It seemed like a great idea at the time, but three years after the merger that created Standard Life Aberdeen, and as a global depression looms, what are the chief executive’s thoughts now? By Mark Latham.
The plan to create Standard Life Aberdeen and one of Europe’s largest asset managers was famously conceived by Keith Skeoch and Martin Gilbert over a burger and fries in 2017.
The chief executives of Scotland’s two largest asset managers thrashed out plans for the £11.3 billion (€12.7 billion) all-share mega-merger in a private room at Edinburgh’s Balmoral Hotel and became co-chief executives of the new entity when the deal completed in August that year.
The tie-up between the 195-year-old former insurer and the 37-year-old emerging markets specialist had been seen as the best way for the two mid-sized active fund houses to take on the rise of the passive asset management giants, as well as increasing competition in the industry generally.
So, almost three years after the deal went through, does Skeoch still believe that the merger of Standard Life, a developed markets and multi-asset specialist, and Aberdeen Asset Management was a good idea, and how successful has it been?
“We have seen progress, but I have always said that it would be three years before we see the full benefits because there was an awful lot to do to bring the organisations together,” he says, adding that “all mergers have their challenges”.
Despite the upbeat tone, many of the FTSE 100 group’s key financial indicators have been heading downwards. Since the merger, SLA’s share price has, despite a recent uptick, more than halved. Meanwhile assets under management and administration (AuMA) of £647.6 billion in 2017 had fallen to £490 billion by the end of April this year.
Fee-based revenue fell 12.5% last year to £1.6 billion, while adjusted pre-tax profit fell 10% to £584 million.The slump in AuMA is largely attributable to Lloyds Bank Group pulling its £109 billion Scottish Widows mandate, which had been historically managed by Aberdeen Asset Management.
The setback of losing its largest customer occurred as a result of the merger, with Lloyds claiming it had pulled its funds as the new entity had become a competitor in savings and investment.
Nevertheless, Skeoch maintains that the “hard work is bearing fruit”, pointing to the fact that the company has in the past few months experienced net inflows for the first time since 2017 and that the firm’s investment performance is “in a pretty good place”. Ahead-of-target annualised cost savings of £352 million have been implemented since the merger and the workforce has been trimmed from 9,000 to about 6,000.
The headcount reduction was largely due to the £3.2 billion sale of Standard Life Assurance to Phoenix, but also the loss of around 800 jobs through natural wastage and a “relatively modest” number of compulsory redundancies.
As Skeoch tells it, the focus during the first two years of the merger was on integrating the firms and “generating a single culture” by bringing the investment and distribution teams together.
“By the end of 2019, the benefits of the merger, the critical mass that we had created both in distribution and investment performance, were becoming visible with a very significant improvement in investment and inflows,” he says.
Skeoch denies that the merger was just about sizing up. “Scale is about creating a critical mass that allows you to play in the big league and serve very large balance sheets around the world,” he says. “It is also about having a well-diversified global business and the financial strength and wherewithal to continually reinvest in the business, in its people and in technology. Part of that is having the breadth and depth to ensure you can continue to deliver investment performance in the right buckets.”
The merger raised eyebrows in the City of London because of the controversial co-chief executive model, whereby Skeoch focused on the investment and internal management side of the business while Gilbert, the founder of Aberdeen Asset Management, concentrated on clients and marketing.
The power-sharing experiment was abandoned last year when Gilbert stepped down to become the group’s vice-chairman, leaving Skeoch as sole chief executive.
Gilbert stood down from the board last month but will remain chairman of Aberdeen Standard Investments until he retires from the company in September.
Skeoch defends the dual leadership model at the time of the merger. “With a merger of that size and complexity, it was absolutely the right thing to do,” he says. “I think both for Martin and me, it certainly worked. The two of us get along very well even though we are very different, and that is actually what made it work, certainly in the early stages of the merger.”
I meet Skeoch in the sixth week of the UK’s Covid-19 lockdown and the interview, originally meant to take place in person at SLA’s London offices, is done online. Since the pandemic started, the affable 63-year-old Yorkshireman and father of two has, like the majority of SLA’s employees, mostly been working from his home in central Edinburgh.
But on the day we speak, conference calls with investors in Asia have brought him to SLA’s swish new head office building in St Andrew Square.
The social distancing arrangements are so far working smoothly, Skeoch says, with internal and external meetings taking place via video conferencing. “Over the last couple of years, we have been moving towards more agile working and the crisis has accelerated this strategy,” he adds. “I don’t think we will return to everyone being in the office five days a week.”
SLA went into the pandemic with a strong balance sheet, he says, which has meant the company has not had to cut staff or put anyone to furlough. The firm has also pledged to pay its first-quarter dividend.
Enthusiasm for the new, virtual way of working is not, though, shared by SLA’s shareholders, who last month rebelled against plans to hold annual general meetings over the internet.
More than 37% voted against a motion to hold future shareholder meetings remotely. However, the firm avoided a revolt on executive pay, despite Skeoch benefiting from a 35% rise in his salary and bonus last year to £1.5 million.
The firm has responded to the Covid crisis by saying it will not attend next year’s World Economic Forum in Davos, Switzerland, where corporate bosses. presidents and environmentalists rub shoulders with film and rock stars. According to Skeoch, the £3 million that SLA would have spent at the event – where it has operated a popular bar dispensing fine malt whiskies to passing delegates – will instead be used to provide community support during the pandemic. Some of the money saved from attending the event in the exclusive alpine resort will also be used to fund a scheme whereby SLA matches the charitable donations of its staff. “Davos has done a lot of good and has been a very good talking shop over the years, but this is a time when we want to bind with our local communities rather than be part of the global elite,” he says.
Discussing the pandemic’s impact on financial markets, Skeoch says that the period of maximum panic is over “but I don’t think we have hit maximum pessimism yet”. He praises central banks around the world for reacting quickly to the crisis by injecting liquidity. This has helped to stave off a rise in insolvencies and boost a market rally in equities since March.
“The authorities seem to have learned some of the lessons of the global financial crisis and there is a recognition that, if you look at the history of recessions, major recessions that have big, long-term consequences have usually been accompanied by a financial crisis,” he says. “Here we have a health crisis which is going to trigger a major economic recession and one of the main things is to make sure that it doesn’t create a financial crisis.”
Skeoch – an economist by training, who worked for the UK government economic service early in his career – expects economic output in the UK to fall by up to 15% and corporate profits by up to 30% over the next 12 months. Compounded by high levels of corporate debt before the crisis, this could lead to serious economic scarring in the years to come.
The most likely economic recovery pattern, he expects, is “a U-shape with an elongated bottom, though I would not be surprised if we get quite a strong snapback in 2021”. He adds: “One of the challenges for asset managers will be dealing with and delivering returns with what looks like a very significant increase in asset price volatility.”
Skeoch believes that the crisis could be good for active fund managers such as SLA, though he says that the industry debate between active and passive is “specious” and that “both active and passive have a role in an investor’s portfolio”.
“Given the volatility in markets and incredibly low interest rates, this is a time when active management should be reaping benefits,” he says.
Last year saw outflows of £10.6 billion from SLA’s once market-leading multi-asset Global Absolute Return Strategies (Gars) funds. At their peak in 2016 Gars accounted for £53.9 billion, but this had shrunk to £11.2 billion by March this year.
Nevertheless Skeoch is optimistic that the highly diversified complex products - specifically designed to produce returns through periods of market volatility - will prove their worth over the coming years.
Asked whether the transitional arrangements between the EU and the UK should be extended beyond the end of the year if trade talks reach an impasse, Skeoch says that the negotiations should continue “as long as it takes to get it right for the benefit of the economy”.
“From an asset management perspective, the really important thing is that we need to operate in a world where there is an appropriate level of regulatory equivalence, and the government should do nothing to jeopardise the delegated rights that are incredibly important to the UK’s role as a global asset management centre,” he says.
In May, Skeoch – who was named Funds Europe’s Personality of the Year in 2013 – took up the chairmanship of the Investment Association, a role he sees as an opportunity to “help promote the common good and make sure that the recovery is as quick as possible and its benefits distributed as widely as possible”. Later this year, he will step down from the board of the Financial Reporting Council.
Outside work, Skeoch enjoys chamber music and recently became a trustee of the Edinburgh International Festival – one of the world’s largest arts festivals, which was recently cancelled for the first time since its 1947 inauguration.
In his twenties, he briefly considered becoming an academic and also a mountaineer and has climbed some of the highest peaks in the Alps, including Mont Blanc. But he admits that, when it comes to rock climbing, his power-to-weight ratio is now “in the wrong place”, so mostly confines himself to hill walking in the Scottish Highlands.
He also enjoys fly fishing, mainly for salmon on the rivers Tweed, Tay or Dee, a pastime in which he is occasionally accompanied by his old pal Martin Gilbert.
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