Abrdn swings to a statutory loss

First the bad news: Abrdn (ABDN) swung to a statutory loss as the value of the listed stakes on its balance sheet fell by £187mn and the investment manager was forced to take £369mn in impairments linked to the unfavourable turn in market conditions.

Almost all asset classes were negatively affected by the fast-rising cost of capital, as central banks struggled to get to grips with inflationary pressures. With few hiding places, it was unsurprising that investors took fright and inflows duly dried up. The group recorded a net outflow of £10.3bn, excluding volatile, lower-margin liquidity flows and Lloyds Banking Group (LLOY) tranche withdrawals.

With valuations in retreat, the group’s assets under management (AuM) averaged £478bn in 2022, an annual decline of 10 per cent. The portfolio bias towards Asian and emerging market economies weighed on performance. Rising interest rates and a strengthening dollar are negatively correlated to index valuations in these economies, many of which experienced double-digit index losses last year.

House-keeping measures aimed at improving efficiencies delivered cost savings of 7 per cent, but these were offset by inflationary and foreign exchange impacts, along with the cost of acquisitions. The reality is that there will be upward pressure on the cost/income ratio so long as revenues are constrained.

Rationalisation is also afoot. The group has entered into an agreement to sell Abrdn Capital, its discretionary fund management business to private bank LGT – formerly known in the UK as LGT Vestra. The £140mn deal involves the transfer of approximately £6.1bn in AuM.

And now the good news: last year’s move to acquire Interactive Investor for £1.5bn appears to be well-founded. The deal not only enhanced Abrdn’s presence in the UK savings and wealth market, but the new business unit also delivered a 38 per cent increase in reported net revenue to £176mn, while doubling operating profit to £94mn.

Chief executive Stephen Bird said that the group is well placed to benefit from its ongoing diversification into alternative asset classes and the unwinding of zero-Covid policies in China. However, we believe the mood of the US Federal Reserve is still likely to be the chief determinant of how Abrdn’s portfolio fares in 2023. The market consensus suggests that AuM could tick up slightly through this year as valuations partially retrace, although the group could still experience an outflow of funds.

Next year looks more promising and the shares have been in recovery mode since the fourth quarter of 2022, yet uncertainties predominate. With AUM at their lowest level since the merger, we feel that further clarity on the group’s investment strategy is required. Sell.  

Last IC view: Sell, 166p, 09 Aug 2022