The acquisitions trail leads to Aberdeen

Bruised and battered by last year's stock markets, Aberdeen Asset Management has been quietly positioning itself to take advantage of the better economic and investment climate that propelled equity values sharply higher from the lows touched in March 2009.

But there is still far to go before it is as healthy as it was before the financial collapse. So, while assets under management rose from £146bn in September to £161bn by the end of February, the picture was dull considering the rise was after including £35bn of assets acquired with the purchase of Credit Suisse's Global Investor operation. And, while significant savings of around £80m a year have been achieved through integrating back-office operations, the merger came with an exceptional cost of £45m, mainly redundancy payments.

The group operates as a fund manager, running unit trusts and investment trusts for both institutional and retail clients. Its core operation centres on activities in the UK, but it has a useful revenue stream from trading in the Far East, mainland Europe and the US. Following the Global Investor acquisition, more funds were acquired when the group spent £85m buying Royal Bank of Scotland's funds of hedge funds, long-only multi-manager funds and some private equity and real estate funds of funds, which together last September had assets under management of £13.5bn. The purchase was funded by a share placing with institutions, equivalent to 8.3 per cent of the existing share capital at the time, which raised £119m before expenses.

All of this has helped to broaden Aberdeen's potential customer base, especially now that it has access to Credit Suisse's private bank platform. What's more, the group has secured a long-term distribution agreement with RBS Wealth Management, which includes Coutts Bank, for a minimum of five years, and which gives Aberdeen access to RBS Wealth Management's private-client franchise.

However, Aberdeen's management is still working to reverse a net outflow of funds that, excluding acquisitions, totalled £17bn in 2009. Much of this reflects the general exodus from open-ended funds that occurred in the first half of last year and, while inflows in equity related investments have been improving, there has been a significant outflow of funds from fixed-income investments.

But the latest picture may well show a turn in the tide, with gross new business inflows in the five months to the end of February totalling £16bn against £19bn won during the whole of the financial year to the end of September 2009. Outflows totalled almost £20bn, resulting in a net outflow of approaching £4bn. However, Aberdeen also had £6bn-worth of mandates awarded but not operational at the end of February. Furthermore, the new business being won is more profitable than the business lost, so that City analysts think fee income will rise this year by £18m.

On the financial side, the latest acquisitions have inevitably put a strain on cash flow, which fell from 93 per cent of underlying operating profits in 2007-08 to 57 per cent last year. Analysts reckon that there will be a further £15m cash cost of exceptional items this year, including the costs of integrating the ex-RBS operation. However, this year should also see a change in emphasis away from acquisitions and towards organic growth. Analysts at broker KBC Peel Hunt forecast that, in the absence of any additional exceptional items, cash flows should exceed operating profits. Pre-tax profits should also be materially higher as there will be no repeat of the £45m of integration costs sustained in 2008-09.