Standard Life Aberdeen Doubles Down on Active Investing
(Bloomberg Gadfly) -- The merger that created Standard Life Aberdeen Plc in August has so far failed to deliver much in the way of shareholder returns. Friday's announcement of the sale of its insurance business is aimed at turning that around.
The agreement to sell the unit to Phoenix Group Holdings is worth 3.24 billion pounds ($4.5 billion). SLA will get a near-20 percent stake in Phoenix, and 2.3 billion pounds of cash to fund more takeovers in the industry.
While the sale of what it calls a capital-intensive operation puts SLA in a stronger position in its aim of becoming a purely active asset manager, the environment for the latter business remains distinctly challenging. Co-Chief Executive Officers Keith Skeoch and Martin Gilbert will need to staunch the outflows they've seen in recent years to maintain revenue and profit growth.
The picture on flows is still mixed. SLA's assets under management increased 1 percent last year to 654.9 billion pounds -- putting them a whisker away from joining what Gilbert has called "that $1 trillion club." The figure is flattered by the rise in stock market values, but net outflows slowed to 31 billion pounds from 37 billion pounds the previous year.
In March of last year, Gilbert told a conference in Edinburgh that the merger that created SLA shouldn't be viewed as a defensive move against the rise of passive investing because the U.S. was where "we are really seeing the battleground."
The passive tanks, though, are rolling onto the lawns of Europe's active fund managers. While European exchange-traded funds are worth less than a quarter of the U.S. market, at $762 billion versus $3.3 trillion, they grew at a faster pace last year, adding $220 billion.
Those flows into low-cost ETFs continue to drive down fees in the active world. So far, SLA is holding up. Its average fee revenue yield only declined to 51 basis points from 52 basis points the previous year, better than the average for its peers.
SLA is responding with a mix of additional cost cuts and new products. The fund manager expects to make 250 million pounds of savings in the coming three years or so, up from an initial target of 200 million pounds. It's also added a combination of quantitative products and so-called smart beta offerings, rather than building an ETF business of its own.
Moreover, it's confident that the increase in volatility seen in stock and bond markets in recent weeks will boost investor interest in active products. That may be true; but the returns delivered by active strategies will need to do better than they have in recent years for that strategy to deliver inflows.
With about 70 percent of its assets in the U.K., SLA is looking to the U.S. and Asia for future expansion, and says some bolt-on acquisitions may well be on the cards.
Prior to teaming up with Standard Life, Aberdeen flirted with buying Legg Mason Inc. The U.S. company's $728 billion of assets would certainly propel SLA well into the trillion-dollar league, challenging Amundi SA's claims to be Europe's biggest asset manager with 1.4 trillion euros ($1.7 trillion).
But with a market capitalization of about $3.3 billion before any takeover premium for Legg Mason's owners, SLA's shareholders might balk at the prospect of Gilbert adding to the 40-odd deals he's done in his career while still digesting his two biggest M&A transactions. Standard Life Aberdeen has much still to prove.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Mark Gilbert is a Bloomberg Gadfly columnist covering asset management. He previously was a Bloomberg View columnist, and prior to that the London bureau chief for Bloomberg News. He is the author of “Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable.”
To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net.
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