The big rout in emerging-markets stocks has been painful for many investors. Few have suffered like Martin Gilbert.
The energetic Scot built Aberdeen Asset Management into the U.K.’s largest listed fund manager through a string of acquisitions and a hot hand in emerging-markets equities. Lately, however, the firm has lost its touch. A spell of significant underperformance combined with developing-markets woes has sent money rushing out the door and allowed London rival Schroders to overtake Aberdeen in terms of size and profitability. The firm had net outflows of £33.9 billion ($51.4 billion) in the 12 months ended September 30, up from £20.4 billion the previous year, reducing total assets under management by 12.5 percent, to £283.7 billion. Aberdeen’s stock is the second-most-shorted among constituents of the FTSE 100 index. There’s talk in the City that the firm could be vulnerable to a takeover.
Gilbert is not one to panic, though. “I learned a long time ago not to worry about the things I can’t influence, so I don’t worry about markets,” he says. “What I do worry about is retention of talent. That is the single most important thing for us as a business: Retain our talent and make sure they stick to the process we’ve told our clients that we’re going to follow.”
Gilbert has earned the right to such confidence. Since co-founding Aberdeen through the purchase of a tiny investment trust in 1983, he has built the firm with a fundamental, long-term approach to investing and a drive for scale. He has acquired more than 50 businesses over the years, ranging from £138 billion fixed-income specialist Scottish Widows Investment Partnership in 2014 to such niche players as Arden Asset Management, a $10.3 billion, New York–based fund-of-hedge-funds manager purchased in December.
Along the way he has suffered his share of setbacks, including bets on U.S. mortgage-backed securities and European financial stocks that went sour in the 2008–’09 financial crisis and the blowup of a specialty vehicle known as a split capital trust in the 2001–’02 bear market that had Aberdeen flirting with insolvency. Each time the firm has bounced back bigger and stronger.
Recovery may be harder this time. For one thing, even the firm’s top strategists don’t expect the markets to come to the rescue. CIO Anne Richards sees soft global growth limiting the upside for investment returns. Market interventions by Chinese authorities in recent months are “diminishing confidence rather than instilling confidence,” she says, while a strong dollar is likely to sap the strength of the U.S. economy. Forecasts of as many as four rate hikes this year by the Federal Reserve’s policymaking Federal Open Market Committee are likely to prove wildly optimistic, Richards thinks: “I’d be surprised if we get more than one.”
Aberdeen sits in the uncomfortable middle of the marketplace, dwarfed by global giants like BlackRock, UBS and Vanguard Group but lacking the nimblenesss and focus of a boutique. Gilbert, 60, will need all of his energy and acumen to get the firm growing again in such a challenging environment.
Earlier this decade Aberdeen capitalized on the craze for all things emerging markets like few others. Its EM portfolios outperformed the MSCI Emerging Markets Index by an average of 500 basis points a year between 2008 and 2012. “They were the darling of the stock market because they were the emerging-markets house of choice,” says Haley Tam, an analyst who follows Aberdeen at Citigroup in London. The firm was whipsawed by the 2013 downturn in emerging-markets equities, though, and it has struggled to regain its balance. Aberdeen did beat the MSCI index by 174 basis points in the 12 months ended October 31, but investors didn’t exactly cheer given that the firm’s portfolios were down by 9.4 percent.
“There’s not much that we can do about that,” says Devan Kaloo, the longtime emerging-markets-equity chief who was promoted to global head of equities in July. “We are several years into a down cycle for emerging markets.”
Kaloo knows full well how far sentiment can swing in regard to emerging markets. Few investors would even listen to the argument for emerging-markets stocks when he began managing money in 1994, he recalls. Fast forward to the gung-ho days of 2011, when, he says, he had to counsel a Danish pension fund against devoting 80 percent of its equity allocation to emerging markets. Kaloo is confident that the current setback is cyclical rather than structural and that the bearishness will run its course. He contends that the U.S. expansion is getting old, which should make it difficult for the dollar to extend its gains: “That is not a bad environment for emerging markets.” To clients who question whether the firm’s bottom-up process of “buying great companies cheap” still works in today’s environment, Kaloo urges patience. “We’re very clear about what we’re trying to do,” he says. If emerging-markets equities are “not at the bottom, we’re getting close to it.”
A turnaround can’t come soon enough. The combined effect of outflows and declining markets caused Aberdeen’s equity assets to shrink by a quarter in the financial year ended September 30, to £80.1 billion. Group pretax profit was flat at £491.6 million in that year, but the decline in assets is ominous: The firm earns average fees of 66.4 basis points on equities, compared with just 21.2 basis points on fixed income.
One of Gilbert’s responses to the pressure is Aberdeen Solutions, a business that provides broad-based asset allocation advice and portfolio management to institutions. “As a word, it’s not great, but nobody’s come up with a better one,” says CIO Richards. She oversees the unit, the firm’s largest, with £119 billion in assets. More than two thirds of those funds are invested in multiasset strategies, with the remainder in quantitative investments and alternatives.
With investors increasingly looking to unconstrained strategies to generate returns in a low-yield world, Aberdeen is hardly alone in its multiple-asset-class approach. Richards sees a bright future for the unit: “Asset allocation is always critical at turning points in markets.” Yet even Solutions suffered net outflows in the latest year, totaling £9.8 billion. By contrast, Schroders had net inflows of £2.6 billion in multiasset products in the first nine months of 2015. “That’s clearly where they see their future,” Citigroup’s Tam says of Solutions. “We’re just not seeing significant flows yet.”
As part of the Solutions drive, Gilbert has been building up Aberdeen’s alternatives offering. In addition to the Arden deal, he snapped up FLAG Capital Management, a Stamford, Connecticut–based private equity and real asset specialist with $6.3 billion in assets, in August.
“We want to be a universal provider,” says Andrew McCaffrey, who came to Aberdeen from BlueCrest Capital Management in 2011 to build up the alternatives business. At the time, alternatives generated just 1 percent of the firm’s revenue. Today the ratio is approaching 10 percent, and Aberdeen manages just under £30 billion in hedge funds, private equity, private markets and infrastructure.
Managers need a wide range of capabilities to meet institutional investors’ needs, and the recent deals give Aberdeen a credible platform, particularly in the important U.S. market, says McCaffrey. “The world is changing,” he notes. “To sit with one lens is very dangerous.”
The acquisitive Gilbert is always looking to increase his firm’s capabilities. But with Aberdeen’s stock price having plunged by 56 percent from its April 2015 high to close at 223.60 pence on January 19, his firepower is constrained. So he’s looking for opportunistic bolt-on deals to strengthen the alternatives business. “We would like a real estate manager in the U.S.,” he says. “We would like to be bigger in loans.”
Most of all, Gilbert would like to be on his front foot again, with Aberdeen growing once more.