The Standard Life Aberdeen (LSE: SLA) share price moved into reverse this morning and is down by 6% as I write.
The asset manager’s latest stumble was triggered by half-year figures showing a 10% drop in pre-tax profit to £280m. That’s slightly below analysts’ forecasts for a figure of £288m.
Although market movements lifted assets under management rising by 5% to £577.5bn, client withdrawals continued, with a net outflow of £15.9bn during the period. That’s an improvement on the £24bn net outflow reported during the second half of 2018, but is still disappointing.
There was some good news
Today’s figures weren’t all bad. One of the biggest disappointments for SLA shareholders was Lloyds Banking Group‘s decision in 2018 to withdraw £104bn of assets from the business.
An arbitration case has found in favour of Standard Life, which will now continue to manage £35bn of assets until at least 2022. The company will also receive a compensation payment of £140m for lost profits later this year.
Although I don’ think this one-off gain is as valuable as ongoing fee income, it will provide a useful boost to profits this year and should help support the dividend.
A Brexit play?
One thing that interested me in today’s results was that the company reported lower inflows as a result of “weaker investor sentiment” due to UK political uncertainty.
The company also reported that most of its outflows were coming from equity funds, many of which invest in the UK stock market.
These statements probably won’t surprise you.
But they’re a useful reminder of the way that asset managers such as Standard Life are a geared play on the market.
When asset values rise, the value of managers’ assets under management also rises. This usually leads to a higher fee income. It also helps to attract new investors who want to profit from rising markets. This provides a second boost to fee income.
When markets fall or stagnate, the opposite happens — investors pull their cash and fee income can fall sharply.
In my view, this is one of the problems facing companies such as Standard Life Aberdeen at the moment. UK investors are reluctant to put new cash into the stock market. They’re also nervous about areas such as retail property.
History suggests that at some point, this cycle will reverse. Investors will start buying UK assets again and inflows will resume. If this happens, I think we could see a significant improvement in SLA’s performance.
Buy, sell or hold?
Active fund managers are facing growing competition from cheap passive funds. These are taking market share and putting pressure on management fees.
To counter this, Standard Life Aberdeen is expanding into areas such as private equity and real estate, where passive investing is difficult. The company is also expanding the range of services it offers and expanding into Asia, with products such as Chinese equities, real estate and pensions.
This broad strategy isn’t yet proven, in my view. Although the 8% dividend yield is tempting, it’s not expected to be covered by earnings this year.
If I was investing in an asset manager today, I’d choose one of the smaller, more profitable players that can be found elsewhere in the UK market. In my view, there’s no rush to buy SLA just yet.
