Standard Life & Aberdeen Asset Management merger makes sense

Shares in Standard Life and Aberdeen Asset Management jumped on the open as investors cheered news of the pair’s £11bn merger. Standard Life rose 7.5%, while Aberdeen climbed more than 5%.

The deal makes perfect sense as a defensive play. The explosive growth in passive investing trends has heaped pressure on active managers like Aberdeen and Standard Life and consolidation had to be on the cards. According to Morningstar, more than half a trillion dollars has flowed in to active funds over the last year, while $325bn has flowed out of active funds. No industry can survive this kind on disruption without consolidation.

There are plenty of other fund houses that are strong takeover targets and until today Aberdeen was one — the merger of (almost) equals may be the best way out for Aberdeen’s Martin Gilbert. Before today its share price had tumbled 40% from a high last October around 350p to around 250p in February. For Standard Life there is plenty of complementary advantages to be had — eg emerging market access — without paying a hefty premium.

Aberdeen has looked in better shape. It has only just reported its 15th straight quarter of net outflows, with £10.5bn in redemptions in the last quarter alone. And there is more to come in 2017, raising fears of a cut to the dividend. Standard Life’s flagship Global Absolute Return Strategies fund suffered net outflows of £4.3bn last year.

Cost savings should be easy to deliver as back office systems and teams can be merged. Merging teams might be harder than IT but the cultures are not so very different. Job losses seem certain — up to 10% of the merged workforce has been talked about.

Active fund management is not dead by any means, but it’s becoming a tougher sell to investors and fees are falling. It represents more than a tenth of UK investment holdings and according to Moody’s, it will overtake active management by 2024 in the US. Warren Buffet, in his latest letter to investors, took a swipe at the fees charged by active managers who cannot match returns from passive funds.

Scale is essential and that’s why this deal also makes sense as an offensive move — it will create a Scottish investing powerhouse capable of taking on the US giants. As today’s statement reveals, the merger will create one of the largest active investment managers globally with £660 billion of assets under administration — well above current UK leader Schroders.

Neil Wilson

Senior Market Analyst

ETX Capital