I don’t know how your weekend was, but I suspect it was more fun than the lawyers, bean counters and PR people at Aberdeen and Standard Life had. Out of the blue, the news was broken by @MarkKleinmanSky around lunchtime Saturday, and from there things have moved rapidly to the point of the merger recommendation being issued first thing today (Monday 6th March)
As always with these things our first thought is for the people involved. We know and work with some hugely impressive people at Aberdeen, Parmenion, Standard Life, SLI, Elevate and so on, and it can’t have been pleasant for them to be watching Sky News over the weekend.
The merger recommendation carries an expectation of “approximately £200m per annum of cost synergies”. As one M&A expert comments in today’s FT, “this feels like an attempt to smash the companies together and take costs out”. For sure the savings won’t be found from travel expenses.
We wish all the 9000 employees well, but especially our Edinburgh friends.
It’s a tough time. Everywhere you look there are significant headwinds. Digitisation, the rise of passives, longevity, regulatory pressure, consumer awareness of costs, pension reforms – the list goes on. 18 months ago we wrote how “Platforms are dead”, and this move is a case in point. Standard Life Wrap’s SLI holdings account for maybe 3% of total SLI assets, and Parmenion will be an even smaller number at Aberdeen. Platforms are utterly irrelevant in this deal; it’s bigger global mandate deals that are driving the change.
A quick glance across the pond at the sales figures for mutual funds in the states makes for interesting/alarming reading, depending on your point of view. Right now, 75 cents of every new dollar invested in the U.S. goes into Vanguard or Blackrock’s index-based products and collectively they own 12 percent of the stock market. Vanguard took £305bn in 2016, destroying the record flow for any asset manager by over £50bn. It wrote £47bn in January 2017, double last year’s pace. If this continues it will write over £500bn in 2017. And meanwhile, in 2016, US active mutual funds shed over £300bn.
Whether this happens over here remains to be seen, but Vanguard and passive investing generally does seem to be gaining momentum. The Investment Association reported last week that tracker funds now represent 13.6% of industry FUM, compared with 11.4% a year ago. Estimates for platform flows and AUA vary, yet Vanguard appears high on pretty much every platform’s best-selling funds list – and it hasn’t seriously entered the UK D2C distribution market. Yet.
Against this backdrop it’s easy to look at the proposed SL/AB merger (SLAB?) and wonder whether it’s a defensive move, especially since neither party has any passive capabilities in-house. 69% of SL’s business is UK based, and whilst Aberdeen has a broader market spread it still relies on the UK for 58%. The combined organization might be eyeing the global stage, but the UK will still pay the bills, and here, at least in the short term, the lack of passive capabilities might not represent a problem.
Standard Life’s Myfolio products, for example, already buy in passives from Vanguard, Blackrock etc. The margins for SL as product manufacturer are still there, especially with its established distribution, and in pure percentage terms those margins may be higher than the ultra-low manufacturing margins passives generate. Competing with the major passive providers would be folly. Complementing them is less so.
SL and Aberdeen both have eyes on the USA – SLI was quite open at the time of taking up its Ryder Cup sponsorship that this was a big priority. Over there, a combined £700bn or $860bn still isn’t enough to get you in the top 5 – but it’s not that far off.
One thing that feels true (and so must be true in this post-truth age) is that this is the tip of the iceberg. Whatever the driving factor behind this merger, it’s hard to believe these circumstances are unique to Aberdeen and Standard Life. As disruptive as this will be for their staff, first mover advantage in the race for scale could be extremely valuable.