Funds flow wrong way for Aberdeen Asset Management

One of Europe's worst performing investment groups in 2014. More than £25bn in lost business since the second quarter of 2013. And last week, another analyst downgrade.

Aberdeen Asset Management is having a torrid time.

Europe's biggest independent investment group has suffered from the downturn in emerging markets, where it has a large chunk of its assets under management.

The acquisition of Scottish Widows Investment Partnership, which it bought for a company record of £550m and completed last year, has sparked outflows as some retail investors have worried about the tie-up and its impact on the business.

Martin Gilbert, the group's resilient and experienced chief executive, is not panicking yet.

"The outflows will reverse if the emerging markets come back into fashion," he says. "The bulk of our outflows are due to a macro decision by investors that the emerging markets will underperform.

"Although we are not an emerging markets house, we are still perceived to be one by investors. But we believe the emerging markets are a good investment over the long term and I am not going to worry about short-term headwinds."

Certainly, Mr Gilbert has been in tighter corners than this. In 2002, his career nearly came to an inglorious end amid the scandal over split capital investment trusts, or split caps, when a number of the company's investment trusts folded and wiped millions of pounds off Aberdeen's share price.

However, Aberdeen's outlook still looks uncertain over the coming months, with expected US interest rate rises likely to put more pressure on emerging markets, which even Mr Gilbert admits may lead to more outflows and lost business.

Since the end of the second quarter of 2013, just after former US Federal Reserve chairman Ben Bernanke sent shockwaves through emerging markets when he signalled the prospect of an end to quantitative easing, outflows have risen to £26.7bn. This makes Aberdeen by far the worst performer among its FTSE-listed peers.

Its mutual fund business also suffered more than $13bn in outflows last year, according to data provider Morningstar - the poorest performance among all the main European investment groups. Worldwide, only Pimco, the troubled US fixed income house, fared worse.

And more outflows are likely to be reported when the group unveils its half-year results to the end of March on Tuesday next week.

Aberdeen's problems prompted Bank of America Merrill Lynch to downgrade the group's shares on Friday, following RBC Capital Markets the week before. EVA Dimensions, Macquarie and Morgan Stanley have also made downgrades in recent months.

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"This is because of the way they are exposed to emerging markets. They have exposure in places like India, which have not performed that well," he says.

"Aberdeen will argue that they are invested in solid companies that should outperform over time. But with US rates expected to go up, then that is going to hurt them. It is difficult to see how Aberdeen will turn this round in the near term."

Bruce Hamilton, asset management analyst at Morgan Stanley, adds: "We moved underweight Aberdeen on concerns that asset flows faced risks from weak equity investment performance and challenges to the emerging market equity asset class as the US moves to a tightening cycle."

Mr Hamilton worries that unless the outflows are reversed soon, then institutional investors may hit the Aberdeen exits too. So far, institutional investors, which are typically more loyal and less influenced by changes in market sentiment than retail investors, have largely stuck with Aberdeen. "But, they may not tolerate another year of underperformance," Mr Hamilton warns.

Revenues from Aberdeen's main "blockbuster" equity products - global equities, emerging market equities and Asia Pacific equities - make up about 60 per cent of group revenues, even once the acquisition of Swip is accounted for. This means there is so-called "concentration risk" to Aberdeen's business, if one of these areas, such as emerging markets, underperform.

Not all analysts have altered their recommendations in a negative way. Michael Sanderson at SG CIB upgraded Aberdeen's stock to a buy recommendation in February because he felt the shares were undervalued. Although he expects more outflows, the group's forward price earnings multiple trades at a discount compared with peers, such as Schroders, Henderson Global Investors and Jupiter Fund Management.

However, in the business of asset management, flows are key. As Mr Lenardos says: "Flows, flows and flows are what matter in fund management. And Aberdeen's are getting worse."

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