Clouds gather over Abrdn

With recession looming, there could be worse to come. Assets under management are under pressure, as demonstrated by emerging market specialist Ashmore (ASHM), which lost almost 20 per cent of assets in the quarter to the end of June. Meanwhile, Jupiter (JUP) also continues to struggle with outflows. It would be foolish to take too negative a view of an entire sector – full-year results at Liontrust Asset Management (LIO) were solid, for example. But nor would it be a surprise, as more updates emerge from key players, if forecasts and ratings are sent further downwards.

One active management giant with upcoming results is Abrdn (ABDN), with interim postings scheduled for 9 August. The group has over £500bn in assets under management, with the vast bulk in institutional, wholesale and insurance funds. The share price is down by over 40 per cent over the past year, and has underperformed the wider FTSE indices. There are specific factors at play that support a bearish view of the shares, and the speculative bears seem to agree – Abrdn is among the 20 most shorted London-listed shares; not a good sign.

Strategic problems

Quite apart from the ins and outs of last year’s dubious name change (about which there have been equal amounts of jokes and publicity), City analysts are concerned about a seeming lack of strategic direction. The merger of Standard Life and Aberdeen Asset Management in 2017, which created the current entity, was supposed to result in a market-leading business full of growth and innovation. But it hasn’t really worked out that way. This is reflected in the performance of the shares, which are trading far below the price (420p) at the time of the merger. It wouldn’t be controversial to conclude that the last several years have delivered little solid progress. Looking forward, the outlook doesn’t look much better.

The group’s struggles with outflows are a case in point. Institutional and wholesale assets in particular have come under strain. Analysts, based on consensus estimates from data provider FactSet, expect assets under management of £521bn by the end of 2022, which compares with £670bn when the merger was completed. This suggests significant net outflows when the upcoming half-year results are announced (the consensus is over £30bn). A fair chunk of this will be from an insurance business that is in run-off, but the group is also still struggling with equity outflows.

What is to be done to turn the tide? Sky News reported this week that the private equity business, which manages around £12bn of assets, has been put up for sale. This is promising, but in our view is not enough to instigate a turnaround. Stockbroker Numis thinks management needs to be more “radical”, with the break-up of the group or an acquisition by a third-party required for shareholders to see full value.

One thing Abrdn’s bosses have been doing to drive growth is getting more active on the retail investment side. This is good, as too much space is being taken up by poorly performing and less profitable products in areas such as fixed income. The acquisition of do-it-yourself investing platform Interactive Investor (ii) was completed for £1.5bn in May. ii has grown quickly and brings about 400,000 customers who are deemed to have high-value portfolios in comparison with competitors.

While the acquisition has yet to have much impact on the share price, it could bear fruit over the longer term. As younger, tech-savvy generations get into investing and need somewhere to store inheritances from their baby-boomer parents, Abrdn could stand to benefit. Management consultant Bain & Company expects demand for wealth managers’ services to double between 2021 and 2030, and growth to outstrip traditional asset management. By 2030, there will be 250mn customers in generation Y and Z with an average annual income of $100,000 (£84,000) who will need advice, says Bain.

On the other hand, concerns have been raised that the ii purchase was made at the height of the market. Broker Panmure Gordon said this month that “given how the market has treated other, arguably better businesses, we believe that the asset is already impaired”. Not good if that means a write-down is on the way.

As well as ii, there have been other interesting acquisitions made since chief executive Stephen Bird – who encouragingly wants to focus Abrdn on other fast-growing areas, such as private markets – took the helm. Private investors’ content platform Finimize, digital wealth manager Exo Investing, and 60 per cent of specialist logistics real estate fund manager Tritax have all been snapped up. But there is a sense that Abrdn hasn’t really differentiated itself with these deals in a material way. Its close competitor, Schroders (SDR), which took a 75 per cent stake in renewable energy boutique Greencoat Capital and has plans to double its private capital arm to £86bn by 2026, probably has a better claim to be setting itself apart.

Alongside the wealth management trend highlighted by Bain’s report, Abrdn could also potentially benefit from a move away from passive investing as equity and bond markets struggle. A recent article in Barron’s, the US equivalent of Investors’ Chronicle, argued that “the volatile market has been the best environment for active fund managers to shine”. In a challenging macro environment with falling markets, so the argument goes, putting hopes in a passive product, which simply follows the market, won’t cut the mustard. Instead, investors need to be more selective – even if that means paying higher fees for an active manager. But a shift towards active investors might not last, and requires funds to be performing well. The company has struggled to achieve this latter goal over the past 12 months. Meanwhile, the passive giants continue their steady march onwards.

Costs and valuation

The group’s high cost-to-income ratio and largely fixed cost base has received plenty of attention. Its cost-to-income ratio was 79 per cent for 2021, and the operating model is heavily tilted towards fixed costs, while peers have more of a variable focus. Despite the inclusion of ii, which has a relatively low cost ratio compared with the rest of the group, analysts do not expect much progress in the upcoming interims. Investment bank Credit Suisse says that “cost inflation and necessary investment spend mean that we see limited opportunity for the group to flex its cost base in the face of revenue headwinds”, while Numis downgraded its forecasts due to concerns around operating costs.

As with costs, the share rating doesn’t look that attractive when set against peers. While Abrdn’s shares are currently trading just below their five-year average earnings multiple, according to consensus data from FactSet, they can’t be described as cheap. M&G (MNG), Amundi (FR:AMUN), and Schroders all trade on lower multiples of this year’s forecast earnings. While the upcoming results could yield some surprises, it seems unlikely that any major boon will be revealed – this is reflected in recent analyst downgrades and sell recommendations from the likes of Citi, Credit Suisse and RBC Capital Markets. As things stand, we aren’t convinced about the group’s prospects and don’t see plausible catalysts for a quick share price recovery. One to sell.

Disclosure: the author is a former employee of Abrdn.