Distribution head Campbell Fleming is confident the firm can keep huge mandates while ouflows persist
Standard Life Aberdeen is optimistic that it can hold on to the £109bn mandate it runs for Scottish Widows as the giant asset manager looks to stem a stream of outflows and build its future.
In a wide-ranging interview with Money Marketing, SLA head of distribution Campbell Fleming explains how the recently merged asset management powerhouse is looking to protect its relationship with Scottish Widows after it decided to stop investment management arrangements due to competition issues.
Fleming talks about how the company is dealing with billions in outflows and gives an update on its plans to cut costs post-merger, as well as details on research payment plans under Mifid II.
He also discusses how the firm is combining its product offerings, what fund mergers will mean for clients and what its focus will be in the coming years.
A ‘massive’ relationship
In February, Lloyds decided to end the deal it had with SLA on the management of £109bn of assets, due to competition issues.
Lloyds’ Scottish Widows Investment Partnership funds, which represent around 17 per cent of SLA’s assets, were pulled as the UK bank sees the newly merged SLA as a rival.
In what many considered a direct response to the move, SLA decided to sell its insurance arm to Phoenix Group in a deal worth £3bn and concentrate on asset management.
However, Scottish Widows, by far SLA’s biggest client, will continue to employ the firm for its fund management business until it finds another potential manager.
As a veteran of asset management mergers, including at Columbia Threadneedle Investments, his previous firm, where he was chief executive, Fleming says the public is wrong in thinking SLA has effectively “lost” Scottish Widows’s assets. He says SLA will continue to manage the funds for at least another year.
To keep the contracts, Fleming says SLA will continue to improve performance and provide Scottish Widows with all the services it always offered “at all levels”.
He says: “This firm is trying all it can to put its best foot forward to show that we should still be their investment manager of choice. We think the Phoenix deal removes the competition angle.
“We will continue to improve performance and serve them the way we can. It is a massive relationship. We really want to keep the business because we think they’re good clients.
“The money is with us up to a year and potentially even longer because these things take time to move.”
‘Clients get it’
In August 2017, Standard Life Investments and Aberdeen Asset Management joined forces to become Standard Life Aberdeen, a giant global asset management powerhouse running £655bn of assets.
For a merger of such scale, where many disruptions are to be expected, Fleming says clients have understood the “strategic rationale” behind it and that despite continued outflows from some of its core funds, clients can still find “enormous” opportunities at the firm.
In its full-year results published this month, SLA reported net outflows of £31bn for 2017, adding to the £36.8bn loss for the businesses in 2016.
Outflows from Standard Life’s flagship Gars fund continued, coming in at £10.7bn, up from £4.3bn in 2016 as a result of gross inflows slowdown and more redemptions from investors.
Outflows from investment arm Aberdeen Standard Investments were £22.1bn in 2017, down from £26bn the previous year, as outflows from equity products decreased from £13.9bn to £8.2bn.
Fleming says: “Obviously, some clients have said this was a merger so they want to wait until they see who is running their money… that just happens. We’ve kept all our ratings from consultants. We had 43 buy ratings across the globe. We only had three ratings overlapping and also have 120 Morningstar-rated funds.
“Once we showed this to clients and talked them through the data and reassured them that we continue to invest for a range of different outcomes, because we can, they have been pretty relaxed.”
Fleming says the teams behind Gars and emerging market funds, which have also historically struggled with flows, have been “completely unaffected” by the merger.
Fleming says: “We know some of the competition is going around saying they are doing better. We have also seen that clients stay with you and avoid frictional costs of changing and chasing performance. They actually do better in the long term than they do in the short.
“Every flagship product I have ever seen goes through a period of difficult performance. People see a bit of a performance dip and they think it’s because of the merger. But the reality is for a lot of our core asset classes the teams and the style remains unchanged. What we’re trying to do is really leverage a huge research base that we have got and a common tradition of bottom-up investing, active management and being socially and environmentally aware.”
SLA was still able to generate £80bn in gross inflows across the globe in 2017, with the largest portion coming through equity funds at £16bn.
Fleming says: “After a year from the biggest merger the asset management industry has seen, for us to have a slightly improved picture in the net flow position and to maintain the growth sales at a reasonable rate is a pretty good outrun. I’m not happy with the fact that some funds are still in outflow, but we’ll get there.
“Part of the way we’ll get there is to make sure our sales people spend more time with our clients and understand what they want, and also introduce both of the firm’s existing capabilities to the other client base and continue to work on the innovation front and new product base.”
New funds meet old funds
As a result of the merger, SLA is going through a “rationalisation programme”, meaning it is still working on the funds it will merge. In the meantime, the group continues to launch new funds.
The reduction in the number of funds could allow the company to cut fees and pass the economy of scale on to clients. Fleming is unable to say which funds from the two groups will be merged yet, but says the process could last up to three years.
He says: “When we move those funds to one range we’ll save money and will try to pass as much of those savings as we can.
“We will start to see which funds clients want the most. Gars will stay. MyFolio has been a huge success for us and is growing very well. Our Parmenion business is growing very well too, they are a very persistent business. Parmenion is taking more than £100m a month.”
Fleming says another benefit of the merger lies in the research capabilities the firm has globally.
On top of its in-house analyst resources covering more than 80 countries, Fleming says SLA has put aside around £35m to pay for investment research, as required by the new Mifid II rules.
He adds: “While the merger was going on, we’ve been launching some products that are doing well; index funds, more multi-asset, the liquid alternatives, a corporate bond tracker, an income and a logistics fund.”
In the past five years, Standard Life Investments and Aberdeen have launched 24 funds in total.
Fleming says: “If you’re not launching new funds then you’re not keeping up with the trends and what clients want. If you look at the flows in the industry, more than half go into new launches.”
As told to Money Marketing a month after the merger was announced, the divisional investment structure of SLA will focus on up to six investment strategies within equity, fixed income, factor-based investing, real assets and property.
Fleming says the firm will strengthen its focus on environmental, social and governance investing, as well as smart beta. Fleming says the company will continue to be a global active house, but it won’t rule out launching pure passive funds if client demand surges.
He says: “I don’t see us doing pure passives but it might make sense one day. But we don’t think algorithms have a conscience. We have clients that are much more interested in social and environmental issues, we are starting to see people moving away from indexes, especially when big firms make a large part of them.”
When the deal between Standard Life and Aberdeen was announced in March 2016, the two firms identified £200m worth of “synergies savings” as a result of the merger.
Fleming says these cost reductions will now increase to £250m as a result of the Phoenix deal. He says: “Synergies are on track. We’re getting through the savings we said we would.”
Over the three years from the merger, SLA has said it would decrease headcount by 900 employees across various departments. However, Flemings is tight-lipped about how many people have been made redundant since 2016 or which teams or individuals will eventually leave the firm.
He says: “Last year we didn’t fill vacancies we had. We had some people wanting to retire earlier and take breaks. It has been a smaller number of people who have actually had to move on and wanted to move on themselves. The actual turnover was about 9 per cent.
“We’ve been changing some roles and keep recruiting people in Europe and Asia. Everyone talks about who has left the firm, but they forget who is staying and who is joining.”