Only drastic measures seem capable of reviving the flagging asset manager Abrdn. In the past eight years since the merger that created the now-disemvoweled group, it has lost cash more frequently than it has recorded net inflows — even after accounting for the mammoth loss of the mandate with Lloyds Banking Group.
Despite worthy efforts to diversify its income stream, its investment management business is still the dominant force. Adjusted operating profit was 10 per cent higher over the first six months’ contribution of the year, but that was only after the inclusion of a full six months of Interactive Investor. Another £6.5 billion in cash was pulled from its funds, which left total net outflows for the group at £5.2 billion, twice the amount that analysts had expected. Any hope of a return to growth has been pushed out.
The shares have fallen by two thirds since the tie-up between Standard Life and Aberdeen Asset Management was completed in 2017, enough to send the group out of the FTSE 100 when it reshuffles this month. But Abrdn is far from bargain basement territory. A forward/price earnings ratio of just over 13 leaves the shares within touching distance of a long-running average of 15, despite stalled progress on arresting the decline in its investment management division.
Abrdn is not the only active manager under the cosh from the market turbulence or the wall of cash heading into cheaper, passive funds. But it is battling from a position of weakness. Poorly performing funds make for bad publicity. Only 58 per cent of assets outperformed their respective benchmarks over the key three-year period, down from 65 per cent last year.
The business is a drag on revenue but an even larger weight on profits. A cost-to-income ratio of 82 per cent remains stubbornly high and a way above rivals such as Jupiter or Schroders. Just over 100 funds have been closed in an attempt to slim down a bloated structure, with plans for another 40 or so to be shut. Yet there is no sign of a previous target of cutting that ratio down to 70 per cent being reinstated soon.
The flood of cash heading out the door might not be merely cyclical. With interest rates rising, more of the defined-benefit schemes that account for a chunk of asset managers’ business have the chance of offloading all or a portion of their liabilities to an insurer. That should mean more of these schemes shifting out of growth assets like equities and into those that match their liabilities, such as gilts, which carry a lower margin, analysts at RBC Capital think. The broker puts Abrdn’s exposure to defined-benefit assets at about 20 per cent of its total.
A break-up of the group could make sense. Analysts at Numis have put a sum-of-the-parts value of £3.94 billion on the group, almost £900 million greater than its present stock market value, about a third of which is ascribed to its asset management division. A sale of this business to a rival looking to bulk up, or of its wealth management operations, an area that increasingly interests mainstream lenders, could mean more capital returned to shareholders.
The Interactive Investor platform, which it acquired last year, could benefit from the structural shift among retail investors towards managing their own capital, but that business is also at the mercy of investors’ confidence, dependent on transaction volumes for just over a fifth of its revenue in the first six months of this year. More than half came from higher interest rates generated on client balances, which won’t last at its existing level.
More radical action than this bolt-on is needed to resuscitate Abrdn’s fortunes.
ADVICE Avoid
WHY Bloated cost structure and prospect of more outflows will hold back progress
Deliveroo
Deliveroo shareholders could do with a sweetener. Will Shu, chief executive of the food delivery company, has served up the prospect of a £250 million capital return to investors, but it will take more than one cash hit to win back investors. Those that bought in at the 2021 flotation are sitting on paper losses of just over 70 per cent.
True, its rate of cash burn cooled to £27.7 million over the first six months of the year, down on £169 million over the same period last year. Cutting back overheads, including spending on marketing, helped. Yet another big fall isn’t expected to repeat in the second half of the year as the benefit of staff cuts will be offset by inflation-driven salary increases. Increasing some fees paid by consumers, food inflation and slightly higher income from advertising (still a sliver of the overall total), also helped to edge revenue 5 per cent higher. On a statutory basis, the group remains heavily lossmaking at £57.6 million over the first six months of the year.
Signs of genuine underlying momentum are hard to see. Deliveroo generates revenue primarily from restaurant and grocer commissions and from consumer fees. The overall volume of transactions put through the app declined by 6 per cent over the first half of this year. Price inflation helped to boost the value of each order by 10 per cent, but that will dissipate as consumer prices cool across the board. Guidance for growth in the gross value of transactions has been lowered to the “lower-single-digits”, down from low-to-mid-single-digits that had been expected earlier in the year.
The number of customers active on its platform each month has declined in Britain and throughout international markets since lockdowns ended. The latter has been the source of most weakness this year, which begs the question of whether Deliveroo could retreat. Last year it exited the Dutch and Australian food delivery markets, where it gave up on achieving scale and profitability.
Without firmer signs that it can sustainably increase its order numbers, the shares will likely continue to founder.
ADVICE Avoid
WHY Weak order volumes indicate revenue growth prospects are weak
