Standard Life and Aberdeen deal explained
Madison Marriage of FTfm and Alan Livsey of Lex explain how the merger is a defensive response to an industry-wide need for consolidation. Active investment management is being challenged by low-cost simplified 'passive' products such as index trackers.
Alan, this weekend Standard Life and Aberdeen Asset Management confirmed that they're in talks about merging businesses. And this morning they said they would like to proceed with that deal. What's the motivation for the merger?
I think for one thing really is Aberdeen has had a lot of outflows over the last four years or so. 105 billion has flowed out of their funds. They're down to $300 billion. So they're hardly a small fund management group. But you know, that's revenues, and that hurts when your costs aren't moving down as quickly.
So they need to cut costs no matter what. Standard Life also has had some performance problems over the last year. So the two companies together are probably thinking we can cut costs and you know, get some scale benefits here in the next two or three years.
And how quickly are they hoping to cut costs?
They are saying by the end of 2018 they will be generating 200 million of annual cost savings every year. But they are also saying that they have restructuring costs, redundancy costs, which will be around 340 million. So split that in two, 150 million a year, 200 million benefit. It's going to take probably into the year three before we really see the full benefits.
So Madison, my turn to ask a question. Now is-- these two companies are active fund managers. That's what they're known for. What does this say about active versus passive fund manager, when you're just following indices? There's been pressure on these companies, hasn't there been?
The vast majority of analysts are saying this looks like a defensive deal, because both companies are under pressure from the constant rise of passive investing, which has basically meant big outflows for active fund managers that try to beat the market and substantial inflows for companies like Blackrock and Vanguard, which have huge index tracking and fund ranges.
And Vanguard has had a lot of inflows, hasn't it?
Vanguard inflows have been tremendous. So last year it pulled in more money in one year than its 10 years [INAUDIBLE] combined.
And they're the index kings, but are surprisingly also known for some active fund management, you said.
They also-- yeah, so it's not quite 50-50. But Vanguard also have quite a big active fund branch, which is also putting in a good amount of money. So the other factor here comes back to costs and fees. So Vanguard is capable of cutting its fees all the time.
It's harder the other big active fund houses to keep doing that, unless they themselves keep control of costs. So this is seen as an attempt to build scale, cut out redundant costs. And in turn it will help the combined company. So whether it's called Standard, Aberdeen, or a combination of those two names--
It's going to be smaller in terms of a workforce.
Exactly, which in turn maybe it will allow them to cut fees as well. And that's how you keep growing. But obviously, still scale isn't just about the threat from passive. It's also about trying to build scale in order to compete with the investment giants, like Vanguard, Blackrock. And they all seem to be over in the US. So formerly, a UK powerhouse, how important is that?
Well, I think that scale benefits are there potentially. I mean, Standard Life has been adding other fund management firms over time. So has Aberdeen. They've been trying to build up scale. And so there bringing together [INAUDIBLE] a big massive leap forward.
You're sharing trading, back office, fund managers. It's a lot of stuff, where you could, you know, share costs and spread those out over the assets and maybe improve your profitability better than it has been. So I'm not 100% sure that bigger is better for the consultants that lead clients to the Standard Life and Aberdeen fund managers, OK. So that's what we have to watch longer term. Is bigger better? We'll see.
Well, we'll start asking a few questions to the big investment consultancies. Thank you, Alan.
produced by Alessia Giustiniano. Filmed by Rod Fitzgerald.