Aberdeen Asset Management
Assets under management £331.2bn
When even seasoned fund managers such as Aberdeen Asset Management worry about why the markets are where they are, we should all be concerned. Martin Gilbert, its chief executive, says that markets seem curiously unfazed over the geopolitical situation — and the potential for it to get significantly worse.
The answer to this apparent mismatch, of course, and one rehearsed by this column many times, is that equities are the least worst place to be, with bond yields and interest rates still at all-time lows. Aberdeen shares, down ½p at 399p on a so-so trading update, yield 4.4 per cent on the expected dividend for the financial year to the end of September, and that dividend looks set to rise by 10 per cent or more each year.
Aberdeen’s year-end trading update shows that the flight from equities, mainly on the part of wealth managers acting on behalf of retail investors, seems to have slowed. Net outflows for the two months to the end of August were £1.7 billion, £700 million of this from the Scottish Widows Investment Partnership business being integrated, and set to beat, as is usually the case, the £50 million of cost savings forecast at the time of the purchase.
That outflow contrasts with the £8.8 billion that came out of assets under management in the three months to the end of June and the truly “frightening” (Mr Gilbert’s description) withdrawals at the turn of this year. Money is going back into emerging market debt and property, more than £1 billion into each over the first 11 months of the Aberdeen financial year, as investor confidence returns.
Favourable market and exchange rate movements meant that total assets under management grew by 3 per cent to £331.2 billion over the two months to the end of August. The SWIP purchase had the effect of lessening Aberdeen’s exposure to those emerging markets.
September delivered some renewed volatility and Mr Gilbert is not alone in wondering how investors have managed to shrug off the potential downside from events in Ukraine, for example. Even if you share his concerns, as I do, that dividend yield still looks like a good reason to hold the shares.
My advice Hold
Why Outflow of funds has moderated, but company is nervous over future direction of markets. Yield in shares is attractive, though
BAE Systems
New orders this year £7.9bn
Shares in BAE Systems are heading back to where they were before the economic downturn hit, above £5 in 2007 and up 1p to 470¼p by last night.
The latest trading statement was light on detail and heavy on contracts already announced, but it did strike a note of caution over the US defence budget. As it stands, spending levels are capped at where they have been for the past year, but this is not affecting the big defence projects, such as the F-35 Joint Strike Fighter, that are already signed off.
BAE is lessening its dependence on American defence, the subject of a profits warning in February, and a key figure from the trading update was that, of the £7.9 billion of new orders won this year, £2.6 billion were from outside the United States and Britain.
The other key figure was the need to write off a further £30 million on commercial shipbuilding contracts in the US, supplying offshore vessels for the oil and gas industry, on top of the £12 million written off at the halfway stage. This is a tiny part of the business, though. The attraction of BAE, aside from any benefits from the worsening geopolitical situation, is the 4.4 per cent yield.
My advice Hold
Why Shares approaching high point, but yield is attractive
Compass Group
US revenue growth 6.5%
At some stage, this was always going to happen, but Compass Group is the first company, as far as I am aware, where analysts are upgrading their forecasts because of the recent decline of sterling against the dollar.
The adjustments were fairly minor — the pound is still strong against the euro and the Brazilian real, for example — but Compass gets almost half its revenues from the United States and this will continue to offer the main opportunity for growth.
So for the financial year to the end of September, organic revenue growth in the US was running at about 6.5 per cent. At its fast-growing and emerging markets, the figure was 8 per cent, but this has been held back by a slowdown in Australia as the big mining and energy companies eased off on investment, which meant fewer workers queueing at the company’s canteens.
Compass took the decision to walk away from work worth about £100 million in a battered eurozone that was not offering the margins it requires, and in Europe and Japan revenues were off by 1.5 per cent, about half the rate of decline in the previous year.
In an unguarded moment Richard Cousins, the chief executive, has suggested that one day Compass could enjoy margins as high as 8.5 per cent, as it gains economies of scale from greater outsourcing by its customers.
A special dividend of 56p in July returned £1 billion to investors. The shares, up 23p at 984p yesterday, sell on 20 times this year’s earnings, which seems well up with events for now.
My advice fully valued
Why Price earnings ratio at the top of historic range
And finally ...
Westhouse Securities, unusually, has started coverage of Pearson with a recommendation to investors to sell the shares. The company will do well out of the extra spending on learning, in particular on English language teaching, as the middle classes increase in number in emerging markets. The broker worries, though, that Pearson still gets about 40 per cent of its revenues from the printed word, while earnings and dividend growth will be solid but unspectacular over the next three years.
