It has been a rough few years for UK fund management giant Aberdeen Asset Management. Bruised by the slide in emerging markets, the performance of some of its flagship funds has waned, prompting investors to vote with their feet.
For those investors who remain, the question is whether this is a temporary blip for an otherwise skilled investment house or a sign of entrenched problems.
The group has seen £16.4 billion of redemptions since the start of 2016, while assets under management fell to £301 billion at the end of June, from a high of more than £320 billion at the time of the merger with SWIP in early 2014.
The loss of high-profile mandates such as that of St James's Place - which removed Aberdeen's Hugh Young as manager of its £1.3 billion SJP Far East fund - and the temporary closure of its property fund have seen the group in the headlines for all the wrong reasons.
EMERGING MARKET EFFECT
This is a headache for chief executive Martin Gilbert, but investors will be far more concerned about the performance of some of Aberdeen's flagship funds.
Long-term performance remains good, but some of its most high-profile and well-respected funds - Murray International, Asia Pacific Equity and Emerging Market Equity - have had a lengthy soft patch that has seen them slip down their respective sectors' rankings.
The group's focus on emerging markets has played a role in its weakness. Emerging markets had a torrid time as the prospect of higher US interest rates loomed.
The theory was that rate rises would inflate dollar-denominated debt held by emerging market countries and weaken their economies. The rout in commodity prices also dragged emerging stock markets lower.
Since the start of the year, as it has become clear that the US Federal Reserve is in no hurry to push through further interest rate rises, emerging markets have performed much better, and this has been reflected in the performance of some of Aberdeen's funds.
The Emerging Market Equity fund is back up to second quartile. Nevertheless, the Asia Pacific Equity fund is still trailing its sector, bad news for a group that prides itself on its Asian equities capability.
NOT THE WHOLE STORY
Hugh Young, managing director at the group's Asia business and architect of the firm-wide investment process, argues that while the emerging market focus has been part of the problem, it is not the whole story.
'At a simple level, when we look at the performance of emerging markets versus the US, the US dollar and US markets have been strong. We take a straightforward approach: we want a bundle of the world's top companies, irrespective of their location.
'Does the US really have 60 per cent of the world's best companies, as the index would suggest? We don't think so, and that means we tend to be underweight the US versus the benchmark across our portfolios.
'There has been fallout in some emerging markets - for good reason, in some cases. Brazil, for example, got into a mess. But some emerging markets are as solid as they have ever been - India, for example. The valuation differential became very distorted, and we saw it reverse this year.'
Quantitative easing and the liquidity it has created have not been kind to Aberdeen's investment style. Although Aberdeen is not a 'value' manager, it is price-sensitive, and paying large multiples for growth is not in its investment DNA, says Young.
'Aberdeen is not a natural buyer of some of the stocks that have performed best in recent years: Amazon, Google, Facebook,' he explains.
'We are always wary of companies that are priced to double earnings over a short period. Some have done exceptionally well, and we've missed out on those. It may be overly simplistic, but we're looking for 10-20 per cent growers on 10-20 times earnings.'
Young is still concerned about continued quantitative easing. 'We are a fundamentals house, so we worry about the huge distorting effect of quantitative easing. My experience in Asia was that when a similar thing happened, [the market] was forced to readjust.
'Distorted asset values are a concern. A lot of pension funds are sitting in gilts or treasuries. This is why markets get buffeted by the US Federal Reserve.'
Is he ever tempted to conclude that markets will not revert, that fair valuations are a thing of the past? Young replies: 'Our belief is still that markets will appreciate the fundamental characteristics of a company in the end.
'The global economy is weak, and the things we look for in a company - strong cash flow, strong balance sheet, good management, the ability to return money to shareholders - should all help businesses grow over the long term.'
All this suggests a more cyclical problem for Aberdeen, one that will work itself out over time. But the group will have to contend with the problem of perception.
Redemptions in themselves create a problem for active managers and can become self-perpetuating. If a fund's management faces a flood of redemptions, it has to make sales.
This can be difficult to manage and may weaken performance. Investors considering whether they should remain in Aberdeen funds may need to be reassured that redemptions are slowing. For the time being, there is no sign of that, but pressures may ease as emerging market performance improves.
POORLY POSITIONED FUNDS
It is clear that some of Aberdeen's funds have been poorly positioned. It is perhaps informative to look at the performance of Aberdeen's emerging market-focused rival, Stewart Investors (formerly First State).
Both have highly respected, long-established management teams, but Stewart Investors has stayed at the top of the league tables. Stewart Investors' Emerging Markets fund has been far more defensive: it holds nearly 12 per cent of its portfolio in the UK, for example, and another 8 per cent in cash.
The Aberdeen Emerging Markets fund has been invested in more 'difficult' emerging markets such as Brazil. Some may argue that Aberdeen was truer to its emerging markets mandate; others may suggest that Stewart Investors was better prepared for the downturn.
These problems are more structural than cyclical, but Young is not planning any changes to the group's well-established process. He says that any recovery in fund performance has been down to a shift in market perception rather than any change in Aberdeen's approach.
'We haven't bought a lot of new stocks. Many companies we've been holding for five to 10 years, some for more than 20 years. This is more a macro change in markets rather than anything specific to Aberdeen. We continue to invest as we always have. There are always some mistakes, but the underlying companies have fulfilled our expectations.'
He is still a believer in the emerging markets growth story: 'I believe emerging markets are still the engine of global growth. Certainly, growth is not as strong as it was 10 years ago, but if you look at multinational companies - Nestlé, Unilever - and where they are planting their roots, it tends to be in emerging markets.'
EASY TARGET, BUT DON'T WRITE ABERDEEN OFF
Gavin Haynes, investment director at Whitechurch Securities, says that while he holds no Aberdeen funds at the moment, investors should not write off the group.
'There has been some recovery in emerging markets, which is positive for the business. Hugh Young has been the driver, and the long-term performance record has been very successful. Style-driven funds will have periods of underperformance. They are well-resourced and have a good team.'
This is important. Usually when a management group implodes, it is common to see high-profile departures. Apart from chief investment officer Anne Richards, who left in February to take up a chief executive position at M&G, the team remains intact, suggesting that internally people aren't panicking.
James Calder, head of research at City Asset Management, suggests Aberdeen may be an easy target: 'It is easy to take aim at a group that has taken a lot of assets and then put poor performance down to that.
'That said, if you are a large asset manager, you want killer products in your core offering, to stand out from your peers. At the moment Aberdeen doesn't have that, but it has made some changes at the top of its retail business. You can assume Aberdeen is well and truly aware of any problems.'
And then there is Brexit to contend with. Although Brexit has been seen as bad news for UK fund managers, the firms Aberdeen naturally invests in are international in their focus.
Young says: 'It is much like Aberdeen itself. We are listed in the UK, but a large chunk of our earnings comes from Asia or the US and is denominated in currencies other than sterling. Brexit drove our earnings up in sterling terms, as it did for many of the companies we own.'
For investors there are no obvious conclusions. Some flagship funds appear to be returning to health, but not all. Investors will need to decide whether this is a temporary loss of form or a more permanent weakness.
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