What to look for as the fund management industry continues to consolidate

The initial flurry of excitement regarding Standard Life’s plan to acquire Aberdeen Asset Management for £3.8 billion in stock is fading, as investors question whether the industrial logic is strong enough to justify the swoop that will create a £660 billion asset manager.

Aberdeen’s shares have slipped to 269p, below the 286.5p offer price initially suggested, not least because Standard Life has slipped from 400p to 364p since the announcement of the deal (which the two firms are describing as a merger).

Share price movements suggest doubts still surround the logic of the Standard Life-Aberdeen deal

Share price movements suggest doubts still surround the logic of the Standard Life-Aberdeen deal

Source: Thomson Reuters Datastream

Investors now face two questions:

  1. What are the implications of the proposed transaction for shareholders in the two firms involved?
  2. And what are the wider implications for the fund management industry? Foreign & Colonial was acquired by Bank of Montreal in 2014, Henderson has announced plans to merge with (or take over) America’s Janus and now we have a third big deal under consideration. Who may be next to receive an approach as the wave of consolidation continues?

Merger and acquisitions check list

As regular readers will know, this column likes to apply four tests to any planned merger or acquisition (M&A) deal.

  • The reasons for the deal: is to boost growth or create it? The active fund management industry faces fee pressure, from customers, passive rivals and regulators alike, but Government penury means more individuals are going to have to save more money rather than rely on the State for a decent income in their dotage. Demographic trends are favourable even if pricing trends are not.
  • How does the acquirer plan to achieve the deal’s financial targets? Bear in mind at this point that some 70% of all acquisitions fail to generate the planned benefits, with cost savings proving easier to achieve than revenue synergies. The joint announcement asserts the deal will offer “material earnings accretion” for both sets of shareholders owing to “significant synergy” which have been quantified at some £200 million – a significant sum when aggregate pre-tax profit forecasts for the two separate businesses come to just over £1 billion for 2017.
  • How many new variables are being introduced to the business? One is usually enough. Deals that bring both a new line of business and new country of operation at the same time usually cause grief. This deal looks straightforward. Aberdeen has been overly reliant on Asian and emerging markets for a long time and this has created significant volatility in its business performance, while Standard Life will see those Asian and emerging market assets as very complimentary to its fixed interest and UK asset base.
  • Is the price being paid a fair one? The price paid is the ultimate arbiter of return on any investment. The all-stock nature of the deal reduces the risk while the £3.8 billion purchase price compares to £312.1 billion of assets under management (AUM) at Aberdeen Asset Management – or 1.1% of AUM, a figure which looks low, as we shall see in a moment. As such, Standard Life shareholders could be seen to be getting the best of the deal here.

Looking for the next deal

Those investors who own shares in neither Standard Life nor Aberdeen may still like to pay attention to how the transaction pans out, not least because the merger is a continuation of consolidation in the asset manager industry.

Further deals are possible, given that fee pressure from customers, rivals and regulators alike and the fund management market appears to going one of two ways, by either moving toward huge asset-gathering groups that seek to benefit from scale or establishing small specialist boutiques which target a particular niche and do it well to justify their fees.

There are more than a dozen pure-play fund managers listed in the UK (while there are also more diversified financial services providers like Investec, Close Brothers and Rathbones who offer discretionary or wealth management services or banking).

The table below ranks them in order, from cheapest to most expensive, on a market cap-to-AUM basis.

As suggested above, this makes Aberdeen look cheap, along with perhaps River & Mercantile and Miton.

Aberdeen, River & Mercantile and Miton are the cheapest on market-cap-to-AUM multiples

Share price (p) Market cap (£m) Assets under management (£b) Market cap to AUM 2017E Price/earnings ratio  2017E Dividend yield (%) 2017 Earnings per share (p) 2017 Dividends per share (p) 2018E Earnings per share (p) 2018E Dividend per share (p)
River & Mercantile 273.5 234 28.7 0.8% 17.9 x 4.8% 15.3 13.2 17.8 14.9
Aberdeen Asset Management 268.7 3,535 312.1 1.1% 13.1 x 6.4% 20.4 17.3 21.3 17.6
Schroders 3,124.0 8,215 397.1 2.1% 16.1 x 3.1% 194.6 97.6 206.6 104.1
Miton 40.0 65 2.9 2.2% 16.7 x 2.0% 2.4 0.8 2.9 0.9
Henderson Group * 231.2 2,602 101.0 2.6% 14.8 x 4.5% 15.6 10.5
Premier Asset Management 140.5 149 5.2 2.9% 12.5 x 5.6% 11.2 7.9 15.4 11.1
Liontrust Asset Management 384.0 175 6.0 2.9% 10.5 x 4.4% 36.6 16.8 42.2 19.8
Brooks Macdonald 1,995.0 273 9.3 2.9% 18.9 x 2.2% 105.7 43.1 124.2 51.1
City of London Group 379.8 102 3.4 3.0% 11.4 x 6.5% 33.3 24.7 36.4 26.8
Man 145.9 2,477 66.9 3.7% 12.1 x 5.1% 12.1 7.4 15.3 8.6
Polar Capital 353.0 323 8.5 3.8% 14.7 x 7.1% 24.1 25.0 28.4 25.0
Jupiter Fund Management 418.2 1,902 40.5 4.7% 12.9 x 6.8% 32.3 28.3 32.9 29.2
Ashmore 354.1 2,482 42.8 5.8% 17.0 x 4.8% 20.9 17.0 19.2 17.3
Source: Digital Look, consensus analysts’ forecasts.
* No forecasts available for Henderson, pending Janus merger. PE and yield based on historic 2016 numbers.

Those firms look less cheap on earnings multiples though, with Liontrust, City of London and Man looking more interesting here.

Liontrust, City of London and Man are the cheapest on forecast earnings for 2017

Share price (p) Market cap (£m) Assets under management (£b) Market cap to AUM 2017E Price/earnings ratio  2017E Dividend yield (%) 2017 Earnings per share (p) 2017 Dividends per share (p) 2018E Earnings per share (p) 2018E Dividend per share (p)
Liontrust Asset Management 384.0 175 6.0 2.9% 10.5 x 4.4% 36.6 16.8 42.2 19.8
City of London Group 379.8 102 3.4 3.0% 11.4 x 6.5% 33.3 24.7 36.4 26.8
Man 145.9 2,477 66.9 3.7% 12.1 x 5.1% 12.1 7.4 15.3 8.6
Premier Asset Management 140.5 149 5.2 2.9% 12.5 x 5.6% 11.2 7.9 15.4 11.1
Jupiter Fund Management 418.2 1,902 40.5 4.7% 12.9 x 6.8% 32.3 28.3 32.9 29.2
Aberdeen Asset Management 268.7 3,535 312.1 1.1% 13.1 x 6.4% 20.4 17.3 21.3 17.6
Polar Capital 353.0 323 8.5 3.8% 14.7 x 7.1% 24.1 25.0 28.4 25.0
Henderson Group * 231.2 2,602 101.0 2.6% 14.8 x 4.5% 15.6 10.5
Schroders 3,124.0 8,215 397.1 2.1% 16.1 x 3.1% 194.6 97.6 206.6 104.1
Miton 40.0 65 2.9 2.2% 16.7 x 2.0% 2.4 0.8 2.9 0.9
Ashmore 354.1 2,482 42.8 5.8% 17.0 x 4.8% 20.9 17.0 19.2 17.3
River & Mercantile 273.5 234 28.7 0.8% 17.9 x 4.8% 15.3 13.2 17.8 14.9
Brooks Macdonald 1,995.0 273 9.3 2.9% 18.9 x 2.2% 105.7 43.1 124.2 51.1

Source: Digital Look, consensus analysts’ forecasts.
* No forecasts available for Henderson, pending Janus merger. PE and yield based on historic 2016 numbers.

This is not to say all of these firms are destined to be gobbled up or wish to be so.

In fact one potential obstacle to further M&A in the sector is owner-founders, family or management and staff having substantial stakes in the business.

If they do not wish to sell, they may well choose not to, blocking any deal, so any would-be predators will have to potentially pay a fat price if they are to tempt anyone to sell, potentially deadening the attractions of any deal for the buyer.

Major shareholdings in leading fund managers listed on the UK market

Top shareholders' stake (excl. staff) Management & staff stake Total
Schroders * 0.0% 87.9% 87.9%
River & Mercantile 66.2% 13.1% 79.3%
Premier Asset Management 66.6% 7.0% 73.6%
Ashmore 23.3% 46.1% 69.4%
Brooks Macdonald 58.3% 6.2% 64.5%
Polar Capital 50.0% 13.2% 63.2%
Liontrust Asset Management 54.0% 5.9% 59.9%
Miton 21.1% 25.0% 46.1%
Aberdeen Asset Management 44.9% 0.9% 45.8%
Jupiter Fund Management 38.8% 3.7% 42.5%
City of London Group 21.3% 19.6% 40.9%
Henderson Group 31.7% 8.6% 40.3%
Man 9.9% 1.2% 11.1%

Source: Latest published company report and accounts.
*Schroders reflects share of voting stock.

Russ Mould, AJ Bell Investment Director
Ryan Hughes, AJ Bell Head of Fund Selection