Aberdeen Asset Management, one of Europe’s largest investment houses, has long been seen as a proxy for problems in emerging markets.
And right now those problems are taking a heavy toll on the FTSE 100-listed fund company. It has suffered net redemptions on a quarterly basis since May 2013 and its share price has fallen by nearly a third this year.
Of the roughly 20 brokers and bankers that follow the group, only three are advising clients to buy Aberdeen stock.
Investors and analysts warn that Aberdeen, which employs 2,485 people, could soon be forced to cut up to 100 jobs if outflows and faltering investment performance continue to weigh on the UK asset manager.
One leading analyst says: “Aberdeen is a group in pain. I don’t think [chief executive] Martin Gilbert’s job is on the line, or [that the group is] about to go under, but there could be job cuts.”
Darius McDermott, managing director of Chelsea Financial Services, the fund research group, believes Mr Gilbert and Hugh Young, Aberdeen’s renowned head of equities, could soon face uncomfortable questions from investors if the problems continue.
“[Mr Gilbert and Mr Young] have a period of grace left. How long for is not really fair for me to speculate. If performance continues to suffer, [they] will come under pressure and scrutiny,” he says.
Mr Gilbert, who has held the top job at Aberdeen since he co-founded the company in 1983, admits cost-cutting measures are a possibility.
But he maintains this is normal business practice and not a reaction to the emerging market issues. “We are looking at costs as any well-run business does,” he says.
He adds that he is not concerned by the drop in the company’s stock price. “We are seen as a proxy for emerging markets and I do not have any problem with how the share price has performed,” Mr Gilbert says.
Yet the pain for the Scottish fund house, which has a quarter of its assets invested in emerging markets, seems unlikely to end soon.
Many investors believe a rise in US interest rates will trigger more volatility in emerging economies and harm the prospects of fund groups focused on these regions, such as Aberdeen and its smaller UK rival, Ashmore.
But the US Federal Reserve’s September 17 decision to keep interest rates at their current level has also been interpreted as damaging for these groups as it prolongs investor uncertainty about the impact of a rate rise on developing countries.
Mr Gilbert, who has presided over a 5 per cent fall in the company’s assets to £307bn over the course of this year, admits investor flows are unlikely to improve until rates rise.
He says: “The outflows will come to an end. Whether [this happens] anytime soon is a good question. Goodness knows where the cash goes.
“We do need to see a rise in US interest rates. Not putting [them] up created more uncertainty than putting [them] up. The sooner the Fed gets on with it, the better.”
Outflows from the FTSE 100 group began to accelerate from May 2013 when the Fed first raised the prospect of an end to quantitative easing.
The central bank’s comments sparked extreme volatility, dubbed “taper tantrums”, in emerging markets, partly explaining why the region has underperformed developed world assets ever since.
The impact of this turbulence on Aberdeen was highlighted in July when its biggest UK rival, Schroders, overtook the Scottish group to become Europe’s largest listed fund house by assets.
Mr Gilbert believes there is little his company can do to counter withdrawals in the low interest-rate environment.
“We are seeing asset allocation away from emerging markets at the moment,” he says. “Stock markets are cyclical and there is nothing you can do when people take money out of funds because of macro events — you have to wait for [sentiment] to turn.”
Amin Rajan, chief executive of Create Research, the consultancy, is sympathetic to the group’s predicament. “In the circumstances, there is not a great deal that emerging market managers can do, other than grin and bear the current turbulence,” he says.
But some investment professionals believe Aberdeen’s efforts to diversify its business away from emerging markets have fallen short of expectations.
The company has made a flurry of small bolt-on acquisitions of late with the aim of diversifying, but it remains heavily reliant on its blockbuster products. Global equities, emerging market equities and Asia-Pacific equities make up about 55 per cent of group revenues.
This is lower than when these products represented 70 per cent of revenues before the group acquired Scottish Widows Investment Management in 2014 for a company record of £550m. This is still too high in the opinion of some analysts.
Mr McDermott says: “Aberdeen has bought a lot of other businesses. It is good to gain assets and it acquired a lot of distribution capabilities via the Swip deal, but this has not helped with performance.”
Mark Dampier, head of research at Hargreaves Lansdown, the UK fund supermarket, believes some of the fears about Aberdeen are overstated.
He points out that the company has weathered worse crises — namely the split capital investment trust scandal in 1994, which wiped millions of pounds off Aberdeen’s share price when a number of the company’s investment trusts folded.
“This is not a big deal for Aberdeen,” says Mr Dampier. “Over a decade ago the investment market thought Aberdeen was completely bust and would never come back — now it is one of the biggest companies in the country, which is extraordinary.
“The emerging market hassle is small fry compared with being called in front of a parliamentary committee and being told you are snake-oil salesmen. I would not write them off and I certainly would not write off [the chief executive]. Martin must think this is easy stuff. ”
Mr Gilbert evidently agrees. “Financially we are strong. I don’t feel any pressure at all,” he says.
Gloomy outlook: ‘Underperformance will continue for a while yet’
Asset managers with high exposure to emerging markets are some of the most heavily shorted stocks in London, as leading hedge funds place bets that shares of these groups are likely to fall sharply because of problems in the developing world.
Both Ashmore, a pure emerging market group, and Aberdeen Asset Management, which has 25 per cent of its assets in the developing world, have been shorted by hedge fund managers such as Crispin Odey, the billionaire financier. Mr Odey declined to comment.
Ashmore is the fourth most shorted stock of those listed in London, with at least 9 per cent of its equity on loan, while Aberdeen is the 30th most shorted stock, with at least 4 per cent of its equity on loan, according to the latest Financial Conduct Authority data.
A short seller typically borrows stock to sell in the belief the price will fall with a view to buying it back later at a lower price.
Some fund managers say emerging markets will continue suffering as fears over the Chinese economy and concerns that US interest rates, which markets forecast will start rising soon, further undermine sentiment in the developing world.
Talib Sheikh, managing director of multi-asset solutions at JPMorgan Asset Management, says: “We are very negative on emerging equities and emerging currencies. We think the underperformance in emerging markets will continue for a while yet. China and US monetary policy are big concerns.”
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