Aberdeen taps private banking sales channels

Despite net outflows of £8.5bn (E9.5bn) over six months to the end of March 2009, Gary Marshall, head of investment products at Aberdeen Asset Management remains optimistic. The main reason for his high spirits is the addition of £40bn in assets to Aberdeen’s existing £96bn total, if the acquisition of the old Credit Suisse long-only funds business, managed in Europe and Asia, closes as expected at the end of June. The second reason, no doubt, is that Aberdeen beat main rival Schroders to the deal, and has achieved the coup at a very keen price of around £250m. This is the latest move in the Scottish group’s expansion plan, after chief executive Martin Gilbert, who founded Aberdeen 25 years ago, bought the UK funds arm of Deutsche Bank in 2005. While other groups are looking at radically trimming fund ranges in order to increase efficiency and save costs, Aberdeen, adhering to Mr Gilbert’s philosophy of expanding in tough times when competitors are cutting back, will look to broaden product ranges through the latest deal. Tough operators Aberdeen has much experience of operating in a tough climate. Six years ago, the investment group managed to survive through its darkest days after it became embroiled in a major controversy over marketing of split capital investment trusts to UK clients. Despite facing near collapse it has been rebuilt by the management. It has since gone from strength to strength, eventually selling a near 10 per cent stake in its business to Japan's largest financial player Mitsubishi UFJ in a major strategic allience, which boosts distribution capacity in Japan. The latest aquisition will further strengthen the product range, particularly in Asian property, Eastern European and Latin American funds, as well as single country offerings for Russia, Chile and Israel. Global emerging market products have seen significant recent inflows for Aberdeen, though these have been dwarfed by money exiting its bond funds. “We were already looking to launch new funds over time, but this acquisition will speed things up,” says Mr Marshall. Rather than having a limited range of products which the salesman can refer to, Mr Marshall believes that the deeper and broader the selection, the easier it is to distribute funds. The business policy is to use the existing Aberdeen plumbing and leverage capacity by putting as much volume of assets as possible through the system. He says Aberdeen has chosen this expansion path rather than the rationalisation which houses such as Schroders have opted for. “Some of the funds might not be that big, but if they fit within our process, then every fund will have its day,” says Mr Marshall. “The more you can offer in an asset allocation process, the more chance there is that clients want those funds in some point in the cycle.” The Credit Suisse deal will give Aberdeen extra presence in the UK, Europe, Japan, Australia and the US. Cash funds should also prove a new area of expansion. “They have not had the best reputation of late, but if we work on the basis that a lot of those problems are behind us, then money market funds will be a big asset class in Europe,” adds Mr Marshall. Fixed income funds, including cash, will make up two thirds of the assets about to be acquired, and could prove attractive to the international private banking market, which forms the most important part of Aberdeen’s client base, believes Mr Marshall. “Private banks tend to look for a range of different funds they can switch money between. Many of these clients want to park money temporarily and then switch later, once the climate improves.” Organic growth While the Credit Suisse acquisition, following on from the Deutsche deal, will transform Aberdeen into a major, global funds player, Mr Marshall is keen to stress that the distribution machine is also an efficient one when it comes to sourcing new assets. “It is wrong to suggest we are just acquisition driven, we need to ensure for organic growth,” he adds. “If you don’t have this, then it won’t work, as assets will simply leak of the door.” In order to be a significant scale player, the combination of assets from distribution networks and acquired business is necessary, he believes, pointing to “five consecutive years of organic growth” since 2003. Keeping the assets of Credit Suisse’s private banking subsidiary under management at Aberdeen is no “shoe-in”, stresses Mr Marshall, as the wealth management arm of the Swiss bank emphasises its independence when it comes to choosing third party managers. “As they have gone down the open architecture route, it has always been difficult for them to explain and defend the choice of investing assets in-house.” An arms-length relationship with Aberdeen, the new owners of the Credit Suisse funds franchise, will make the whole situation more comfortable for the private bankers, he believes. Despite Aberdeen’s reputation as an institutional manager, assets sourced from private banks have been responsible for much of the group’s growth since the early 1990s. “We are familiar with private banking. It is not a foreign distribution channel to us,” claims Mr Marshall. While Aberdeen has 100,000 UK clients in pooled retail funds, the wholesale distribution arena is also earmarked for future growth. “Prior to the Deutsche deal, our pan-European wholesale, private banking and fund distribution channel was the fastest growing,” he recalls. “With input from the Deutsche teams, the institutional market accelerated for us very significantly. Credit Suisse will put [the business mix] on an even keel again.” There are many benefits to the business from adjusting this mix, says Mr Marshall. “Institutional business can be very lumpy. There is nothing for a while, then you get a couple of hundred million. With the wholesale market, on the other hand, you get regular clients investing E5m to E10m in one go.” The deal will also help Aberdeen to focus on US wealth managers looking to diversify distribution into Europe. “We have never tried to sell US equity before in Europe,” reveals Mr Marshall. “But we have been well received on our recent tour of European private banks, which are looking to switch or add to US equity exposure, as they think the US will be the first region to come out of the crisis.” Much more to do He admits, however, that Aberdeen must still do a lot more groundwork to capture significant funds from private banks in this area. “US equity capability has always been a weakness in our global equity product. We have been underweight US, as we previously did not have enough resources to cover the US. Now we have a much better resourced team.” Flows are just beginning to turn positive, after last year saw clients switch investments, change allocations or pull out due to underperformance. “In the current environment, a lot of people don’t know what to do, but many are going passive, in fixed income especially,” says Mr Marshall. However, he does not feel that private banks allocating larger tranches to exchange traded funds (ETFs) will necessarily hinder active managers such as Aberdeen. “Given the conditions, people are worried about taking active briefs, but we are not competing against passive investments. People are still choosing active funds when they need to take a bet. Passive is really for people who don’t know what to do, so they just buy the index.” The managers who will suffer in the current climate will be those who underperform and also charge larger than average fees, believes Mr Marshall, whose staff are increasingly positioning themselves to exploit Europe’s distribution channels. “What attracts us to the wholesale and private banking market is its cross-border nature, as opposed to the retail market, where the UK is very different to France and Germany and there are no economies of scale."

Gary Marshall