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SLA dividend prospects weaken

The asset manager has suffered heavy net outflows from its flagship strategy
March 21, 2019

Volatile equity markets and pressure on fees have put shares in asset management companies under the cosh in recent months. Standard Life Aberdeen (SLA) is suffering more than most. Its flagship Global Absolute Return Strategy (GARS) has been haemorrhaging assets at an accelerating pace, while new sales have also been slowing over the past three years. The sale of its UK and insurance business to Phoenix (PHNX) last year has made the sustainability of the group’s generous dividend even more reliant on growing assets at its core investment management arm, yet those assets declined by a tenth last year. Investors' doubts about the company's ability to fulfill its promise to maintain the dividend at last year's level are reflected in the shares' too-good-to-be-true forecast yield of 8 per cent. Alongside disappointing 2018 results, the group announced that co-chief executive Martin Gilbert would be stepping down to take up the role of group vice-chairman and chairman of the investment management arm.

IC TIP: Sell at 264.8p
Tip style
Sell
Risk rating
High
Timescale
Medium Term
Bull points

UK retail savings gaining net inflows

Won Scottish Widows dispute

Bear points

Rising net outflows

Poorer dividend outlook 

Falling fee income

Poor investment performance

The asset manager – formed via the merger of Standard Life and Aberdeen Asset Management in 2017 – suffered net outflows of £40.9bn during 2018, up from £32.9bn in the prior year and representing the third consecutive year of net outflows. Redemptions from maturing insurance business in long-term run-off – gained via strategic partners – contributed to £5.5bn in net outflows. However, the bulk of redemptions came via equity and multi-asset strategies, which suffered a 20 per cent rise in combined outflows to £54.4bn. Meanwhile, gross sales excluding platforms of £69bn represented 12 per cent of Aberdeen Standard Investments' opening assets under management, which lagged rivals Schroders (SDR) and Jupiter (JUP) at 21 per cent and 24 per cent, respectively.   

Net outflows from GARS reflects poor asset gathering by absolute-return funds – which seek to beat cash returns by investing across a range of assets – across the industry. Assets in absolute-return funds across Europe fell by 28 per cent in 2018, according to Morningstar. With many asset prices moving in the same direction, the benefits of diversification did not shine through last year. GARS, which aims to outperform cash returns by 5 per cent on a three-year rolling basis, reported a negative return of 5.5 per cent in 2018. That reflected a weak investment performance at a group level, with only 50 per cent of assets generating returns above their relevant benchmarks.

SLA has won a reprieve from suffering a further loss of business after an arbitration tribunal found in favour of the group in its dispute over Lloyds Bank's attempt to terminate a £109bn mandate.  

Combined with negative investment returns, heavy external net outflows meant assets under management and administration fell by 9 per cent to £552bn last year. That pushed down fee-based revenue and offset a reduction in adjusted operating expenses, resulting in a 14 per cent decline in adjusted operating profit to £473m. While this was 5 per cent ahead of consensus expectations, that was predominately due to increased reserves releases from Phoenix – inwhich it has a 20 per cent stake in – after a change in mortality assumptions.

Admittedly, the merger has produced cost synergies for the group, with £350m in savings being targeted by the end of 2020. Actions have been taken to deliver £175m ahead of schedule. That has helped bring down the cost-to-income ratio to 68 per cent, from 71 per cent in 2017. SLA’s Wrap, Parmenion and Elevate UK retail savings platforms are also another brighter spot, gaining £5.3bn in net inflows last year.

STANDARD LIFE ABERDEEN (SLA)   
ORD PRICE:264.8pMARKET VALUE:£6.57bn
TOUCH:264.7-264.8p12-MONTH HIGH:380pLOW: 219p
FORWARD DIVIDEND YIELD:8.2%FORWARD PE RATIO:12
NET ASSET VALUE:304p*NET CASH:£1.1bn
Year to 31 DecTurnover (£bn)Pre-tax profit (£bn)**Earnings per share (p)**Dividend per share (p)
20172.1066023.721.3
20181.8765023.121.6
2019**1.5961119.921.6
2020**1.5463521.621.6
% change-3+4+9 
Normal market size:5,000   
Matched Bargain Trading    
Beta:1.05   
*Includes intangible assets of £3.4bn, or 137p a share
**Berenberg forecasts, adjusted PTP and EPS figures