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$1 Trillion Dream Sours for Standard Life on Lloyds Move

Updated on
  • Standard Life Aberdeen shares decline as much as 9.8 percent
  • Loss of Lloyds assets may lead firm to look abroad for growth

The Standard Life Plc head office in Edinburgh, U.K.

Photographer: Matthew Lloyd/Bloomberg

Martin Gilbert and Keith Skeoch’s $1 trillion dream has grown a little more distant.

Six months after merging Scotland’s two biggest money managers to create a giant capable of competing with the largest U.S. companies, the co-chiefs of Standard Life Aberdeen Plc are instead digesting the potential loss of almost 20 percent of the funds at their asset-management business. 

Lloyds Banking Group Plc’s decision to pull 109 billion pounds ($153 billion) of assets overseen by Standard Life Aberdeen may drive the owner of Britain’s largest active money manager to accelerate efforts to win more clients abroad.

Gilbert, in a Bloomberg Television interview, cited “huge opportunities” in the U.S., Europe and Asia. Investors were less sanguine, and the shares tumbled.

“A large part of the justification behind the merger was for these companies to become more important and larger,” said Michael Werner, a London-based analyst at UBS Group AG. “This is a business they had hoped to maintain.”

In an interview with Bloomberg last year, Gilbert stressed the importance of scale and said he aspired to membership in the “$1 trillion club.” The 3.8 billion-pound merger between Standard Life Plc and Aberdeen Asset Management brought the firm within sight of that threshold, with combined assets of more than $900 billion. Some 70 percent of the funds at the asset management unit come from within the U.K.

While Gilbert said that Lloyds’s move wasn’t a complete surprise, describing it as just “one of those blips,” investors responded by pushing the shares down by the most since the aftermath of the Brexit vote in 2016.

Passive Inroads

Lloyds’s move is just the latest setback for the Scottish fund manager. It’s also grappling with outflows from its flagship Global Absolute Return Strategies fund amid a relentless push by investors toward cheaper passive investments. Active money managers globally are struggling to ward off this index-tracking explosion and mitigate pressure from falling fees, while also coping with the rising costs of regulation and technology.

In that context, Standard Life Aberdeen was in a relatively weak position in negotiations with Lloyds over the mandate, with the bank able to either move the money elsewhere or extract an even lower fee for what was already a low-margin contract. 

Gilbert said the firm could still end up managing money for Lloyds, insisting the arrangement, which is now set to end by the first half of 2019, “is good value for their customers.”

Old Rivals

Still, the partnership between the two companies, which have historically been fierce competitors in insurance, was always going to be tricky. The arrangement was a legacy of Aberdeen Asset Management’s acquisition of Scottish Widows Investment Partnership from Lloyds in 2013. After the merger of Aberdeen and Standard Life last year, the combined entity became a competitor of Lloyds’s insurance unit. A six-month lock-up on the fund management agreement expired this week.

“It’s a blow for Standard Life Aberdeen, but it’s only to be expected,” said Laith Khalaf, a senior analyst at Hargreaves Lansdown Plc. “Standard Life and Scottish Widows are long-standing rivals, so one managing the assets of the other was never going to sit particularly comfortably.”

Gilbert declined to say on Bloomberg Television whether the loss of the mandate will affect the company’s dividend. Standard Life Aberdeen said the decision would result in an impairment of about 40 million pounds to its intangible assets. The company is due to announce its full-year results on Feb. 23.

Earnings Blow

Losing the mandate could also result in a 10 percent hit to earnings, according to Arnaud Giblat, an analyst at Exane BNP Paribas. A loss of all of the funds would cut the combined company’s full-year revenue by about 130 million pounds, UBS analysts estimate.

While that’s a setback in relation to the promised cost savings of around 200 million pounds within three years of the merger being completed, the bigger question is what it means for the ambitions of the Scottish giant to position itself among the premier league of global asset managers.

“The larger global footprint and stronger appeal to more higher-margin business has still got to be the key strategy going forward,” said Charles Graham, a senior analyst at Bloomberg Intelligence. “It’s not helped if you have assets of that size leaving.”

— With assistance by Stefania Spezzati

(Updates with earnings information in 13th paragraph. A previous version of this story was corrected.)
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