The Aberdeen value trap

As a fund manager, the fortunes of Aberdeen are naturally at the mercy of the markets - and unfortunately the markets have not been very merciful. In 2015 Aberdeen experienced £33.9bn of net outflows which got worse as the year went on, culminating in a £12.7bn net outflow in the three months to the end of September. The exodus from the asset manager's funds shows little sign of abating, with the first quarter of the new financial year seeing net outflows of £9.1bn. True, this was better than outflows in the fourth quarter, but it still represents a substantial increase over net outflows of £4.8bn in the equivalent quarter 12 months earlier. At the end of December, the group's assets under management stood at £290.6bn - a 10 per cent fall on assets at the end of the 2014 financial year.

It is not hard to see why the group has been subject to such large withdrawals in funds, as investors seek to take the EM risk off the table. The MSCI emerging markets index has fallen 24 per cent over the past 12 months. Unsurprisingly, it is Aberdeen's equity investment business, which accounts for 28 per cent of assets under management, that is suffering most. Net outflows from equities were £16.4bn last year and a further £6.3bn came out in the first quarter. The problem has been compounded by the decision of sovereign wealth funds from oil-exporting countries to withdraw their investments, as they look to shore up capital.

The picture does not look likely to get brighter for Aberdeen any time soon. Following the group's disappointing first-quarter trading update in January, Investec Securities downgraded its earnings per share forecasts for 2016, 2017 and 2018 by 6 per cent, 14 per cent and 15 per cent, respectively. Meanwhile, analysts at Cantor Fitzgerald anticipate a drop in the group's pre-tax profit margin in 2016 from 42 to 32 per cent, due to falling assets under management. It therefore predicts a reduction in adjusted EPS of more than a third this year.

In order to tackle rising outflows management has been trying to diversify the business towards multi-asset and alternative strategies. As part of this strategy it acquired Scottish Widows Investment Partnership in 2014, which delivered cost synergies ahead of expectations. The group has also identified £50m in annual cost savings from the wider business. Management expects to achieve most of these savings in the latter part of the current financial year, with the full benefit coming through in 2017. However, it is difficult to see how these initiatives will have enough impact on the group's bottom line, if outflows continue at the same pace.