Standard Life Aberdeen (LSE: SLA) has clocked up one of the worst performance records of any stock in the FTSE 100 over the past 12 months.
Following the merger between Standard Life and Aberdeen Asset Management, which was formally completed in August last year, shares in the combined entity have lost nearly a third of their value excluding dividends, underperforming the FTSE 100 by around 28%.
Not going to plan
The merger with Aberdeen was supposed to create a force to be reckoned with in the asset management industry, offering clients an unrivalled selection of investments as well as the security of one of the largest asset managers in the UK.
However, despite the company’s attractive qualities, investors have not flocked to the enlarged group in the way management initially hoped. In fact, the path of least resistance has been away from, rather than to the firm with assets under management falling to £610.1bn at the end of the first half of 2018, compared to £626.5bn at the end of 2017.
By far the most painful client loss has been the decision by Lloyds Banking’s Scottish Widows insurance unit to move away. Worth £109bn, the portfolio of Lloyds assets only generated a relatively small percentage of Standard Life’s total sales, but the hit to the company’s reputation has been significant.
Stopping outflows
A lot now depends on Standard Life’s ability to turnaround the exodus of investors from its funds. Stopping the outflows may be harder than it sounds because competition in the investment management market is only increasing, and there are now more companies fighting over investors’ assets than ever before.
That being said, the one advantage Standard Life does have is its size. The group’s size and scale should, in my opinion, allow it to outmanoeuvre smaller competitors and offer investors more for less.
Some progress
I believe the outlook is linked to the company’s fight for assets. In other areas, management is producing results. Costs are falling, and the group recently disposed of its last major legacy insurance book. A chunk of the proceeds from the sale (£1.75bn) is being returned to investors.
Over the next few years, management wants to streamline the business further, reducing its cost/income ratio to 60% from 69.4% currently, which should boost profit margins. However, if the group cannot win over new clients, efforts to reduce costs may be for nothing as revenue continues to slide.
The bottom line
Overall, I’m cautiously optimistic on the outlook for Standard Life’s share price. The company has its problems but it is still one of the largest asset managers in the UK, and this is its primary selling point.
At the same time, I believe the stock’s valuation of 11.6 times forward earnings undervalues the business and gives a large margin of safety for investors at current levels. The shares also support a yield of 7.5%, one of the most attractive distributions in the FTSE 100 today.
