The FTSE 100’s Standard Life Aberdeen (LSE: SLA) is the result of the 2017 merger of Standard Life and Aberdeen Asset Management. Initially, the combination brought insurance services and asset management into the same house, but during 2018 the newly created company struck a deal to sell off its insurance business to smaller peer Phoenix Group.
A changing animal
Now Standard Life Aberdeen is an asset management business similar to the old Aberdeen Asset Management. If you’ve been a shareholder of the old Standard Life you must be feeling a little dizzy due to the frenetic pace of change. One thing is for sure, this is not the beast you initially invested in at all.
The directors tell us in the recent half-year report that the sale of the insurance business completes the firm’s “transformation” to a “fee-based, capital-light business.” Generally, I’m all in favour of operations that don’t require mountains of capital to function, and fee-earning businesses can be very profitable. However, asset management has its challenges and one of the biggest is the inherent cyclicality in that kind of business.
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In fact, things haven’t been going that well recently, which reflects in the relentless slide in the shares. In the first half of the firm’s trading year, total Assets Under Management and Administration (AUMA) from continuing operations dropped 2.6%, compared to the equivalent period last year, to just over £610bn, and the firm owned up that “net flows remain a challenge.”
There may be trouble ahead
Things could get worse before they get better. If the firm’s funds don’t deliver decent returns we could see even more net outflows of AUMA, and decent returns from the stock market and other investments could be hard to achieve in the near future. The company said in its own outlook statement that “market conditions remain challenging, as macroeconomic and political uncertainties continue to affect investor sentiment.”
I think this murky outlook is weighing on the share price. The stock market could be marking down Standard Life Aberdeen’s valuation in anticipation of trouble ahead. At some point, the macroeconomic environment could turn down and sentiment on the stock market could plunge along with share prices. If the general stock market declines, asset managers like Standard Life Aberdeen tend to magnify such moves, so we’ll likely see a big move down in the share price and 200p is well within the scope of possibility.
If that happens, the dividend yield will initially look very high but that won’t save you as an investor in my view. Cover for the payment is already low, and with falling earnings, the firm will likely cut the dividend anyway.
I don’t believe that cyclical outfits such as this one ever make decent vehicles for a long-term buy-and-hold strategy, and I’m wary of the stock now with the shares seemingly locked in a strong downtrend. I think the stock market could be trying to tell us something, so I’m staying away and will look for enduring investments elsewhere.
