Active asset management is a besieged business. The interminably shape-changing Abrdn has stepped up efforts to fortify itself against the march of passive rivals, whipsawing markets and a weighty cost base and shareholders have rewarded the FTSE 100 group with a 45 per cent appreciation in the share price over the past six months, in hope that the £1.5 billion acquisition of Interactive Investor, the investment platform, and efforts to drive down costs might turn around a spotty track record.
Progress has been mixed. The investment management division still accounts for 75 per cent of assets under management and more than 40 per cent of adjusted profit, even after earnings halved last year. It continues to offset a steelier performance from the savings and wealth management businesses.
A large part of the problem is that said asset management business entered the latest market turmoil from a weak position. A bloated cost base and heavy outflows have made the dive in markets more painful. The investment management division’s cost-to-income ratio, a key measure of profitability, worsened to 89 per cent last year, up from 79 per cent in 2021, which pushed up the same metric to 82 per cent overall. That is inferior to peers such as Schroders, at 71 per cent last year, or Jupiter’s 69 per cent. With a target to bring down the measure to 70 per cent by the end of this year having been scrapped recently, hitting anything like that level is a distant prospect. Numis thinks the ratio will stick at 79 per cent this year and next.
Turning around the investment division also relies on stemming the sharp outflows sustained in recent years. Even excluding the last of the withdrawals from the loss of a colossal £100 billion Lloyds Banking Group mandate in the wake of the 2017 Standard Life-Aberdeen merger, clients withdrew £10.3 billion from Abrdn funds. That is not just a function of recent market turmoil; negative flows stretch back to 2016.
Improving investment performance might convince more retail and institutional punters to keep their funds parked. The bias within Abrdn’s equity funds towards growth strategies has been ill-suited to the rapid shift towards cheaper, value stocks as interest rates have ratcheted up. And the proportion of assets beating benchmarks in the core investment management division has weakened: on a five-year basis, only 58 per cent were ahead of the index, while on a one-year horizon, a mere 41 per cent were higher. As for Abrdn’s ambition to capitalise on fixed-income strategies this year to drive a recovery, that might have to take a back seat amid the turbulence in bond markets.
Much of the effort to win back investors by Stephen Bird, the chief executive, has been convincing them to look past asset management and to focus instead on its savings and wealth management businesses. There is merit in the acquisition of Interactive Investor, which carries a higher margin and is a less volatile source of income than the rump asset management business. Adjusted operating profit here more than doubled last year to £94 million. But it is not immune to the forces that have damaged rivals such as AJ Bell and Hargreaves Lansdown: it still earns a chunk of revenue from transactions on its platform. Even after a fall of 30 per cent last year, trading income accounted for 31 per cent of the total generated by Interactive Investor.
Abrdn has committed to shareholder returns this year roughly in line with the £600 million handed back last year via share buybacks and dividends. It also can call on its stake in Phoenix Group, the FTSE 100 insurer. Yet the idea that this will be enough to secure a turnaround any time soon is not convincing.
ADVICE Avoid
WHY A bloated cost base and heavy outflows could cause more disappointments
Chesnara
Six months of chaotic bond markets has slapped a cheaper price tag on insurers. In the wake of the latest upheaval caused by recent banking failures, shares in Chesnara trade at a 19 per cent discount to the group’s economic value, a measure of net assets and future cashflow set to be generated by the business.
Yet annual trading figures underline why the closed-book consolidator can withstand a short-term fall in investment returns and crucially, maintain generous dividends. Another 3 per cent rise in the dividend to 23.28p a share extends its record of consecutive dividend increases to 18 years. At the present price, the shares offer a dividend yield of 8.1 per cent.
How sustainable is that? Without completing more acquisitions, the existing business is expected to throw off about £300 million in cash over the next five years. That would easily cover the £239 million cost of increasing the dividend by roughly 3 per cent each year plus servicing its debt. Last year alone, cash generated by the group’s British, Dutch and Swedish businesses was £61.9 million, almost twice the £34 million cost of the annual dividend.
On one hand, falling equity markets last year meant lower fees earned on policy investments by Chesnara — not good over an extended period. On the other, a sharp decline in stock markets also reduces the level of capital that Chesnara has to hold, as the risk of a further heavy decline diminishes, pushing up cash generation in the short term. That is one reason that, from a regulatory capital position, Chesnara is in solid form. The Solvency II ratio is 182 per cent even after acquisitions, a way above the target range of 140 per cent to 160 per cent.
For a closed-book insurance company such as Chesnara, dealmaking is crucial to replace the cash generated by pools of policies as they mature. Three acquisitions have been completed since the start of last year, which should generate annual cash of £10 million. There is about £100 million left for more bolt-on deals, after maintaining between £40 million and £50 million on the balance sheet. It is enough to keep investors secure in dividend prospects.
ADVICE Buy
WHY A generous dividend at a discounted price
