British fund manager
Standard Life Aberdeen
isn’t an easy stock to love in an industry facing immense challenges.
There’s pressure to cut fees with the shift to low-cost index funds along with more regulatory scrutiny.
At the end of June 2019, the company (ticker: SLA.UK) earned 43.9 basis points for every pound of assets managed in its institutional funds, down from 51.1 basis points in 2017.
On top of that, the company has struggled with performance. The Standard Life Global Absolute Return Strategy fund, once the biggest fund in the United Kingdom, has halved in size as substandard performance led to outflows. Over three years, just 27% of its equity funds were outperforming their respective benchmarks, according to the company. Performance on the bond side has been stronger, and about two-thirds of all its funds are outperforming the benchmark.
The 2017 merger between Standard Life and emerging markets–focused Aberdeen Asset Management led
Lloyds Banking Group
to withdraw its assets from Aberdeen, since Standard Life is a competitor on the insurance side to the Scottish Widows arm of Lloyds. Terms of settlement have seen 74 billion pounds sterling ($96 billion) in assets already out the door and another £35 billion set to go, though Lloyds paid a £140 million fee. Martin Gilbert, who led Aberdeen since he co-founded the firm in 1983, and then ran the combined firm, has stepped down.
Sell-side analysts are, at best, lukewarm. Out of 16 ratings, half were Hold and two were Sell or Underweight, according to FactSet.
The company’s £7.3 billion market cap includes stakes in three companies—India’s
HDFC Asset Management
and HDFC Life Insurance, as well as a 27% stake in U.K. insurance and pension consolidator Phoenix. Standard Life Aberdeen had £577.5 billion in assets under management as of June 30.
Fahad Hassan, a fund manager at Atlantic House Fund Management, said that the core Standard Life Aberdeen’s market cap when those stakes are backed out, even applying a 25% discount, is just £3.5 billion.
He estimates that if assets managed for its key partners are excluded, the company runs about £250 billion, on which it earns £1.2 billion to £1.3 billion in fees. On those numbers, the asset management business is trading at just 6.75 times earnings, whereas the group as a whole trades at 21 times, he says. Analysts at JPMorgan Cazenove have similar numbers, saying the core asset-management business trades at eight times projected 2020 earnings.
There’s reason to think Standard Life Aberdeen’s assets can grow again once the overhang of the Lloyds settlement is removed. Hassan says its distribution in the U.K. pension market is second to none. A 2008 law requiring employers to auto-enroll some of their staff members in pensions will keep that market growing.
Its stake in Phoenix also is a help. Phoenix buys the annuities of companies that are no longer offering new policies, and it uses Standard Life Aberdeen as its fund manager for these policies.
“They won’t be able to replace the whole of the Lloyds’ outflow, but there is room for them to replace some of that through Phoenix-based acquisitions and various tie-ups that they have around the world,” Hassan said.
The company’s stock price has already moved up some 17% over the past 12 months, well ahead of the 9% gain for the FTSE 100 over the same period. Even with the stock price appreciation, its dividend yield is still north of 7%.
Standard Life Aberdeen carries more than its share of risks. But a dividend that high is an encouragement for investors willing to take the chance.