By Ian Fraser
Published: BQ Business Quarter
Date: 25 March 2014
Martin Gilbert is one of the corporate world’s great survivors. Between 2002 and 2004, the 58-year-old lived through a crisis that came close to destroying his firm and ending his career. The asset management firm he co-founded through a management buyout in 1983, Aberdeen Asset Management, was up to its neck in the so-called ‘split capital’ investment trust scandal – and the investors it had impoverished were baying for blood.
The crisis saw shares in several Aberdeen-managed split capital investment trusts wiped out. It had been fuelled by a cocktail of weak governance, over-leverage, incestuous cross-shareholdings between trusts and some dodgy fund raisings. Some describe it as a precursor of the banking crisis of 2007-08.
Aberdeen had marketed split caps, savings vehicles which have both capital growth and yield components, as ‘low risk’ but the debacle left 50,000 investors nursing losses of £700 million. As the crisis intensified in July 2002, Gilbert was dubbed a ‘sophisticated snake oil salesman’ by John McFall, Labour MP for Dunbarton and chairman of the Treasury committee – a barb which really hurt – while another MP said the Scotland-headquartered group’s marketing methods were ‘the unacceptable face of capitalism’.
To make matters worse, Aberdeen was at the time burdened with £240 million of debt, a hangover of an acquisition spree in the late 1990s and early 2000s. The group’s share price nose-dived from a high of 725p in early 2001 to 18 pence in 2002, causing its market capitalisation to shrink from £1bn to £85m. There were fears Aberdeen might be unable to service its debt pile and go bust. Gilbert says: “We didn’t really realise how bad it actually was. I never really thought we would go under – but a lot people did.”
Later that year, Gilbert attended a board meeting at the fund management group’s granite-fronted head office in Aberdeen’s Queen’s Terrace. The laid-back Aberdonian, then 47, told the board he was willing to fall on his sword.
“Martin had not been directly involved in the way in which [the split caps] business was run but, quite properly, he was taking full responsibility,” said Sir Malcolm Rifkind, a former Conservative Secretary of State for Scotland, who was a non-executive director of Aberdeen from August 2000 until 2011.
“He told us if we felt it would help he was prepared to go. We thanked him and said that’s something the non-executives would have to discuss. We then came to the view that, although there was a legitimate cause for criticism and he had taken his eye off the ball, there was no suggestion of any failure of integrity or ethical standards on his part. In addition, we came to the judgement that – even though he was tarnished – Martin remained the best asset the company had.”
Gilbert said that, of all the directors on the Aberdeen board at the time Rifkind was “the most robust during it all.” Having served as foreign secretary under Prime Minister John Major, Rifkind had been through the mill of other crises and was cool under fire.
At the time, journalists found Gilbert to be refreshingly open and honest about the pickle he and the company were in. In September 2002, he said it felt like Aberdeen had been hit by an Exocet missile. “It just went in and caused pandemonium and, of course, everyone gets upset, your clients, staff. The whole company just froze for about a year and a half.” Without this self-deprecating approach to the crisis, Gilbert may well have struggled to rehabilitate himself.
The intense media, political and regulatory criticism of Aberdeen eased in October 2002 when Chris Fishwick, the executive director who had run the collapsed ‘splits’ business, was effectively thrown to the wolves. Gilbert explained: “He was the one who ran that area, hence the reason he thought ‘I will do the decent thing’.”
But the prospect of unquantifiable fines and compensation payable to investors who lost their shirts continued to hang over the company’s share price for at least two years. In the end, as part of voluntary settlement brokered by the FSA and Channel Islands regulators, Aberdeen Asset Management paid out £75m in compensation.
The subsequent turnaround in the company and Martin Gilbert’s fortunes has been remarkable. From being a pariah at real risk of extinction, the company has grown to be the largest independent asset management company in Europe. It has done this though a mixture of organic growth – which mainly involves winning investment mandates from institutional investors like pension funds – and a string of opportunistic and keenly priced deals.
In its latest annual results the company said its underlying pre-tax profits for the year to September 2013 rose 39% to £482.9m. Gilbert told BQ the surge in profitability was almost entirely down to strong investment performance. “We’re good at what we do. We’re good at global equities, good at emerging market equities, good at Asian equities. As you know, asset managers are geared plays on the market. If a pound of extra revenue comes in on a fixed cost basis, a lot of it drops to the bottom line.
The performance drove up Gilbert’s pay and those of many colleagues. He was paid £5.1m last year, including a bonus worth ten times his £500,000 salary. Hugh Young, the global head of equities, was paid £5.1m too, including a bonus of 13 times his £352,000 salary.
Corporate governance group Pirc thought the rewards ‘potentially excessive’ and recommended that investors should vote against Aberdeen’s remuneration policy. In the end, however, the protest fizzled out, with 86% of shareholders voting in favour of the group’s remuneration policy at Aberdeen’s 16 January annual general meeting.
Speaking at the meeting , Gilbert said: “Other people are paid more than me in the industry. I am always delighted with my remuneration. If we do a good job for our clients, we do well, if we do a bad job for our clients, we do badly.”
Many attribute Gilbert’s success to his easy manner and self-deprecating charm. Rifkind said: “A lot of people under-estimate Martin because he comes across as laid back – the truth is he is incredibly focused. Very single-minded. Even though he has a personality which is incredibly gregarious and good fun and the sort of person you could easily share a pint with and not realise how senior a financial figure he is.” These are characteristics which, among other things, stand Gilbert in good stead when he is seeking to do deals.
One senior City of London source said “Martin sees the big picture. He has a gift for business. He enjoys it. For Martin, every day is fun. He is constantly looking for new opportunities. But he is not a details man. If he makes the odd mistake, that’s for others to tidy up. He would never micromanage anything. He has others who cross the ‘i’s and dot the ‘t’s.”
Describing his approach to deals, Gilbert said: “What we’re good at is recognising the times to buy, recognising the way the market’s changed and integrating them. We’re never as good as we would want to be at integration, but we’ve got better at it.” He said that to make an integration a success, “you have to make a decision, communicate it early, and implement it swiftly. “
At the height of the split caps crisis 11 years ago, Gilbert and his boardroom colleagues accepted that Aberdeen’s reputation as a retail asset manager was so tarnished it could have no future in this part of the market. So, in January 2003, he sold Aberdeen’s retail fund management business to New Star Asset Management for £87.5m.
“We had to get out of retail,” said Gilbert. “Otherwise we would have lost all the assets. We had to sell it while there was still some value left in the business.”
The turning point however came eight months later when Aberdeen and New Star did a joint ‘carve-up’ takeover of the beleaguered Edinburgh Fund Managers, which had some good franchises but had been haemorrhaging funds owing to poor investment performance and inadequate management and governance.
The deal saw Aberdeen take over EFM’s ‘closed-ended’ business – mainly investment trusts, but not split capital ones – while New Star took EFM’s mutual funds and OEICs, funds targeted at individual investors. In purely financial terms, it was one of the best deals of Gilbert’s life. It also brought talented younger managers like Anne Richards (now Aberdeen’s chief investment officer) and Rod MacRae (now Aberdeen’s group head of risk) into the fold.
Since the EFM takeover, Aberdeen has capitalised on a trend among large banks to offload their fund management businesses. The banks have, to an extent, been forced sellers, as they struggle to stay abreast with tougher post-crisis Basel capital requirements or because the idea of ‘too big to fail’ sprawling financial supermarkets is no longer so acceptable.
So Aberdeen bought the London and Philadelphia-based fixed-income business of Deutsche Asset Management from Frankfurt-based Deutsche Bank in 2005. According to the US magazine Institutional Investor, the takeover, which tripled Aberdeen in size, was ‘one of Gilbert’s biggest coups’. Aberdeen defeated rival bids from Schroders and French bank BNP Paribas with the help of financing from investment bank JP Morgan Cazenove.
In August 2007, just as the global financial crisis was erupting, Aberdeen paid £8.95m for Glasgow Investment Managers. Then in June 2009, Gilbert paid £250m to Zurich-based Credit Suisse for Credit Suisse Asset Management, gaining £35bn of assets to manage. He topped this with an £84.7m deal to buy RBS Asset Management, which specialised in funds of hedge funds, from the state-rescued Royal Bank of Scotland.
Aberdeen also paid £130m for Nicola Horlick’s Bramdean Alternatives investment company in November 2009. The business was reinvented as a private equity specialist as Aberdeen sought to distance itself from the embarrassment of its investment in Bernard Madoff’s $65bn Ponzi fraud.
In commercial property investment, Aberdeen acquired Germany-based Deutsche Gesellschaft für Immobilienfonds (DEGI) in 2008, as well as London-based Goodman Property Investors in the same year. The latter had formerly been Aberdeen’s own property business, which it was forced to jettison in order to ensure it could float away from the splits crisis.
During the rescue and rehabilitation phase, the Aberdeen Asset Management board occasionally had to rein in Gilbert’s deal making tendencies.
Rifkind, who stepped down as a non-executive director in 2011, told BQ: “There was rarely a board meeting when Martin did not offer his views on potential acquisitions… There was a feeling on the board that you mustn’t overdo it – to ensure you had fully and properly absorbed existing acquisitions before starting to contemplate anything beyond that.”
Rifkind added that the board became more cautious about deals following the split caps fiasco. The near death experience of 2002-04 is clearly seared on Gilbert’s consciousness. The pain was deepened because, at the time, Aberdeen was heavily indebted and Gilbert had a consortium of rapacious banks with which to contend. The experience taught Gilbert a crucial lesson. “I vowed from 2002 onwards we would never breach a bank covenant again. Every purchase that we’ve made since, we have issued shares, so we’ve made the balance sheet stronger. We’ve strengthened this business very considerably.”
That meant allowing banks including Credit Suisse to have significant positions on the share register and directorships on the board. Limiting debt has almost become an obsession for Gilbert. Today, Aberdeen has absolutely no debt – “We’re sitting on £400m of cash,” said Gilbert.
In September 2010 Gilbert told the Financial Times that no further deals were planned, saying: “We’ve really got everything we need” and suggested that he would henceforth focus on consolidation and organic growth. It was a pledge that he honoured – but only for three years.
After much media rumbling, Aberdeen last October confirmed it was paying £650m for Edinburgh-based Scottish Widows Investment Partnership. For Gilbert, it was a tie-up that was too good to miss, with cost savings arising from the proximity of its existing £50bn Edinburgh based investment operation at 40 Princes Street (itself built on the takeover of Murray Johnstone in 2000 and EFM in 2003) to SWIPs bigger Morrison Street operation.
With £136 billion of assets under management, SWIP is the largest takeover Gilbert has ever made. When added to Aberdeen’s existing £196 billion of assets under management the deal will take the enlarged group’s assets under management to more than £330bn, propelling it past Schroders as the biggest listed investment group in Europe. The deal, expected to complete at the end of March 2014, has many advantages for Aberdeen one of which is it gives it a stronger position in less volatile assets classes included fixed income.
Aberdeen was able to see off rival offers from Sydney-headquartered Macquarie Group and Montreal-based Royal Bank of Canada since the vendors, Lloyds Banking Group, had a preference for a partner with an established UK business.
Lloyds will end up owning 10% of Aberdeen’s equity, cementing a distribution alliance which sees the state-rescued bank – which plies its trade under brands including Bank of Scotland, Halifax, Lloyds Bank – becoming a conduit for ‘asset gathering’ for Aberdeen. While generally positive about the deal, Nic Clark, an analyst at stockbrokers Charles Stanley, said “There will be some concern about asset retention following the deal and much will depend on how the relationship with Lloyds develops.”
Speaking at Aberdeen’s annual meeting in January, Gilbert said Aberdeen had ‘learned a lesson’ when they bought businesses from RBS but were unable to benefit from the growth of its wealth business, including Coutts & Co and Adam & Company. “We structured the transaction more cleverly than in the past,” he said.
Gilbert declined to respond when asked if SWIP had lost its way as an asset manager prior to the deal, saying only: “I think [Lloyds CEO] Antonio Horta-Osorio realised that banks are not great owners for these sorts of businesses and he felt that, from the clients’ point of view, it would be better if it was merged with us.”
The deal takes assets managed by the combined Aberdeen/SWIP operation in Edinburgh to £170bn. This means Aberdeen’s Edinburgh operation will be about the size of Standard Life Investments. It will also mean half of all Aberdeen’s total assets will be managed from the Scottish capital. A source close to Gilbert said that, despite the noises that have been coming out of Scotland based financial institutions including Standard Life and Alliance Trust, the firm has no plans to turn its back on Scotland should the country’s voters vote for independence on September 18.
Asked whether all the group’s Edinburgh-based employees would be housed in the same building, Gilbert said. “Eventually it will be under one roof, we’re just not sure which roof.” Aberdeen’s Edinburgh office is located overlooking Princes Street, directly above a branch of H&M Hennes & Mauritz. SWIP is at One Morrison Street opposite the eponymous insurance company, which Lloyds still owns.
Gilbert says, “It’s amazing. When we bought Hugh Young’s business they were at £90m and we were less than £200m. When we did Prolific [buying Prolific Financial Management from Scottish Provident in 1997] we were £2bn and they were £4bn. The figures have become so vast it’s almost become incomprehensible.”
Aberdeen has catapulted itself into the big league – it is now the largest quoted asset management firm in Europe and the sixth largest independent asset manager in the world. But it remains a David compared to the Goliaths of the industry. The US firm BlackRock has assets under management of £3.5 trillion, Vanguard £1.2 trillion and Fidelity £1.14 trillion.
Gilbert believes the SWIP deal, the largest in Aberdeen’s 33 year life, gives the company the critical mass to take on such Goliaths on their native soil – it takes overall assets under management above the psychologically important $500bn threshold. “Half the world’s AuM is in the US so it’s vital that you have a big presence there in terms of distribution. And it is something we have been building up.” In the United States Gilbert is more inclined to grow organically than by acquisition, saying he does not envisage acquiring a US asset manager. “No I think culturally that’s very difficult.”
As a result of the global financial crisis, which hit all financial stocks, Aberdeen Asset Management’s shares broadly halved in value between May 2007 and October 2008. While clearly serious, this was a much lesser fall than that experienced by most banks.
And the company’s shares rebounded strongly on the back of investors’ faith in Gilbert and his revised business model – which boils down to delivering good investment performance to institutional clients worldwide. The shares rallied during 2012 and 2013, peaking at an all-time high of 492p in November 2013.
However, they have since fallen back to 382p on 10 March 2014. That 22% slide was precipitated by City fears of an exodus of investors’ cash from emerging market equities – which was in turn triggered by the decision of the US Federal Reserve to call time on its quantitative easing progamme.
The ‘tapering’ or unwinding of QE, first announced by Ben Bernanke in May 2013, and also pursued by his successor as Fed chair Janet Yellen has caused palpitations across the globe, with flows of cheap money into the emerging markets going into reverse. Currencies and investor confidence in emerging countries including India and Brazil have taken a hammering, and the uncertain global backdrop became even more uncertain after Russia started its rough wooing of Ukraine.
One knock-on effect was a 3% fall in Aberdeen’s assets under management. They fell to £193.6 billion at the end of December. Speaking at the annual meeting on 16 January, Gilbert said: “We’re seen as a proxy for emerging markets which is fair enough. But a large percentage of our business is not related to emerging markets and the SWIP transaction helps that enormously.”
Even since the splits crisis subsided in 2005, there have been some bumps in the road for Gilbert. Last September, the Financial Conduct Authority, one of two successor bodies to the FSA, fined Aberdeen £7.2m for failing to protect clients’ money. The regulator said that funds placed in money market deposits with third party banks between September 2008 and August 2011 were incorrectly labelled and not subjected to the correct client money rules.
Gilbert said: “We were depositing client money with various banks overnight in order to get a better rate. And we booked them wrongly – we booked them as Aberdeen Asset Management. That was basically it, and also we did not have the right documentation in place. No-one lost money, but it was sloppy administration.”
Another embarrassment for Gilbert personally came last year when his chairmanship of the Aberdeen-based transport company FirstGroup ended somewhat ignominiously. The company had amassed debts of £2bn after borrowing to buy Laidlaw International, the parent iconic US coach company Greyhound in February 2007.
Gilbert admitted: “We made a mistake clearly not funding that acquisition properly but we’re speaking about the biggest surface transport company in the UK and US, built from nothing. I know FirstGroup has had a bit of difficulty but it’s still a great Scottish company. And, as you know, I wanted to do the rights issue two years ago, when Tim O’Toole took over as chief executive. The finance director at the time was adamant that would not be necessary. My mistake was that I didn’t push hard enough for that.”
In July last year, 23% of FirstGroup’s shareholders voted against the reappointment of Gilbert as chairman and 29% voted against the remuneration report. He said, “Quite rightly they were pretty annoyed.”
Aberdeen owes its strong position in emerging market equities to a far-sighted decision taken in the early 1990s. The firm’s Far East equities fund management team led by Hugh Young, who joined Aberdeen as part of its acquisition of Sentinel Asset Management in 1988, decamped to Singapore in 1992. As the Asian Tigers started to roar, Young and his team had a ringside seat, and were much better placed to spot companies with strong growth potential and emerging regional trends.
Asked why the office relocated to Singapore, as opposed to the more obvious regional hub of Hong Kong, Young said: “It was quieter, more thoughtful and longer term. It was a place where we could make plans for the next 10-20 years, which mirrors how we invest.”
One senior City source said: “Martin was early to see the opportunities in Asia and gave his fund managers the freedom and flexibility to build an enduring business there.” Gilbert is fulsome in his praise of Young, describing him as “the Warren Buffett of Asia”.
He added: “as head of equities, Hugh made the company what it is today. He just buys stuff and holds it. He doesn’t panic. He is really a bottom-up fund manager, a stock picker. He finds macroeconomics irrelevant, preferring to concentrate on the companies. Hugh has been my friend and the guy I’ve relied on throughout my career to manage the money.”
Young is one of three senior managers at Aberdeen who have worked alongside Gilbert since the 1980s. Like Gilbert, the other two were educated at Robert Gordon’s College in Aberdeen – finance director Bill Rattray and deputy chief executive Andrew Laing. Gilbert said that the other two “deserve as much credit for what has been achieved as I do.”
Gilbert added: “The only thing I’ve learnt from my asset management career is that when everyone’s negative on something buy it, and when everyone’s positive, sell it!”