Aberdeen Asset Management offers a grim how-to guide for fund manager survival. The UK group faces pressure from passive funds, zealous regulators and a protectionist Trump presidency. Chief Executive Martin Gilbert’s coping mechanism – more deals, fewer costs – applies to the sector as a whole.
Aberdeen‘s full-year results make for bleak reading. The group grew assets under management to 312.1 billion pounds, but this was flattered by the weaker level of sterling, and acquisitions. Net flows were negative. Despite the higher assets, revenue and pre-tax profit sank 14 and 28 percent respectively, as fee margins fell.
Aberdeen‘s challenges are individual and sector-wide. Its emerging market franchise has been pumped up by years of loose U.S. monetary policy, and now faces a stronger dollar as the Federal Reserve raises rates. U.S. President-elect Donald Trump wants to bring back domestic jobs from emerging economies, and may trigger trade wars. Trump may be all talk, but competition from cheaper passive and “smart beta” funds is not. Finally, regulators are demanding managers hold more capital and are scrutinizing competition.
Aberdeen has strengths. Its emerging markets business may be more resilient to the passive onslaught than managers focused on more commoditized developed market equities. And its blended margin of 30 basis points is already lower than many peers'.
Gilbert is already pulling on most of the available levers. He cut 50 million pounds of costs this year, but will need to do more: operating expenses were roughly flat year on year, and up 15 percent over the past three years, even as shareholder returns collapsed and the EBIT margin fell to 32 percent from 45 percent in 2013. The risk is that talent leaves if cuts are too deep.
An easier way to pump up profits is to get more scale by buying new assets or clients. Gilbert has been snapping up smaller firms, but big deals remain elusive. Aberdeen was barged out of bidding for UniCredit’s Pioneer by bigger rivals like Amundi. The ideal deal would be one that unlocks the vast U.S. market and enables big cost cuts, like Henderson’s merger with Janus, although Aberdeen may be more a target than acquirer. If this recipe for survival is a bit depressing, Gilbert is at least not alone.