Standard Life Aberdeen’s parody-like rebranding to abrdn may have been widely mocked by commentators this year, but the group’s dismal performance has given investors little to laugh about. The asset manager has been hemorrhaging assets in recent years, and that’s even if you exclude the huge loss of its Lloyds Banking mandate to Schroders and BlackRock three years ago.
Investors were — rightly — less than enthused by some signs of progress at the half-year mark. Even though adjusted operating profits for the first half were ahead of consensus forecasts, up just over half on the same time last year, shares in the FTSE 100 group slid by about 2.3 per cent after the results. Perhaps investors have realised that they may need to lower their recovery expectations. The shares are valued, undeservedly, at the top of the peer group at 21 times forecast earnings for next year.
After being appointed to the top job last year, Stephen Bird, the chief executive, announced goals of high-single-digit compound annual revenue growth and an improvement in the cost-to-income ratio to 70 per cent by 2023.
The fall of the global absolute return strategies —“largely yesterday’s story”, according to Bird — left the asset manager in need of a new identity, which will take more than a vowel-sapping rebrand. Bird is looking to its UK wealth and advisory business, with Asian and private markets, and hopes that growing higher-margin assets will offset weakness elsewhere.
In his view, “we are not just an asset manager”. Technically, that might be true, but at the moment it’s where the group makes most of its profit and it’s struggling to hold on to assets. Admittedly, there was some easing in the rate of net outflows, which, together with market gains and better performance fees, helped to boost fee-based revenue by 7 per cent over the first six months of the year. After also nudging down costs, the cost-to-income ratio improved to 79 per cent, from 85 per cent this time last year. However, Mandeep Jagpal, of RBC Capital Markets, thinks that ratio is likely to miss management’s target and to be 78 per cent in 2023. He has the stock on an “underperform” rating.
The company’s bosses might trumpet an improvement in net outflows, but at £5.6 billion the figure was worse than consensus expectations and assets under management also disappointed. Even if you exclude Lloyds assets and liquidity funds, which tend to be more volatile, flows were in net negative territory at a group level.
If abrdn is going to tempt more capital back in, it needs to prove that it can generate a good return for investors. Only 66 per cent of assets under management were above their benchmark over three years, no improvement on the full-year level. On a one and five-year basis, the level ahead of the benchmark was worse than it had been at the end of December.
If investors can get cheaper passive management from big groups such as BlackRock and Vanguard, then active strategies need to prove their worth. To judge by customers’ reluctance to park their cash with abrdn, they agree with Bird that its investment performance still has “room for improvement”.
The dividend will be held at 14.6p a year until it is covered 1.5 times by adjusted capital generation and only then increased. Analysts don’t expect a rise in the payment until 2024.
The shares are just over a fifth lower than they were when the Aberdeen-Standard Life merger was announced in March 2017, yet still trade at a toppy earnings multiple. If abrdn can’t convincingly show that it can gain more assets than it loses, investors might be less forgiving.
ADVICE Avoid
WHY Valuation of shares does not reflect weak flows and risk of volatile revenues
Derwent London
Unlike the rally in stocks of beaten-up retail landlords last November, the influx of cash into the UK-listed office sector looks like a recovery bet with more legs.
Investors in Derwent London, the FTSE 250 constituent, have been vindicated by raised guidance for rents this year, touting potential estimated rental value growth of up to 2 per cent and a worse-case fall of 2 per cent. That’s better than previous expectations of, at best, a flat annual performance and potentially a 5 per cent decline. Yet that’s not the only indication of bullishness about the market’s prospects. The commercial landlord has committed to a big development on Baker Street, central London, and has exchanged contracts to acquire two freeholds for almost £215 million.
Derwent’s offices are focused on London’s West End and in the capital’s technology belt, which spans King’s Cross to Whitechapel. The management line in the depths of the pandemic was that a two-tier office market would emerge, split between snazzy modern offices with additional amenities, like showers and secure bike storage, and the rest.
There are early signs that this might be right, as the vacancy rate in the central London office market rose to 9.3 per cent during the second quarter, according to CBRE, the property services provider. Derwent’s vacancy rate was 3.3 per cent at the end of June and has fallen further to 2.4 per cent since then.
There’s still the question of when, or even whether, the volume of new letting activity will return to pre-pandemic levels. So far this year the amount of new space let is just over half of the same point in 2019.
A low exposure to retail property, about 9 per cent of rental value, has ben a key weapon in Derwent’s defence and is one reason that rent collection has held up better than some of its peers, at 93 per cent of the amount due for the June quarter.
Peel Hunt, the broker, has forecast a return to growth in the group’s net asset value next year at £42.20, against which the shares trade at a 10 per cent discount. Helical, a smaller rival, looks better value, but there’s still enough price differential to make Derwent worth backing.
ADVICE Buy
WHY Progress on rental values signals there could be more recovery to come in the group’s NAV
