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If UK fund management has a Frankenstein’s monster then Abrdn best fits the bill. Stitching together Standard Life and Aberdeen Asset Management in 2017 was meant to offer protection against the threat of passive investing. The result is a giant, shambling business that earns little from its core funds business.
Chief executive Stephen Bird unveiled new measures to reinject life into Abrdn on Wednesday. Cuts to central functions will sever £150mn of costs and some 500 support roles by 2025.
Bird will hope that when Abrdn’s revenues do revive, the lower overheads will help lift profit margins to that of peers. That is a strong assumption given the unrelenting assault on active management.
An investor’s horror story, around £10bn of value has disappeared since the creation of Abrdn. Its share price has trailed an index of FTSE asset managers by 55 per cent over the period.
Abrdn has three component businesses: investments, advisers and personal. It earns solid profits in its platform business for investment advisers and its (personal) retail platform Interactive Investor. But there is very little return from its £367bn of actively managed assets, just £26mn of operating profit in the first half.
Declining markets have hurt. Abrdn had net outflows of £12.4bn in the six months to December. To Abrdn’s credit it has already taken some £400mn of costs out of the division since its merger. At about 30 per cent of overheads, this looks typical for a financials merger. Fees have fallen faster, down by half.
Investments should still generate about £900mn in fees this year and next. Adding 80 per cent of the £150mn of cost cuts on to expected consensus operating profits of £58mn results in a margin of some 20 per cent. That trails the industry’s 25 to 35 per cent, says Numis’s David McCann. Now put that estimate on an average earnings multiple of 14 times and investments is worth £2.5bn, a sixth below the group’s market value.
Depending on better market conditions to close that gap is hopeful. Bird has bought himself time with patchwork repairs. Pitchfork wielding shareholders may call for more radical surgery.
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