Times are tough for the asset management industry.
The growth over the past two decades of so-called “passive” funds, which simply seek to track the performance of an index such as the FTSE 100 or the S&P 500, has accelerated.
More and more investors are finding that they don’t have to pay fees to an “active” fund manager when they could simply leave their savings in a low-cost passive fund.
Active fund management also suffered from its reputation following the spectacular fall in former star manager Neil Woodford.
This has forced some of the biggest names in the industry to fight harder than ever to prove their worth and, as they have cut costs to preserve their own profitability, has also resulted in the loss of many thousands of jobs in the sector globally. .
Today results and progress updates from two of the biggest players in the UK fund management industry – Standard Life Aberdeen, which has a stock market value of £7bn and M&G, which is valued at £5.4 billion.
Both have gone through an interesting recent past.
The first was created by fusion, in August 2017, between the former mutual Standard Life and the fund manager Aberdeen Asset Management.
The combined company has had a difficult few years, struggling with huge customer outflows amounting to tens of billions of pounds, partly due to the loss of some business of Scottish Widows, owned by Lloyds Banking Group, which resulted in a court hearing.
SLA, which still has nearly 100,000 shareholders as a legacy of its demutalisation 15 years ago, also spun off into a pure-play fund management business by selling Standard Life’s former life and pensions business.
The Standard Life brand in these activities is now belonging to the Phoenix group which following the deal is now the UK’s largest long-term savings and pensions business.
M&G, meanwhile, has only been a standalone business for just over a year.
The original M&G, which launched the UK’s first unitary trust in 1931, was bought by Prudential in 1999 for £1.9billion and remained part of the insurance giant for the next two decades.
It was spun off by the Pru as a separate company in October 2019 and immediately became the third largest listed fund manager in the UK after Schroders and SLA.
Shortly thereafter, the company was obliged to “door” its widely held £2.1bn property fund following a rush to exit by investors who had uncomfortable echoes of a similar run on the sector after the Brexit vote in 2016.
Judging by the stock price reaction to today’s results, however, the pair’s fortunes diverge.
M&G’s share price rose more than 5% at one point, making it the FTSE 100’s biggest gainer, despite reporting a full-year pre-tax profit drop of 1.75 billion to £1.61 billion.
The rally reflected joy at the announcement of a dividend increase and the assertion by Chief Executive John Foley that the company remains committed to raising £2.2bn of capital over the next three years leading up to the end of 2022.
Mr. Foley said, “In our first year as an independent company, we delivered a strong and resilient performance in one of the most challenging operating environments ever.
While M&G managed to win over City skeptics today, the jury is still out on SLA, whose shares fell more than 4% at one point, making it the biggest fall on the FTSE 100.
Like M&G, SLA also suffered a decline in full-year pre-tax profits, from £584m to £487m.
Unlike M&G, it did not increase its dividend, but actually cut it by a third.
Still, Stephen Bird, who took over from longtime Keith Skeoch as chief executive last September, today insisted there was reason to be positive.
For starters, it could signal a slowing in the rate of customer outflows, once Lloyds/Scottish Widows’ loss of business is taken out of the equation – although the situation appears to have deteriorated since the half-yearly update.
Second, he pointed to the opportunities of last December’s deal in which SLA bought 60% of Tritax, a fund manager specializing in investing in the growing field of warehouse and logistics assets.
And third, he argued that the performance of SLA funds was improving, with two-thirds of assets under management outperforming their benchmark over the past three years.
Mr Bird, born in Motherwell, is also optimistic about the future of the world economy.
He noted that ALS had raised its global growth forecast for this year due to the huge economic stimulus provided to the US economy and China’s early emergence from COVID-19 – making it the only great economy to grow in 2020.
These, he said, created a “favorable market environment”.
He continued: “We assume that vaccines are distributed in the developed world and are found to be effective.
“We are starting to see an easing of restrictions and a recovery in activity as a result of this – and this will in turn be followed by a recovery in corporate profits.
“When the market doesn’t, we take action and we have a response plan.
“If this environment does not deliver the expected level of growth, we will take action.”
SLA is certainly capable of doing this.
Mr Bird pointed out today that over the past year the company has reduced costs by 10%.
Yet, there is still much to do.
Long-suffering shareholders, especially those who clung to the free shares they received when Standard Life demutualized, have already been promised robust growth – only for it not to materialize.
They can be forgiven for being skeptical – but there’s a reason above all else why, perhaps, they should be optimistic.
Mr Bird has earned so much in more than two decades with his former employer, Wall Street banking giant Citi, that he never needs to work again.
He’s not in the job for the money, but for the challenge of reviving one of Scotland’s biggest employers.