Buccaneering days are over for Aberdeen Asset Management

By Ian Fraser

Published: Financial Times (FTfm)

Date: September 20th, 2010

Martin Gilbert, fund-management’s deal maker extraordinaire, may have lost his appetite for deals but he has lost none of his enthusiasm for growth. The chief executive of Aberdeen Asset Management, who has led the fund management group for a quarter of a century, said that no further acquisitions are on the menu. “We’ve really got everything that we need.”

The company’s decision to focus on organic growth has, to some extent, been dictated by investors. Some suspect the company’s vigorous post-2005 dealmaking spree, which has been entirely funded by issuance of new shares, has put the dampeners on the Aberdeen share price.

Rae Maie, analyst at JP Morgan Cazenove, said he is encouraged by Aberdeen’s decision to refocus on organic growth. In a note to investors he said: “Should management deviate from a largely organic strategy, a rerating is likely to prove elusive.”

Also post-crisis, financial regulators are being much more vigilant over banks and their capital positions. Asset management firms are also coming under greater regulatory scrutiny, which is likely to make the buccaneering deals of recent past much more difficult.

Even so, Gilbert denies that he has any intention of slowing down. “We’re going to put our foot further on the gas and grow organically and generate cash,” he said. Having reinvented the business as an institutional asset manager since the 2005 acquisition of parts of Deutsche Asset Management, the 55-year-old Aberdonian said “the group’s product suite is complete.”

Aberdeen has extended its presence in a number of growth sectors through a mixture of bolt-on and strategic deals and boosted overall assets under management to £164.7bn. The most recent came in February, when it paid £84.7m for RBS Asset Management. This brought additional assets of £13.5bn, as well as expertise in fund of hedge funds and a platform for growth in the alternatives market. The nascent FoFH group has since raised over £200m for a funds of UCITS III funds product.

“We’d been looking to get into the fund of hedge funds space for a few years, and the RBS deal has given us the opportunity,” said Gilbert. “Few of the world’s leading pension funds have the expertise to construct their own hedge fund portfolios and the fund of hedge funds approach offers the ideal solution – portfolios of funds – constructed by experienced, research-focused teams and portfolios that are sufficiently diversified to mitigate against individual blow-ups.”

The deal followed the £130m acquisition of Nicola Horlick’s Bramdean Alternatives investment company in November 2009, which has since been reinvented as a private equity business to distance itself from the embarrassment of its investment in Bernard Madoff’s $65bn Ponzi fraud.

In real estate, Aberdeen regained a presence in 2008 when it acquired Germany-based Deutsche Gesellschaft für Immobilienfonds (DEGI) and London-based Goodman Property Investors, which had formerly been its own property business. Gilbert said that Aberdeen is today the world’s sixth-biggest property manager, with £25bn of property assets under management.

Gilbert’s biggest and most audacious deal of recent times, however, was the takeover of Credit Suisse Asset Management in December 2008. The parent bank’s urgent need to raise capital and uncertain market outlook enabled Aberdeen to acquire the business for £250m, or just 0.625% of assets under management. The deal has significantly enhanced its presence in markets including Australia, Switzerland and Germany.

The integration of CSAM, which Gilbert said is nearing completion, appears to have been rather brutal. Of the 500-600 people who joined from CSAM, only 100 remain with the business today. Those who have remained were selected on a “best of breed” basis, he said. “Where they were better than us, we kept the people. We really just choose the best teams.”

Aberdeen’s head of equities Hugh Young took over the CS Orient fund from CSAM’s Boon Yeo while Aberdeen’s head of US Equities Shahreza Yusof now runs the CS US Systematic Alpha Equity fund, which has already been merged with the Aberdeen American Growth fund. On the fixed income side CS’s Paul Griffiths was appointed global head of fixed income while CS’s Pierre-Henri de Monts de Savasse was appointed as head of convertibles.

Gilbert said the merging the two groups’ overlapping funds is now “almost finished” and that the integration of the “big complicated, cross-border merger” had been overseen by Aberdeen’s chief operating officer Ken Fry. Overall he said integrating fund management businesses is “dead easy”.

“You don’t need two management teams when you buy an asset manager – the synergies are very significant on an asset management deal.”

Gilbert said Aberdeen already offers some tracker funds, which are run out of its Edinburgh office and that it has considered getting into Exchange Traded Funds, but decided against not to proceed after recognising that such products are “best left to the big guys, the Blackrocks and the big investment banks.

“It’s a different skill set. If we were to go into ETFs the only way of doing so would be to buy a business rather than try and build one. I was speaking to Robbie Fairburn at Blackrock and he said they were considering a start-up in ETFs but he said once they bought Barclays Global Investors, they realised how little they knew.”

Gilbert sounds relieved that, by September 30, Aberdeen will have repaid all its bank debt, will be sitting on cash, and will have just one £125m US bond to repay next year. He said the split capital investment trust crisis, which nearly destroyed Aberdeen in 2002-03, taught him and Aberdeen about the perils of leverage.

“It was the most frightening experience. I vowed from that day on we would never have to breach a bank covenant again. Every purchase that we’ve made in the last five years, we have issued shares, so we’ve made the balance sheet stronger. We’ve strengthened this business very considerably.”

What does Gilbert think about the current state of the markets? He said: “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! So to a certain extent what we’re seeing is everyone’s negative on equities, so equities are going down. People need yield, they can’t keep their money in the bank any longer, government debt is yielding nothing so bonds, property or alternatives are the only place you’ve got to go. We’re well positioned in all these asset classes.”

He said that a weak economic outlook in developed markets such as the UK and USA does not mean there is a shortage of equity investment opportunities. “A really good example where you have a really strong economy, with great growth, but where it’s very difficult to find companies to invest in, is China. The US and UK are the inverse: crap economies but with plenty of good companies.”

Gilbert does not lose sleep about the risk of a second financial crisis. However if there is going to be such an economic Armageddon, he believes Aberdeen is well placed to survive the storm. “You want to be sitting there ungeared with a strong balance sheet, and a reputation as a good, safe, sleep-at-night fund manager, as we have.”

Perhaps with further volatility in mind, he warned asset management to be careful about labeling so-called UCITS III-compliant funds as “absolute return” products. “That is a big risk, particularly when marketing them to retail investors.”

• An edited version of this article was published in FTfm on Monday September 20th. To read article on FT.com, click here

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