Aberdeen-Standard Life tie-up a ticket to giants’ playground

In his office at Aberdeen Asset Management, tucked behind Cheapside in the shadow of London’s St Paul’s Cathedral, distribution boss Campbell Fleming looks content with his lot. In the twilight of his career, the seasoned campaigner is about to increase the size of his sales army by at least 50 troops, with 

the completion of the merger between Standard Life and Aberdeen looming ever closer. Regulatory approval has now been obtained.

Two powerful asset management companies, both regularly in the news, are about to join forces to create a European giant running £670bn ($880bn) in clients’ assets and it is Mr Fleming who will lead the 500 strong sales force for the new incarnation. 

This gives his existing staff, until now mainly dependent on peddling Aberdeen’s expertise in emerging markets, access to Standard Life’s flagship Gars [Global Absolute Return Strategies] franchise. The latter has been plagued by a recent run of poor performance, but there are group plans to boost returns across equities in particular.

“One of the things I was hearing from many clients is that we were too heavily dependent on the equities franchise. Standard Life was receiving the same criticism about Gars,” says Mr Fleming, previously chief executive at Columbia Threadneedle and distribution head at the funds arm of JP Morgan. 

“Now we will have a big bonds and equities business, with some real estate and property in between. This is a much more diversified, meaningful asset management proposition, which is reassuring for clients.”

His optimism has been further boosted by a recent sit-down with his distribution counterparts at Standard Life’s head office in Edinburgh. In the much-anticipated meeting, both parties showed their hands, revealing their top 50 clients, and finding to their amazement that only four of them crossed over. 

“This means the opportunity is quite compelling,” says Mr Fleming. “We have totally different growth histories and channels. Compared to Standard Life, many more of our clients are international. I was quite surprised, expecting a much greater overlap. It means the opportunity to expand these relationships will be quite a big one.”

This entails a fast education for many of his sales staff, previously concentrating on selling a handful of blockbuster products, particularly those concentrated on emerging market returns. 

“The smart ones get it and they understand that if they are not going to do it, then somebody else will,” says Mr Fleming, whose company faces a cull of 800 staff over three years following the merger, although it is hoped much of this will be taken up by staff retiring or taking a career break.

He appreciates that learning the finer points of Standard Life’s fixed income and derivatives-led strategies may be an uphill task for some Aberdeen staff, but believes it is an excellent opportunity for them to boost their skills and expertise.

“Even if we don’t merge, there are still things we like and don’t like selling. My sales people need to think more about fixed income and alternatives. They need to learn new skills and stories, not just talk about how Hugh Young [Aberdeen’s renowned veteran boss of its Asian investment business] invests money. There are other things they need to get their heads around.”

In fact, most distribution staff are keen to get their hands on the new stock which the merger promises them, says Mr Campbell, who spends much of his time during site visits telling his staff to be patient. “They are all asking me: ‘When can I start selling this stuff to my clients?’”

Size matters

This expansion of the product inventory is vital for the health of major asset managers, believes Mr Fleming. The trend among private banks and distributors in general, he says, has long been moving towards the fund sellers dealing increasingly with a golden circle of mega-brands, with the days of true open architecture now a distant dream. The merged company can capitalise on this.

“Wherever we go now, clients are looking to do more with fewer partners. Unless you can provide a broader product range and do it well, you will be forever consigned to the B-list of players,” says Mr Fleming.

This new reality leaves no space for the mid-sized firms, which once thrived as asset managers, the trend now favouring behemoths such as BlackRock, Vanguard, Amundi – which has recently swallowed up the Pioneer brand – and his own almost merged entity of Aberdeen Standard Investments.

“If you are not in the top bracket or a tiny boutique, rather than vying with the global players for big-ticket business, you are just competing with hundreds of others for crumbs,” says Mr Fleming. 

The combative, expatriate Australian is dedicated to creating a “British power-house” in asset management, able to compete with global players by accelerating the growth plans of two already famous fund firms. “By combining, we can recognise and negotiate the industry headwinds rather than simply ignoring them.”

Taking on the passives

One of the challenges for this new combo of active asset managers is how to fight back against the low-cost passive giants taking so much new business in both the US and Europe. This will mean re-engineering some active products in order to take the battle to the ETF fraternity.

“Passive is a major challenge to us,” admits Mr Fleming, who is looking at how to make the group’s £65bn active quant business more attractive to potential clients. “Creating a smarter beta-type offering will be important to us. What other industry in the world says ‘pay us this money just to take the average?’ Let’s face it, paying fees for a pure-play passive beta product is fundamentally sub-optimal for most clients.”

The plan in the group lab is currently to create a cheaper, active twist on beta products, creating more value for clients. “Imagine if you went to a National Health Service hospital and they told you they are only going to refer you to an ‘average’ doctor! When it comes to financial and physical well-being, people are not happy to settle for just the average and they are prepared to pay a little more.”

The passive versus active battle is far from over, according to Mr Fleming, with the business models of the two sides soon to lock horns. “The revenue basis of the passive players is to stack it higher and sell it even cheaper. But this mass asset gathering is hiding their decimation of margins. We can achieve a much better revenue mix with a smaller sales volume.”

With investment and distribution staff currently stationed in around 25 different locations, serving 50 countries, performance must improve to keep profits healthy, says Mr Fleming. “It’s an expensive business model to maintain, but if we are going to charge active fees, we have to be able to justify this. When you have a headcount of nearly 9,000 people, it’s not a cheap undertaking.”

One way this is being done is by adding an extra layer of quantitative screening to the equity research function. “When we position the equity portfolio, we are increasingly focused on improving ‘sell’ disciplines and how we invest. We are starting to come through with improved performance, with clients respecting that we are long-term active investors. When people buy Aberdeen processes, they really know what they are getting.”

The key trends among private banks he deals with is an increased allocation of client assets to higher alpha-generating alternative products including real assets and infrastructure funds. “They will now be able to come to one single shop and get all the things they need, knowing that our client relationships are good and our services are good.”

If anything, he is currently talking down his firm’s emerging markets heritage, concerned that the so-called ‘Trump bump’ may just be a temporary boost for the sector. “Depending on what your needs are, emerging markets might sit well, but we now want people to understand how all our capabilities work. We are moving away from a conversation about a single strategy or market.”