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Aberdeen Asset Management - Outflows still a significant feature

Equity research team | 28 November 2016 | A A A
Aberdeen Asset Management - Outflows still a significant feature

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Outflows still a significant feature

Despite net outflows of £32.8bn, overall assets under management (AUM) increased 10%, helped by improving emerging markets sentiment, lower sterling and acquisitions. However, poor product mix, with a higher proportion of assets in lower margin money market funds, acted as a drag on revenue, which fell 14% on a year earlier.

Aberdeen's underlying earnings per share for FY16 fell to 20.7p, down 31%, while the full year dividend remains flat at 19.5p per share. The shares rose 4.6% following the announcement.

Our View

Emerging markets (EMs) have been out of favour for some time. That has led to outflows from Aberdeen's higher margin EM debt and equity funds, hitting profits hard. However, conditions seemed to be improving by the end of the summer. Weaker sterling boosted overseas asset values and flows turned positive on emerging market equity products.

Unfortunately, just as things looked to be picking up, Donald Trump's election has set the cat among the pigeons. With a year end of the 30th September, 2016 results miss the period after the US election when Donald Trump's 'America First' rhetoric caused a significant fall in emerging markets.

Fund outflows are part and parcel of asset management. After all, nothing is fashionable for ever. Aberdeen's particular problem at the moment is that their broader investment style, of investing long term, with a focus on high quality stocks chosen with a Value bias, has been out of kilter with current market trends.

The process is designed to avoid the star fund manager culture, reducing their vulnerability to talent defecting to rivals with bigger cheque books while also keeping a grip on costs. Sensible though that is, the group clearly thinks there is more fat to be trimmed and is focussing hard on efficiencies.

We have sympathy for the Aberdeen process, while the group is also benefitting from being geographically diverse and increasingly spread across multiple asset classes.

With AUM a fraction over £300bn, Aberdeen is big, but not a giant. M&A is likely to be a big part of its future, for it is in the "buy, or be bought" category. Smaller bolt-on purchases have been the chosen route so far, but with plenty of cash on the balance sheet the group could decide to look for a bigger meal.

Macro headwinds and ongoing outflows mean that the stock currently offers a prospective yield of just over 6.8%.

Full year results:

Investors became more positive on emerging markets as the year progressed. Although initial flows favoured passive funds, the group saw healthy net inflows into its higher margin emerging market equity products in the fourth quarter.

The group implemented £50m of annual cost saving by year end, and remains on track to deliver the full £70m target by March 2017. Cash conversion remains strong, with core operating cash flow of £362.9m representing a conversion rate of 111%. The group finished the year with net cash of £548.8m.

Headline outflows of £32.8bn this year included £8bn from lower margin insurance books. The first quarter of 2017 is expected to see further outflows from two lower margin but large AUM blocks.

Political and economic events are expected to result in continued short-term volatility in global markets. In this context, and with sector-wide headwinds such as fee pressure, increased investment in technology and higher regulatory capital requirements, the group will continue to seek cost efficiencies in the business.

Unless otherwise stated, all estimated figures, including prospective dividend yields, are taken from a consensus of analyst forecasts compiled by Thomson Reuters. These estimates should not be taken as a reliable indicator of future performance.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.