Standard Life, Aberdeen to build passive business post-merger?
The takeover of Aberdeen Asset Management by Standard Life is unlikely to have a huge impact on the two UK firms’ Asian operations, but it should bring the merged entity the global scale to better support an index investment business, say industry observers.
The rise of passive asset management is inexorable, noted Justin Ong, asset and wealth management practice leader for Asia Pacific at PwC. “If [active managers] want to stem outflows, there is no choice but to get better at active management or consider offering passive products."
Globally exchange-traded fund assets hit a new record at the end of last year, exceeding $3.5 trillion and overtaking hedge funds’ roughly $3 trillion in assets for the first time some months ago. A big driver of such flows is that multiple pieces of research have shown that in many markets a majority of active managers underperform their benchmarks.
Ong said he would not be surprised to see the Standard Life-Aberdeen entity, which would have a combined £660 billion ($809 billion), eventually launch ETFs and build out index investing expertise. That has been the trend among other active managers in recent years, he noted. Rather than acquire ETF arms, the likes of Amundi and Legg Mason are setting up operations in-house.
As recently as two years ago, added Ong, executives at active fund houses would say it didn’t make sense to move away from their core strength and try to move into the passive space. “But that viewpoint has changed,” he noted. “When there’s so much money going into passive assets and ETFs, you have no choice.”
That said, some argue that passive may be a cyclical fad and investors are bound to rotate back into active strategies at some point.
But Keith Pogson, global banking and capital markets assurance leader for Asia Pacific at consultancy EY, said it is wise to have a balance between the different types of investment. “My gut feel is that Aberdeen brings more alpha and Standard Life Investments [SLI] more beta.
“Whichever way you look at that, it’s got to be the future,” he noted. “Either you get more into alpha [products] to justify fees or you consolidate and offer beta at a cheaper price.”
SLI, as the insurance group’s investment arm, is naturally focused above all on fixed income, while Aberdeen’s traditional focus has been on equities, though it now also offers bond products.
But one senior Asia-based executive at a research house said: “I’m not surprised Aberdeen is being sold, but I am surprised that Standard Life is the buyer. Standard Life has built most of its success organically and has a strong culture, he noted; and mixing cultures is notoriously difficult."
Still, the deal will provide a more solid Asian base for SLI, which over the years has made several pushes to gain stronger traction for its regional business. It is pouring a lot of resources in, having set up a Singapore office and added to its Tokyo team, both last year.
Seeking cost efficiencies
Ultimately, however, the main driver of investment industry mergers is boosting cost efficiency, in light of tightening regulations, rising costs and lower margins, noted Ong. “If you can’t scale up, and scale up quickly across the world, life becomes very difficult.”
Wealth managers had suffered more initially after the 2008 crisis, while asset managers were faring reasonably well, he added, but now both sectors are under a lot of pressure. The environment has led to several recent mergers, such as those of Henderson Global Investors and Janus Capital, and of Amundi and Pioneer Investments, both late last year.
Pogson agreed: “It’s the cost side of the equation that brings a lot of value to this deal.” While there are decent synergies between Aberdeen and Standard Life’s investment offerings, what will prove the biggest benefit is the reduction in costs, he noted.
The merger will create “a stronger beast that can survive more turbulent seas”, he said. That is a beneficial for clients, who should also see lower costs passed to them as a result, he added.
Pogson also cited benefits the deal would bring in relation to the Markets in Financial Instruments Directive 2. Mifid 2 is European legislation that aims to remove barriers to cross-border provision of financial services.
The rules require a lot more administration and reporting for financial firms, noted Pogson, and companies will save a lot of money employing one team to cope with this, rather than two.
Post-merger, the biggest headcount reduction is likely to come in the UK rather than in Asia, agreed Ong and Pogson. That is partly because most of the staff are based in the former geography, but also because that is where most of role duplication would be.
Aberdeen has a bigger headcount and more assets than Standard Life in Asia, partly thanks to its strong focus on emerging markets. Aberdeen had $24.6 billion Asia-Pacific AUM as of September last year.
But Aberdeen's EM focus has also been a big contributor to its heavy fund outflows and plunging share price in the past couple of years. It more than halved from a high of 507.50 pence on April 10, 2015 to 220.40 pence on Feb 12, 2016, though it has since recovered somewhat to close at 298.80p as of yesterday's close. The hope will be that the firm has now turned the corner.
The merger values each Aberdeen share at 286.5p and Aberdeen’s existing issued ordinary share capital at £3.8 billion, said the firms in a joint statement on the deal. Following completion, Aberdeen shareholders would own 33.3% and Standard Life shareholders 66.7% of the combined group on a diluted basis.
Aberdeen did not respond to an emailed request for an interview by press time. A Standard Life said the firm would not comment beyond what was in the public statement released yesterday.