Standard Life/Aberdeen talks underscores threat to asset managers
Traditional money groups face intense competition from low-cost passive rivals
Standard Life’s late-stage discussions to acquire Aberdeen Asset Management underscore the threat traditional money managers face from low-cost competitors.
An £11bn combination of Scotland’s two biggest investment companies would create the UK’s largest fund house and allow Aberdeen and Standard Life to rip out costs and oust underperforming managers at a time when both companies are losing assets to cheaper passive funds that track the market.
An M&A banker, speaking on condition of anonymity, said: “This feels like an attempt to smash the two companies together and take costs out. They are both smack in the centre [of the problems caused by] the rise of passive funds.”
The companies confirmed the talks on Saturday evening in a joint statement. Standard Life would own 66.7 per cent of the combined group, while Aberdeen would own the remaining one-third.
Aberdeen recorded its 15th consecutive quarter of net outflows last month, while Standard Life’s flagship fund range, Gars, has performed poorly over the past year with investors withdrawing a net £4.3bn in 2016. The investment teams at both companies focus on actively picking stocks and bonds.
Amin Rajan, chief executive of Create Research, the asset management consultancy, said: “The threat from passives is keeping CEOs awake at night.”
According to figures from the data provider Morningstar, assets managed in passive mutual funds grew 4.5 times faster than active funds in 2016. Since 2007 the passive fund market has grown four times faster.
The Anglo-Australian asset manager Henderson’s take over of its US rival Janus Capital in October last year was expected to kickstart a raft of defensive deals in the sector as investment houses battle with pressure on fees and rising regulatory costs.
A senior fund at a rival investment company said: “This is absolutely about scale, with fees under pressure and costs rising.”
If a deal were to go ahead between the two Scottish fund companies, the combined entity would employ about 4,400 staff and oversee £570bn of assets. This would catapult the combined group up the rankings of Britain’s biggest fund companies, overtaking Schroders, the UK’s largest standalone investment house that oversees £397bn of assets.
Analysts highlight other large insurance-owned investment companies, including Prudential’s asset management business M&G, and Legal & General Investment Management, as alternative partners for Aberdeen or Standard Life should their talks fall apart.
The all-Scottish merger initially raised questions about the future of Aberdeen’s boss and serial deal maker Martin Gilbert. Aberdeen, which has a market value of £3.7bn, is almost half the size of Standard Life, which is worth £7.5bn, meaning that Aberdeen would be the junior partner in any deal.
But in the statement released on Saturday night the two companies confirmed that Martin Gilbert, who co-founded Aberdeen in 1983, and Keith Skeoch, who became chief executive of Standard Life in 2015, would become co-chief executives of the new business.
Bill Rattray of Aberdeen would become chief financial officer and Rod Paris of Standard Life would serve as chief investment officer.
Mr Gilbert has previously said he would never sell Aberdeen. The 62-year-old Scot famously said he would only retire when his friend Sir Alex Ferguson, former manager of Manchester United, stepped down from football management. When Sir Alex retired in 2013 at the age of 71, Mr Gilbert later said he too would carry on until he was 71.
Mr Rajan says: “Aberdeen has grown hugely under his stewardship, notwithstanding the recent haemorrhaging of assets. He would want to ensure that the merger will take it on to a new trajectory.”
A new board would be formed with equal representation from the two companies and will be lead by Sir Gerry Grimstone, Standard Life chairman. Aberdeen’s chairman, Simon Troughton, would become deputy chairman.
A merger between Aberdeen and Standard Life Investments is expected to trigger redundancies at the combined group. However any deal would also enable Aberdeen to leverage Standard Life’s strong distribution capabilities, while Standard Life would benefit from Aberdeen’s investment expertise in areas like Asian equities.
“This would increase the scale of Standard Life quite significantly, and its full-year results showed the challenges the company faces in terms of margin compression and outflows. It strikes me that there is a lot of logic to this deal,” said an insurance banker, who asked to remain anonymous.
Analysts expect more deals will follow, and highlight Jupiter and Ashmore, the FTSE 250 fund houses, as two of the most likely takeover targets in the months to come. Maarten Slendebroek, Jupiter chief executive, told the Financial Times earlier this month that his company was a “very attractive” takeover target.
Consultants at McKinsey estimate that a third of the profits earned by investment managers globally could be “wiped out” by 2018, unless more radical steps are taken to cut costs amid growing regulatory and competitive pressures.
The world’s two largest asset managers, BlackRock and Vanguard, which specialise in passive investing, had the largest inflows in their history last year. BlackRock took in net inflows of $202bn in 2016, while Vanguard attracted $315.3bn of net new money.
Regulators globally are simultaneously scrutinising the active investment industry. The UK watchdog has launched a wide-ranging investigation of the asset management market, which is expected to dent profit margins for active fund houses. Investment companies are also struggling to comply with sprawling reforms, such as the EU’s Mifid II regulations.
Haley Tam, an analyst with Citi in London, says: “As more fund flows head to passive, only the best will survive and competition between active s to outperform will intensify.”