Abrdn cuts are deep in an industry feeling the pain

At the end of March this year, Abrdn will quietly close the doors of its office in the Scottish city after which it is named. The building will then be sold, marking the end of the asset manager’s association with Aberdeen, with local staff being told to work from home.

It is not just symbolic ties that the company is slashing: chief executive Stephen Bird announced £150mn in cuts this week, including the loss of 500 jobs, or about 10 per cent of the workforce. The mood inside the FTSE 250 company is “unstable and yet melancholic,” one employee told the Financial Times. “People are understanding [but] frustrated; it needs to happen” another staff member said.

Abrdn is far from alone in its struggles. This same week, Edinburgh-headquartered Baillie Gifford unveiled dozens of lay-offs and its plans to close four fixed-income funds. Other money managers such as BlackRock, Charles Schwab, Invesco and Manulife have announced job cuts and restructurings in recent months. 

The burden of regulation for these companies has significantly increased in recent years, driving up costs. Meanwhile, attractive yields on cash products have lured investors away from choppy markets and the rise in popularity of passive funds has proved a severe threat to their businesses.

The combination of these factors has forced asset managers to streamline operations and fight harder for the smaller market share available to them. Mid-sized managers like Abrdn have found themselves trapped between behemoths like BlackRock and Vanguard, and smaller specialist boutiques.

“You can still survive in the middle, [but] you need to be in the right asset class with good investment performance,” said the CEO of a rival asset manager. “If you don’t have good investment performance, you are going to be in significant trouble.”

But Abrdn is unique in its struggle to break free from its past and its creation through the merger of Standard Life and Aberdeen Asset Management in 2017. Sir Keith Skeoch and Martin Gilbert, the CEOs of the respective companies, decided over burgers and chips in an Edinburgh hotel that they would stitch the two firms together to help them withstand the incoming headwinds the industry was facing.

There were immediate issues, such as the early termination of a £109bn mandate from Lloyds Banking Group, which resulted in a legal battle. There were also more deep-seated problems, such as the lack of staff integration and insufficient cost-cutting. Skeoch and Gilbert were criticised for their decision to become co-heads of the new company, eventually resulting in Gilbert’s departure from the role in 2019. Skeoch stepped down a year later.

The group’s shares are off 67 per cent since the merger, crashing 17 per cent in the past 12 months. Its share price has also trailed an index of FTSE asset managers by 55 per cent over the period.

The danger signs were already appearing before the tie-up, with outflows ticking up from Standard Life’s flagship global absolute return fund, once worth £53bn at its 2016 peak, and a decrease in the popularity of the Asian and emerging markets equities funds upon which Aberdeen Asset Management made its name.

“If you put two failing fund managers together, it just makes one big failing fund manager,” said one fund selector. 

The company is eager to move the narrative on from this period, hiring Bird from Citi’s global consumer bank in 2020. At the time, he called himself the “reset guy” and embarked on a plan to return the business to revenue and earnings growth and reduce the cost-to-income ratio to 70 per cent. More than 250 of its investment funds have been closed, restructured or merged since, and the company undertook a much-ridiculed disemvowelling rebrand from Standard Life Aberdeen to Abrdn.

The company is made up of three parts: asset management, advisers and personal, which includes the retail platform Interactive Investor that Bird acquired in 2021, a move welcomed by shareholders. While the retail and investment adviser platforms are profitable, the investments division is less so. The department made just £26mn of operating profit on the £367bn of mostly actively managed assets in the first half of 2023.

Investment performance has been faltering, with just 58 per cent of assets under management gaining more than their benchmark over the three years to the end of June 2023, compared to 65 per cent at the end of 2022 and 67 per cent a year earlier. To tackle this, Peter Branner was hired from APG Asset Management in February last year to the new role of chief investment officer.

The cost-to-income ratio remains stubbornly high, sitting at 82 per cent in 2022, far higher than Bird’s 70 per cent target. The group swung from a £1.1bn pre-tax profit in 2021 to a £615mn loss in 2022. 

Abrdn said: “Since the new management team came in three years ago, we have reshaped and sharpened the focus of our investments business. We made a conscious decision to stop offering products across the full waterfront of investment, and to focus instead on the areas where we have strength and scale.

“We have significantly rationalised our product range, sold subscale businesses, and successfully added new capabilities in fast-growth areas.

“The cost transformation programme announced this week will further strengthen the business and deliver improved profitability. The plan will achieve this with minimal impact on front office roles in investments.”

Although analysts are broadly supportive of the cost cuts, their effectiveness — and the company’s long-term success — remains uncertain. “We think that more needs to be done and more radical action is required,” said David McCann, a Numis analyst, who thinks the best value for shareholders would be to sell the company for its parts.

Others think management embarked on cost cuts and restructuring too late. “Once a fund business starts going backwards it is hard to turn around . . . you can’t restructure fast enough,” a fund manager told the FT. 

Meanwhile, relations between management and staff are under strain just as more job cuts are in the offing. A group of employees are already exploring whether to mount a legal challenge after redundancy payouts were halved and parental leave reduced.

“It is not dissimilar to the charge of the light brigade,” an employee told the FT. “Onwards, onwards we ride…”