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Aberdeen/SLI merger: the Citywire view

Aberdeen/SLI merger: the Citywire view

Behind the proposed merger of Aberdeen Asset Management with Standard Life is a remarkable tale of resilience. On a number of occasions in the past 20 years, Aberdeen and its chief executive Martin Gilbert (pictured) were on the ropes. The chances of survival were slim.

The first time was more than two decades ago. It was 1996, the company was then known as Aberdeen Trust. A rival fund management group, Jupiter Tyndall, had acquired nearly 30% of its shares.

In those days Jupiter was run by the legendary John Duffield. A man known for his great business acumen and not afraid of a fight.

If Jupiter wanted to buy Aberdeen then there was one man it needed on its side: Hugh Young. Young was at the helm of Aberdeen’s Asian business, running a number of funds and investment trusts. Aberdeen had been early into Asia and, thanks to Young, had built and would continue to build a very strong franchise in emerging markets investing.

Jupiter sought to get Young onside. But Young was happy with the status quo. Then Jupiter was hit by an investigation from the regulator IMRO. It would later emerge with a clean bill of health, but the opportunity to buy Aberdeen had gone.

Aberdeen would face another existential crisis with the split capital fiasco. It was a key player in a so-called magic circle of fund management groups which launched new highly geared split capital investment trusts, buying each other’s shares.

This shaky edifice, relying on supportive stock markets came crashing down when global equity markets tumbled and Aberdeen and others were forced by the then FSA regulator to fund compensation to investors. Such vehicles would never get off the drawing board now.

But the company survived. While it made a number of acquisitions, probably the turning point was the purchase of the UK and US institutional business of Deutsche Asset Management in 2005. This provided a solid platform for growth – through acquisition.

Behind the series of acquisitions which transformed Aberdeen was a tight knit team of executives around Gilbert, plus a very strong culture. Many of the people at Aberdeen had worked closely with one another for decades. This too was one reason why the company was able to survive some of the earlier crises.

Some say the retirement of key executive Hugh Little was a factor behind Gilbert having had enough. He was employee number nine, having worked with Gilbert for 28 years.  

The relentless quarterly announcements of further outflows must have taken a toll. The company’s success in emerging markets became a drag when those markets were out of favour and, although it has real expertise in other asset classes, such as property and multi-asset, it nevertheless had a lopsided feel to it.  

Aberdeen has re-built its reputation in investment trusts – and indeed in terms of the two groups – it is easily the dominant partner. However, while there will be a lot of consolidation in the two groups’ open ended funds, investment trusts have independent boards. There will be no automatic mergers.  

Recently, Standard Life itself has also been a victim of its own success. The remarkable growth of its Global Absolute Return Strategies  (Gars) franchise -  has faltered. One factor has arguably been the departure of key executives who worked on Gars, most notably Euan Munro, the pioneer of the strategy, to Aviva Investors.

Other Gars alumni went to Invesco Perpetual. Both rival groups launched ‘sons of Gars’ funds which have taken in billions of pounds, while the recent performance of Gars slipped. Gars went into reverse with an outflow in the recent annual results of over £4 billion compared to a net inflow the previous year of £9.4 billion.

It should also be remembered that while Standard Life has successfully re-invented itself under CEO Keith Skeoch, with asset management at its core, it nevertheless remains a formidable distribution business and brand. Its wrap platform, pioneered more than a decade ago by legendary Aussie Trevor Mathews, has been a great success.

It has managed to transform a legacy, paper-based, 20th century product suite, into a modern, digital platform, used by thousands of advisers across the UK. It also provides it to corporations in the pensions arena, although with nothing like the level of success as rival Legal & General.

Skeoch incidentally comes from the James Capel stable. In its heyday this was consistently voted the best investment research house in the City. He joined Standard Life as chief investment officer of the investment business – Standard Life Investments, later becoming CEO and then CEO of the entire group.

Like a number of groups, Standard Life is also pursuing a strategy of building its distribution capability. Recent examples are the purchase of the Axa Elevate platform and the formation of 1825, which has been buying up independent financial advisers in the UK.

Pundits typically refer to the twin threats of regulation and passive investing – both these houses are committed to active fund management. These are undoubtedly crucial factors.

If you want to be a global player in active fund management you need scale and this deal provides it. Over the past 12 months we have seen Pioneer and Amundi tie up, more recently Janus and Henderson. No doubt more will follow.

Ultimately, however, what needs to be remembered is that all these asset management groups exist for one reason alone: they have clients who trust them to deliver. The world has changed. As regulators bite harder and the internet provides transparency on performance, asset management groups have to demonstrate and deliver value to their clients.

Otherwise they will not survive. So long as the dominant culture of the combined Standard Life/Aberdeen business is investment-driven, and there is no reason why it shouldn’t be, it has every chance of thriving.

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