Standard Life and Aberdeen to join forces: what it means for investors

Kyle Caldwell
6 March 2017

Fund managers Standard Life and Aberdeen Asset Management have announced plans to join forces to create one of Europe's largest asset managers.

Over the weekend the groups announced they were in discussion over a possible merger, and it seems talks went smoothly as an early stock exchange announcement on Monday (6 March) confirmed a deal had been struck.

The merger will result in combined assets under management of £660 billion, which the firms said will combine 'complementary strengths to create a world-class investment group'.

Under the deal Standard Life will acquire Aberdeen for around £3.8 billion. Once the merger is completed Aberdeen's shareholders will own 33.3% of the combined group, while Standard Life's shareholders will have a stake of 66.7%.

This reflects the fact that Standard Life is bigger than Aberdeen, with a market capitalisation of £7.5 billion.

The combined group will have two co-chief executives - Standard Life's CEO Keith Skeoch and Aberdeen's Martin Gilbert.

Skeoch said the combination of both businesses will 'create a formidable player in the active asset management industry globally', while Gilbert described the merger as bringing 'financial strength, diversity of customer base and global reach'.

It is expected both Standard Life and Aberdeen names will remain in place following the merger.

Why are the two firms merging?

For the past five years or so passive funds, which aim to mirror the performance of a particular index, have been growing in popularity, with both financial advisers and private investors who choose to go it alone.

A price war breaking out between the biggest tracker fund providers has helped fuel demand. Some tracker funds from the likes of Vanguard, BlackRock and Legal & General now cost as little as 0.1%.

In contrast, actively managed fund charges have largely stayed static, with a typical equity fund having on ongoing charges figure of 0.9%.

At a time when there is growing scepticism over the merits of active funds, in part due to the existence of scores of 'closet tracker' funds that are failing to add value, the active management industry is feeling the pinch and is making less money than it did in the past.

Rebecca O'Keeffe, head of investment at our sister website Interactive Investor, explains: "The move by Standard Life to buy Aberdeen is a major attempt to try to build their defences as the active management industry comes under increasing pressure from lower-cost passive managers.

"Although the UK is still dominated by active managers, the move towards passive funds is growing rapidly (at Interactive Investor, 24% of existing fund assets are now passive, but nearly half of all new fund purchases in Sipps are index trackers).

"As investors become more cost-conscious and aware of the deleterious compound effect of higher fees, active managers are going to have to work hard to try and stem the tide, attract new money and secure their financial futures."


What does the deal mean for investors?

Both firms stress the deal is complementary and this is indeed true. Aberdeen is renowned for its strong foothold in the emerging market and Asia Pacific regions, whereas Standard Life has various offerings in developed markets, particularly in the UK.

But its biggest fund by a fair distance is its absolute return fund - Standard Life Investments Global Absolute Return Strategies - known as GARS. The fund is a big favourite among financial advisers and has £25 billion in assets.

As well as both firms running various open-ended funds or unit trust, they also operate a number of investment trusts - 25 in total - with combined assets of just over £10 billion.

Inevitably there will be some fund consolidation, with fund mergers or even fund closures taking place in order to cut costs in areas of commonality. Laith Khalaf, senior analyst at Hargreaves Lansdown, said the main places of overlap are in multi-asset, bonds and property.

"Standard Life brings some stability to the table for Aberdeen, which has seen 15 quarters of consecutive outflows (due to investors pulling money from the firm's emerging market funds), and which will also now benefit from distribution through Standard Life's workplace pension.

"Aberdeen meanwhile offers Standard Life a quick route to the big boy's table by almost doubling assets under management."

Analysts at Numis, an investment trust analyst, do not expect any closed-ended fund mergers.

Numis analyst Ewan Lovett-Turner said: 'We do not envisage any significant impact from the merger on most of the individual investment trusts (which have independent boards), although there are some areas of overlap for the combined group."

The companies expect £200 million of annual cost synergies within three years of the merger taking place. In theory some of these cost savings may be passed on to investors in the form of lower fund charges.

But there are no guarantees. When it comes to active fund management there is only a small number of examples where economies of scale result in lower charges, with Baillie Gifford one of the few firms to reduce fees when assets grow.

Indeed, research by SCM Direct, an investment manager that calls for complete transparency of costs and holdings in the UK investment and pension industry, found 70% of actively managed equity funds charge an identical annual management charge of 0.75%.

Gina Miller, co-founder of SCM Direct, says this represents evidence of anti-competitive behaviour within the active UK fund management industry.

"The regulator should investigate to determine whether some form of price collusion, whether formally or informally, is being undertaken by major fund groups," says Miller.

Ryan Hughes, head of fund selection at AJ Bell, adds: "If the merger goes ahead, investors can expect a long period of fund range consolidation as the combined group looks to cut costs.

"This could create a period of uncertainty but until more news becomes available investors would be wise to stay patient.

"This merger is a continuation of consolidation in the asset manager industry and I would expect to see more as the market appears to move towards huge combined groups or small specialist boutiques."

This money was originally written for our sister magazine, Money Observer.

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