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Standard Life and Aberdeen must prepare for battle against passive investing boom, analysts warn

The planned Standard Life and Aberdeen Asset Management merger seems like a defensive move to some analysts
More investors are swapping the hefty fees of the star managers in favour of passive investing

Standard Life PLC's (LON:SL.) struggle to stem net outflows highlights the pressure that active fund managers are under from lower-cost passive investing competitors.

The company, which is on track to complete its merger with Aberdeen Asset Management plc (LON:ADN) on 14 August, suffered £3.7bn in net outflows in the first half.

A weaker investment performance at the group’s flagship Absolute Return Global Bond Strategies (GARS) fund was blamed for the outflows.

READ: Standard Life says it will complete Aberdeen Asset Management merger next week as it lifts profits

Neil Wilson, senior market analyst at ETX Capital, said the wider active fund management sector has been hit by outflows recently, including Aberdeen.

“Active fund management is not dead but more and more investors are swapping the hefty fees of the star managers in favour of passive investing,” he said.

“Passive investing represents more than a tenth of UK investment holdings and according to Moody’s, it will overtake active management by 2024 in the US.”

Passive investing involves buying a variety of securities that track the overall performance of an index like the FTSE 100 and has much lower fees than active fund management, whereby a manager will select the holdings of a portfolio based on analytical research and their own judgement. The former strategy is more machine-based in that a computer tracks investments against an index, while active fund mangement has more of a human element, hence the higher fees.

Standard Life and Aberdeen face sector-wide challenges

Wilson said Standard Life’s planned merger with Aberdeen will offer the pair much greater scale and £200mln of estimated annual cost savings but active fund management has to cope with much change.

“It’s becoming a tougher sell to investors and fees are falling. Passive investing represents more than a tenth of UK investment holdings and according to Moody’s, it will overtake active management by 2024 in the US.”

Shore Capital said Standard Life and Aberdeen’s proposed merger feels like a “defensive move” by the two companies in an attempt to drive out costs and compete with passive investment.

The broker also “doubts the wisdom” of the decision to have Standard Life boss Keith Skeoch and Aberdeen boss Martin Gilbert serve as joint chief executives of the combined group. The machinations of the joint CEO roles will be scrutinised closely in the months to come, ShoreCap said.    

First half profits beat forecasts but outflows and margins a concern

ShoreCap reiterated a ‘hold’ rating on Standard Life, saying first half profits were ahead of its expectations but that the level of net outflows and a decline in fee based revenue margins in its workplace and retail businesses were “likely to worry the market”.

Standard Life delivered a 6% increase in operating profit to £362mln in the first half and raised its dividend by 8.2% to 7p. Assets under management rose 1% to £361.0mln despite the outflows as a poor performance in its institutional investment business was offset by growth in its workplace and retail divisions.

Nicholas Hyett, equity analyst at Hargreaves Lansdown, said: “There are two sides to today’s numbers. On the one hand profits and dividends have delivered a meaningful improvement. On the other, Standard Life continues to struggle with outflows from the flagship GARS fund, with knock on effects on margins,” said Nicholas Hyett, equity analyst at Hargreaves Lansdown.”

However, the results are something of a side show to the group’s planned merger with Aberdeen, Hyett added.

Valuation 'reasonably attractive', says Numis

Numis issued an upbeat note on Standard Life’s results and the pending merger, repeating an ‘add’ rating and target price of 465p.

“We think the valuation is reasonably attractive,” the broker said, pointing to the combined company’s targeted cost synergies and an estimated 5.2% dividend yield in fiscal year 2018.

“We also believe that the group will be more diversified than either individual business was before, reducing shareholder risks to specific factors.”

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