of size. And the well-worn rationale of business merger was rolled out like a flame-throwing cannon to eviscerate the doubters: two plus two would make five. Today? It looks more like three.
This seen in isolation might not seem to matter much. It’s early days. It needs time to settle down. But the performance of this merger to date unfolds against a worrying backcloth for Scotland’s financial services sector.
Its two largest banks were virtually destroyed in the 2008-09 financial crisis. Scottish Amicable (founded 1826) sold out to the Prudential and a name respected for generations was abandoned. Scottish Equitable (founded 1831) disappeared into Dutch concern Aegon. Scottish Provident (established 1837) disappeared into Royal London, as did Scottish Life (founded 1881). And Scottish Widows (founded in 1815), one of our two largest mutual assurance companies, was consumed by Lloyds Bank.
By 2017 Standard Life, founded in 1825, and Aberdeen Asset Management, a business built up rapidly from the take-over in 1983 of the North of Scotland Canadian Mortgage Company (founded 1876) were Scotland’s best global prospects in a rapidly changing world of finance management.
The £11 billion merger completed last August, created the second-largest fund management group in Europe. The rationale was that it would enhance performance and give Scottish fund expertise more clout on the global stage. Sceptical eyebrows were raised. For some it seemed Standard Life had married below its station. But that is to belie the singular achievements of both companies – and both had impressive success stories to tell. AAM, propelled over the past 30 years by Martin Gilbert, had grown impressively, acquiring Murray Johnstone, Edinburgh Fund Managers and Deutsche Asset Management. By the eve of the merger, it had assets under management of £302bn and a formidable record in Asian markets.
But long before then, Standard Life had an enviable international record. In the 19th century, it was one of our first financial empire builders, selling policies in Germany, Ireland, India, Egypt, Shanghai, Uruguay and the West Indies. Ironically, Standard Life has been selling overseas businesses such as its operations in Canada: a cost-saving retreat, perhaps, but a loss, too, of the group’s history and defining character.
But success bloomed at home. By the eve of the merger, its investment arm had more than £270bn under management. Its outstanding product, the Global Absolute Return Fund, (GARS), nurtured under the stewardship of Keith Skeoch, was the toast of financial advisers, pulling in a staggering £27bn. And its investment trusts featured star managers such as Harry Nimmo and Thomas Moore.
But the merger has not just failed to build on these foundations. It has gone backwards. Funds are pouring out of Aberdeen. And GARS has seen a huge exodus. Results this week revealed total assets under management are down three per cent to £557bn. Pre-tax profits from continuing operations are down 12 per cent from a year earlier to £311 million.
Aberdeen experienced net outflows as emerging market economies slowed down. And as the star of GARS fell, investors pulled out a net £5.3bn over the first six months of the year, only slightly lower than the £5.6bn outflow in the first half of 2017. Assets have tumbled from £27bn in May 2016 to £17.5bn. While equity markets world-wide have risen, the price of the GARS fund is down 4.4 per cent over the three years to the end of June.
The group said that “while GARS performance is behind benchmark over one and three years and behind its target over one, three and five years, it has continued to operate within the targeted volatility range, which is a key element of its design” – a baffling explanation that investors will have greeted with a dismissive snort.
As for the Standard Life Aberdeen share price, far from gaining traction on the back of the much-heralded savings and efficiencies, it has fallen 26 per cent from 431p last August to 307.5p last month. It has rallied a little since, on confirmation that it was accelerating plans to return £1.75bn to shareholders by way of share buyback, adding that the first £175m of this programme would begin “in the next few days”. This is part-funded by the sale of the insurance division to Phoenix, which will see around 3,000 people, mainly in Edinburgh, transferred out by the end of September. It is hard not to view a share buyback on this scale as the strategy of a retreating company.
The board says macroeconomic and political uncertainties continued to affect investor sentiment, and that conditions for the asset management industry were “challenging”. The problem here is less to do with post-merger teething troubles, but with a growing investor preference for low-cost, index-tracking funds. The result, in addition to a net outflow of funds, is a compression of revenues from investment management. To make this good, Standard Life Aberdeen has to generate more than the £350m it has already knocked out of its cost base.
Investor exodus, shrinking assets, job losses and a tumbling share price: it is too early to pronounce a definitive verdict on this merger. But there are warning signs. Without a sharp turnaround in performance, a major disappointment may be tiptoeing by – and another blow to Scotland’s reputation in finance.