Standard Life Aberdeen faces passive pressure

Pretty much standard

Despite an auspicious first week, Standard Life Aberdeen shares continue to signal investors are less than assured about the newly combined company.

The stock gained as much as 2.8% last week, though closed on Friday up a more modest 1.8%. Standard Life (Aberdeen) has advanced some 16% since 2nd March, when Standard Life and Aberdeen Asset Management announced their intention to merge. That’s slightly more than the 13% rise by a Thomson Reuters index including leading active investment managers, of which SLA is now the largest. In other words, Standard Life Aberdeen’s efforts to fight off ‘passive’ competitors are widely expected to bear only modest fruit.

It’s worth noting that shares in the Aberdeen bit of the new co. rose around 30% between the start of the year and about a fortnight ago. That was to be expected. Its investors received the best half of the ‘merger’ deal as Aberdeen equity was diluted the most. But erstwhile Standard Life stock now represents the combined group, and that is up pretty much in line with peers.

SLA NPV

That reflects conservative merger synergies. SLA officially projected these would be around £200m a year within three years of completion, with an initial cost of £320m. On that basis, the merger returns a positive net present value, £75m—before tax—only after the fifth year. On a perpetuity basis, Thomson Reuters calculates net present value of savings as worth $1.3bn. SLA will of course keep facing ‘passive’ pressure before synergies kick in, another small red flag. For example, Standard Life's flagship £44bn Global Absolute Return Strategies fund saw £5.6bn net outflows in the first half, despite making a better than expected £362m operating profit. Such pressures will probably moderate, though it’s difficult to forecast when. Even after factoring them in, it looks like shareholders don’t believe £200m in savings each year will be sustainable.

Second-half slippage

Flows on the Aberdeen side have been just as precarious over the last few years. Its emerging markets exposure is a frequent source of volatility. SLA's joint-CEO structure is another niggle that may have capped its stock. These set ups sometimes work for global companies, but major investors don’t like them. There’s too much room for ego-fuelled disruption.

Of course, there’s scope for the new group to set new standards that eventually impress scepticism away. SLA’s below-peer group average forward rating also offers leeway. But short of a strongly accretive growth spurt, Standard Life Aberdeen’s shares are unlikely to be the dons of sector by year end.