Nicholas Hyett, Equity Analyst | 10 March 2020 | A A A


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Standard Life Aberdeen (SLA) reported a 12.5% fall in fee based revenue during the year to £1.6bn. That reflects a 1.3% decline in Assets Under Management and Administration (AUMA), with underlying operating profits down 36.4% to £301m.

However, the numbers were slightly better than the market had expected.

The board announced a final dividend of 14.3p per share, taking the full year payment to 21.6p per share - unchanged year-on-year.

The shares rose 1.8% in early trading.

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Our view

Having sold off its UK life insurance business and reduced its stake in Indian insurer HDFC Life, SLA is now first and foremost an asset manager.

We can see the reasons for the switch. Asset management is less capital intensive than life insurance, freeing up cash to fund shareholder returns. A product range that embraces most of the major asset classes should reduce the groups exposure to investment fashions too.

The problem is that, so far at least, SLA hasnt proven a terribly popular option as an asset manager. Over 10% of assets walked out the door in 2019, and while most of that was down to the end of the Lloyds relationship a sizeable chunk wasnt. It doesnt help that outflows are concentrated in the more lucrative equity and multi-asset funds. Thats depressing margins.

The fact SLAs struggling to hold onto funds isnt altogether a surprise. 69% of the groups equity funds have underperformed their benchmarks over five years. That makes the funds a tough sell. Passive alternatives are not only cheaper, in recent years they would have performed better too. Investment performance has improved more recently, but we suspect the group will need a sustained period of outperformance to tempt investors back.

Its difficult to be positive while outflows continue, and coronavirus disruption doesnt help, but there are some reasons for optimism too.

The merger has gone reasonably well, and guidance on cost savings has been upgraded. While flagship funds struggle, the financial adviser platforms are gathering assets nicely.

With several billion pounds from the Phoenix and HDFC deals in the bank, plus the release capital previously restricted by regulatory requirements, the groups got plenty of cash on hand.

This cash could be used as dry powder to fund growth or acquisitions, but for now it looks like propping up the dividend despite the falling profits. The group is currently aiming to hold rather than grow the dividend, but the prospective yield of something like 9.0% will likely turn a few heads. Remember though that no dividend is guaranteed, and the group will need to turn things around if its to be sustained long term.

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Full Year Results

Lower AUMA reflects net outflows of £58.4bn during the year, largely down to a £41bn withdrawal by Lloyds Banking Group. However, money continued to flow out of the higher margin equity and multi-asset propositions and into lower margin strategies. Investment performance improved compared to last year, with 60% of assets ahead of benchmark over 3 years compared to 50% last year.

Fee based revenue fell 19.3% in Institutional and Wholesale as outflows continued. However the retail focused Wrap and Elevate platforms continue to grow as assets under management increase - albeit revenues remain small at £150m over the year.

Operating expenses fell 4% to £1.3bn, as the group achieved more cost savings from the merger of Standard Life and Aberdeen. However, the more dramatic fall in revenue meant the cost-to-income ratio increased to 71% (2018: 68%).

SLA finished the year with £1.7bn in surplus regulatory capital, up from £0.6bn in 2018. That primarily reflects the sale of stakes in HDFC Life and HDFC Asset Management.

The group described the outlook for the market and industry as turbulent but will focus on improving efficiency going forwards and driving profitable revenue growth going forwards.

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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.

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