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Standard Life Aberdeen's outflow problems likely to persist despite dollar boost

A weakening of the U.S. dollar will boost emerging markets and investment houses specializing in them, but for Standard Life Aberdeen Plc, this alone is unlikely to stem outflows, according to analysts.

Earlier in February, Lloyds Banking Group Plc and unit Scottish Widows Group Ltd. served notice that they intended to review the management of about £109 billion of assets currently managed by Standard Life Aberdeen. This was followed by revelations in the Feb. 18 issue of The Sunday Times that Lloyds decided to cancel the agreement after talks related to a potential £6 billion merger between Scottish Widows and Standard Life Aberdeen had broken down in December 2017 due to a clash over the structure of the new operation.

Standard Life Aberdeen was quick to highlight that revenues associated with those assets under management (AUM) represented less than 5% of its full-year 2017 pro-forma total. But outflows have been a persistent problem for the company, even as the operating environment has improved.

Improving environment

Aberdeen's performance prior to its August 2017 merger with Standard Life — which had included 15 consecutive quarters of outflows through the last quarter of 2016 — had been "a bit underwhelming" compared to other emerging-market investment firms, said David Holder, senior analyst for fund managers at the investment research company Morningstar.

With over a third of Aberdeen's equity assets in the developing world, its fund performance fortunes are closely tied to the dollar. Three years of a strong dollar hurt emerging markets by shrinking commodity prices, said Emre Tiftik, deputy director for global capital markets at Washington D.C.'s Institute of International Finance.

On Dec. 27, 2016, the dollar was the strongest it had been since March 2003, with a value of $96.55 against a basket of other currencies, according to the U.S. Federal Reserve, following three years of strengthening after the Federal Reserve's July 2014 decision to halt its bond purchase program.

However, the dollar's fortunes reversed from January 2017 onward, with sterling and the euro recently gaining ground on the prospect of interest rate rises. On Feb. 1, 2018, the dollar fell to its lowest level in three years, at $84.67.

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A softening dollar "boosts foreign investors' appetite for local-currency-denominated assets, particularly local-currency-denominated government bonds and, of course, emerging market stocks," Tiftik said, adding that it also eases "pressure on emerging-market corporates that have large refinancing needs in U.S. dollars."

Jason Hollands, managing director of London-based financial planning and investment company Tilney Group, echoed that view, saying "we are pretty positive on emerging markets" and calling them "one of the few regions where valuations have remained reasonable compared to longer-term trend."

Yet "as a rule of thumb, a weak dollar and strong commodity prices are good for the overall environment for emerging markets, but not necessarily for each and every emerging market," cautioned John Husselbee, a fund manager at Liontrust Asset Management.

Outflow challenges ahead

In any case, the possible dollar-related reprieve for Aberdeen Standard Investments — the post-merger asset management arm — comes at a time when it has the U.K.'s most AUM in funds that have been underperforming their benchmark by over 5% over the last three years, equivalent to £1.75 billion on Dec. 31, 2017, Hollands said.

He nonetheless called the Aberdeen funds' performance "an improvement from two years ago," but also warned: "A key challenge will be to stem outflows."

On the plus side, "the combined business has a more stable asset base given the breadth of capabilities, and this should provide a much more resilient book of assets," Hollands added.

This view was shared by Moody's in an Oct. 2, 2017, ratings update, when the rating agency wrote that the Standard Life-Aberdeen merger had improved the "diversity of the company's AUM by product and geography" and "is likely to enhance its ability to weather market shocks and changes in investor behavior."

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Aberdeen Standard Investments shed £16.4 billion in net outflows in the first nine months of 2017, up from £14.9 billion for the comparable units in the same period of 2016, the company said in a Dec. 15, 2017 trading update. This was as the dollar had weakened by 8.6% to $88.13 on Sept. 28, 2017, from $96.47 on Jan. 3 that year.

Joint Chief Executive Martin Gilbert attributed recent net outflows to the merger dampening inflows, saying in a Dec. 15, 2017, conference call that "people [were] not funding or waiting to see how the teams are going to settle down going forward."

Gilbert also said redemptions were partly due to "a lag from the poor performance in 2016," with institutional investors responding to what he admitted had been "some pretty bad years" for the asset manager. Among retail investors, who he said were "a little more performance-sensitive," there had been significant reduction in outflows in the third quarter of 2017, he noted.

Several of Aberdeen's funds were closed or soft-closed to new investors, making investment platforms less likely to list them compared with other emerging markets funds, explained Holder.

Meanwhile, Gilbert noted in the conference call that ASI's emerging-market debt funds, which are not closed, were "seeing some nice healthy flows." He also said Standard Life Aberdeen would be announcing a local-currency China bond fund and had recently registered as a private securities fund manager in China.