(Fundsupermart.com) The parent of Aberdeen Asia, Aberdeen Asset Management Plc, which is listed in London and Singapore, saw its share price plummet from 4 pounds to 71 pence last year. This followed a public storm over some of its investment products sold in the UK, called split capital trusts. These funds, known colloquially as 'splits', are listed companies in their own right, typically with a fixed life of five or more years. Each has multiple share classes, with different entitlements. Many investors bought the low risk zero dividend preference shares, which offered pre-determined redemption values. So when the funds were not spared from the blows of the bear market, irate investors started complaining.
The financial regulator has had to step in as allegations abound of mis-selling. The episode has been damaging for Aberdeen Plc because it's the biggest manager of splits in the UK. And it's been such a public relations nightmare that the company has had to hire a corporate communications consultant to help stem the tide of bad press against it (click here for related report).
Meanwhile Aberdeen Asia, based in Singapore, is a study in contrast. Not only has it remained unscathed from the troubles of its parent company, 2002 was its best year ever since it set up shop a decade ago, says its Managing Director Hugh Young. He reveals that Aberdeen Asia attracted over S$500 million in new investments from institutional and retail clients, despite the difficult market conditions. Another notable achievement, he adds, is the export of Aberdeen Asia's disciplined investment expertise to the London office. Two of Young's Asian proteges now head the Group's UK equity and Emerging Markets desks - in the first, after the British lead managers were given their marching orders for performing below par.
"If you read between the lines, you'll see a colonisation of the UK by Asia... What we'll have in the London office is the same process as that we have here," says Young, who's visibly proud of Aberdeen's Asian operations, which he started with Peter Hames (Director Of Asian Equities) 10 years ago above a congee shop in Boat Quay. The firm today manages over S$6.3billion in assets and has consistently garnered awards for several of its funds.
Q: Investigations by the UK financial regulatory body into splits are ongoing, but there's been talk that Aberdeen may have to pay out compensation. Is this expected?
A: Well, we rebut any notion of wrongdoing. These trusts were all launched with prospectuses under the aegis of leading financial institutions, indeed several were over-subscribed. They were then distributed chiefly by private client stockbrokers, IFAs and other third party intermediaries. As managers, we are accountable to boards of directors, and we believe we acted in accordance with our mandates.
In retrospect, the effect of gearing (used extensively in such structures) over a prolonged bear market was to undermine returns. But this was unfortunate rather than negligent. Besides, we are only one of many managers in the sector, at one stage managing 19 out of 137 funds. To date four have failed. Where we feel responsible we are already addressing investor concerns, for example in a unit trust that invested in the zeros, for which we are putting together an uplift package. That fund was sold direct to the public. The UK regulator will have to take all this into account amid a climate of public outrage - so it would be rash to predict the outcome.
Q: Is Aberdeen in financial dire straits because of this episode?
A: No, but it has brought attention to our balance sheet. Historically, we used debt to finance our expansion with the result that we have a total debt of over 200 million pounds today, of which 100 million is in commercial debt and the other half is in convertible bonds. We are strongly cash generative and interest coverage is around four times. Still, we have decided to sell our property division, which should raise, according to analysts, about 100 million pounds. Once done, the Group will be slimmer but stronger. The only real cloud is the damage inflicted to our reputation by splits, which may constrain business expansion in the UK in the short term. Investors in our conventional funds have stayed loyal. Remember they are the majority - splits now represent about 4% of our funds under management.
Q: Could that 'damage' lead to Aberdeen being sold off?
A:Your guess is as good as mine! I'm being flippant: any public company is potentially up for grabs where it doesn't have the luxury of a protective dominant shareholder. If the board received an approach - and I'm not aware of any - it would have to evaluate the best interests of shareholders. Right now we recognise a golden opportunity to focus our core equity and bond operations, becoming a 'proper' active manager, while several of our peers pay lip service, preferring the comfort of closet indexing.
The adoption of the Asian process groupwide is a harbinger of such change, and it's something that consultants are watching keenly. To work, it requires managers to be motivated and we need time for performance to develop. Yet our success has always been rooted in our adaptability and I see no reason why we can't steal a march on the competition. The irony here is that we probably had more risk of being sold when we were 7 pounds a share than when below a pound!
Q: In straightening out your balance sheet, you've had to lay off people. How many did this involve, and were there any who were managing the funds sold to investors here?
A: We've laid off 27 in our equity and fixed interest divisions and 61 in marketing and administration. Given we have 1300-odd staff and in the context of a three-year bear market, much of this had become essential pruning. The only radical decision concerned UK equities, where the two senior fund managers have left but the underlying team remains the same. The US equity heads of desk have also gone. In Asia we never bulked up in the good times, so we haven't been forced to make cuts.
Q: What's been the knock-on effect on business for Aberdeen Asia?
A: Touch wood, minimal. We are still seeing net inflows into our funds. We are run independently, and there have been no redundancies. If you examine our staff turnover, it's exceptionally low. In ten years we've only lost one senior manager.
Q: Was last year a good year for Aberdeen Asia, in terms of attracting money?
A: We brought in about S$500 million in new money, part-retail, and part-institutional. So it was a very good year. In fact, it was our best ever! Our performance in Asian equities was excellent. We were at the top of the first quartile. And that was replicated across all our institutional accounts as well, because we run them the same way. That means what we do for, say, a stat board client is the same as what we do for someone with $1,000 in a unit trust.
Q: Why was business good when it was the third year of the bear market?
A: While clients value outperformance, they also want to understand the reasons for it. We buy companies that are good, unexciting, 'steady eddies'. You know: the ones with 10 times earnings, 5% dividend yield, good balance sheets, and 10-15% growth. By sticking to this rubric our portfolios generally behave in they way one would expect. Clients like that; they hate shocks.
Q: Is Aberdeen Asia profitable?
A: Yes, highly. It's probably one of the most profitable Aberdeen subsidiaries because we have kept costs low, we pay fairly, and we try not to overpay. We grow our people from the start rather than buy in expertise, which tends to be expensive.
Q: Some investors have written to us saying they are concerned that if Aberdeen Plc goes belly up, their investments will disappear. So what will happen to their money?
A: Nothing is the answer. The legal ownership of the assets of a unit trust remains at all times with the trustee, and not the manager. This also means that investor monies are protected from the manager's creditors because they do not form part of the manager's assets. So your money is protected even in a highly unlikely worst-case scenario, such as bankruptcy of the manager. Unfortunately, not all investors understand these distinctions, so some panic needlessly. Whether Aberdeen - or indeed any other manager - goes belly up or survives, what they ought to watch out for is whether the team of managers is still intact. It's the managers who provide the continuity.
Q: Will Aberdeen Asia splinter off as a separate company? You built the Aberdeen presence here with Peter Hames 10 years ago, and you've got a good track record.
A: Exactly - and my first loyalty is to the team. However, it's always been an Aberdeen-branded one, and I don't think of it otherwise. Peter is of a like mind. We have built up a great young team with the support of our UK colleagues. Ironically, the fruits of that effort now is less here than in seeing Chong Yoon Chou and Shahreza Yusof (who were sent to London recently to head the UK equity and Emerging Market desks) plant their flags there. They were our first hires in Asia eight-plus years ago and we hope they can do great things.
Q: But that's in effect one desk, Emerging Markets being run by you?
A: Just ONE DESK? Our UK equities desk is THE DESK! Little else matters, it's huge! In the UK, our biggest institutional clients have 75% of their portfolios in UK equities. You know, my fantasy is this: Aberdeen sells off a couple of its assets, sorts out its balance sheet and the regulator comes out with a verdict that doesn't destroy everyone in the business. During that 12-month period, Chou will have put in place all the disciplines and processes in the UK that we uphold here. Already, quite a few of the managers in the UK have come here for training, and not vice versa. So that's the excitement; we don't want to spin off.
Q: What if Aberdeen gets bought over; does that mean breaking away?
A: If things were to unravel at Group level, of course we cannot discount other possibilities for the operations here. As investors we always look at worst-case scenarios, and that's how we manage the business side too. So, yes, it pays to have contingency plans but divorce is a last resort. Suitors apart, I'm not ambitious to form Young Hames Asset Management? it means starting afresh when the excitement for us is here in Aberdeen? really.
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