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abrdn - Market movements reduce profits

Half year fee-based revenue fell 7.8% to £696m, while underlying operating profits fell 28.1% to £115m...

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Half year fee-based revenue fell 7.8% to £696m, while underlying operating profits fell 28.1% to £115m, reflecting market movements. The group saw net outflows of £35.9bn, while total assets under management and administration fell to £508bn from £542bn, which includes the withdrawal from Lloyds Banking Group.

Restructuring costs of around £150m are expected for the full year. Recently acquired Interactive Investor is performing ahead of expectations. Looking ahead, abrdn said: "Current market uncertainty means our ambitions for revenue growth and improved cost/income ratio are likely to take longer than originally expected."

An interim dividend of 7.3p was announced, and abrdn is maintaining plans for the total annual dividend to be 14.6p, until dividend payments are underpinned by stronger capital generation.

The shares fell 4.3% following the announcement.

View the latest abrdn share price and how to deal

Our View

There's no other way to view asset manager abrdn's half year results than disappointing. Operating profits came in lower than expected, as the amount the group earns from fees fell because of volatile and weaker markets.

The group's doing what it can in trying to remove as many costs from the business as possible, but this isn't happening fast, or harshly, enough in our opinion.

Huge geopolitical uncertainty, recession fears and inflation all mean fund flows are challenging for the wider sector. But there are abrdn-specific issues. abrdn's funds haven't proven a terribly popular option for investors. Assets have been walking out the door for years. Given its Environmental, Social and Governance (ESG) options currently lag peers, and demand for ESG investments is on the rise, it may be a more difficult ask to convince people to leave more money invested in its funds.

Together with the incredibly challenging market conditions this means abrdn has turned to acquisitions to help keep revenue moving in the right direction. abrdn now owns Interactive Investor (ii), which is one of the UK's biggest direct-to-consumer investment platforms. Taking on an established platform is, in theory, a sensible and faster way to do this. And in the long run we think retail investors probably provide a relatively stable source of assets for the group. That's where ii slots in nicely.

The group's ability to fund the deal highlights a core benefit of abrdn. Asset management is a capital light business, meaning profits are free to be funnelled where they're needed.

We should also mention that the majority of the funds abrdn manages have been able to deliver investment returns ahead of their benchmark - a key requirement if fund investors are to be tempted back. Offering funds across all the major investment categories means the group can cater to whatever happens to be flavour of the month.

We also have no immediate financial concerns about abrdn - but investors should be aware the projected dividend isn't covered by earnings. The reserved approach to shareholder distributions is therefore sensible, but we can't rule out further changes to the policy. At the half year point, abrdn said the dividend will be held until its financial performance improves.

The about-turn in revenues can't come soon enough for abrdn. A bolstered direct-to-consumer offering and improved proposition are all excellent developments. But we'd like to see abrdn generating meaningful inflows, stronger fund performance and more progress on costs before saying the coast is clear.

abrdn key facts

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

Half year results

Excluding investment flows relating to the highly volatile liquidity segment and exit from Lloyds Banking Group (LBG), net outflows were £3.8bn, up from £1.9bn last year.

Underlying operating expenses fell to £581m from £595m reflecting flat staff costs, excluding variable compensation.

Within Investments fee-based revenue dropped to £546m from £613m, where adverse market movements negatively affected assets under management (AUM). AUM reduced 16.8% to £386bn, and there was a net outflow of £5.2bn, excluding liquidity and LBG. The group highlighted that Investment performance over a three year period has weakened, with 63% of AUM ahead of its benchmark - this was 67% at the last full year mark. abrdn said: ''The sharp rotation in equities from growth to value has impacted our equity investment performance in H1 2022. Asia Pacific, Emerging Markets and Small Cap equities were particularly challenged''.

Adviser fee-based revenue rose to £92m from £87m, as there was a higher than average assets under administration (AUA). Total AUA fell 10% again reflecting adverse market movements. The cost to income ratio reached 59%, up 2 percentage points on last year.

Personal fee-based revenue included a £13m boost from Interactive Investor's first month in the Group(ii), and rose 41.5% to £51m. There was a net inflow of £0.3bn, which was largely driven by the ii acquisition.

abrdn remains mindful of ongoing uncertainty and expects to further reduce operating costs in line with its ongoing strategy.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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 disclosure for more information.

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Written by
Sophie Lund-Yates
Sophie Lund-Yates
Lead Equity Analyst

Sophie is a lead on our Equity Research team, providing research and regular articles on a selection of individual companies and wider sectors. Sophie's specialities are Retail, Fast Moving Consumer Goods (FMCG), Aerospace & Defence as well as a few of the big tech names including Facebook and Apple.

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Article history
Published: 9th August 2022