Aberdeen Standard Investments' CIO's interesting 12 months

Channels: SAA/ALM, Managers, People

Companies: Standard Life Investments, Aberdeen Asset Management, Scottish Widows, Prudential, M&G

People: Rod Paris, Martin Gilbert, Keith Skeoch, Anne Richards

Rod Paris, CIO at Aberdeen Standard Investments (ASI), talks about the company's transformational twelve months following the merger and that cancelled Scottish Widows mandate, likely to cost the company some 20% of its assets. By Sarfraz Thind

 

Rod Paris would make a good diplomat. His considered views on the ups and downs experienced by Standard Life Investments in the last twelve months following its merger with Aberdeen Asset Management are measured and sometimes elusive.

But Paris has not had the simplest of tasks. The merger between the two companies pulled the group into the top 25 largest fund managers in the world. Immediately ASI's assets under management shot up past the £670bn figure ($900bn). It was a growth trajectory that Martin Gilbert, co-chief executive of ASI and previously head of Aberdeen, had envisaged when he aimed at propelling the newly formed asset manager to the $1trn mark.

But ASI was hit with a sizeable blow when, in February, Scottish Widows, its biggest client, announced it was terminating a £109bn mandate it had held with ASI since 2014, citing competition issues.

This came in the wake of £14.9bn of outflows in the nine months after the merger was announced. And, to cap it all off, in February, ASI then sold its insurance book to Phoenix.

Evolution

To say the world has changed for Paris would be an understatement. Yet he is quite sanguine.

"The merger with Aberdeen has reinforced the direction of travel," he says. "Then the final part is the partnership with Phoenix – it is a good fit. We see it very much as an evolution of the story."

Paris started his career in 1981 as a credit analyst at Chase Manhattan before running asset management money at various fund management groups, including Warburg Asset Management and Merrill Lynch Investment Managers, between 1984 and 2002.

In 2002 he joined the newly created Standard Life Investments to build out a "really quality" fixed income offering, moving on to CIO in 2007 with oversight of real estate and private markets. He was given a blank sheet of paper and the task of increasing the company's third-party assets which then stood at a paltry 5% of total assets.

"The decision was made in order to give the investment side of the business an identity and build our own culture," he says. "When I joined less than 5% was third-party investments. The nature of the client proposition has changed hugely over 15 years."

And changed it has. ASI currently manages £280bn of insurance assets – £158bn is for Standard Life, whose assets ASI will still manage after selling to Phoenix, £60bn was acquired via the purchase of Ignis in 2014. The remaining £62bn come from third-party insurers. The merger would have brought a further £109bn of Scottish Widows assets – Aberdeen's only significant insurance client – but that, of course, is now in limbo.

Future-proofing

Things had been tricky pre-Scottish Widows. The merger came at a time when both Aberdeen and Standard Life had seen funds drain out of their main products. Aberdeen had four consecutive years of outflows before the merger – indeed, net outflows for the six months to the end of March 2017 were £13.4bn--while Standard Life's flagship Global Absolute Return Strategies (Gars) had experienced a chastening period of redemptions and poor performance.

Despite this and the loss of nearly 20% of its assets from Scottish Widows' withdrawal, Paris says there is excitement in the ability of the new company to generate ideas that run across all asset classes. 

"We will use the political will created by the necessity of the merger to reshape the business with an eye on the future – not just the here and now," says Paris.

The company has said the yoking of the two businesses should bring cost savings of around £200m within three years. And each of the asset management strands brings a different expertise to the show.

Aberdeen, for one, has a significant amount invested in private markets, including real estate and infrastructure, and has always been known as a big player in emerging markets. This global expertise gives a "hugely valuable" footprint to the company, says Paris. Standard Life, meanwhile, brings its insurance heritage with it, giving it know-how necessary in the post-Solvency II world. He says the new company now has a breadth of capabilities with expertise ranging from traditional equities and fixed income to real estate, private markets and quantitative strategies.

"The merger has allowed us to develop sophistication," says Paris. "To be effective to insurers you need to understand Solvency II and internal models as well as the demand for restructuring traditional asset exposure with capital efficient means. You have to have the DNA to straddle both sides of the balance sheet which means having the actuarial as well as investment understanding. That is the core of the proposition."

Paris sits on the board and is chair of the combined investment committee and reports to Keith Skeoch, his old SLI boss. As there was no CIO on the Aberdeen side, with the departure of ex-CIO Anne Richards who left to join M&G in 2016, he is in charge of the investment business, managing more than 1,000 individuals in 24 countries. His role, he explains, is "like a conductor bringing it all together."

"It is a rich palette of colours to paint with," says Paris. "The potential of the two comes together. We are committed to a broader research platform. It is a collaborative approach across all asset classes. The merger will bring much richer ability and greater confidence to the investment insight."

The integration of the companies is going well, Paris says. ASI has brought down information barriers and moved quickly through the people discussions that needed to be cleared, including global co-location of 2,000 employees and some exits. 

The expansion of capabilities comes as part of a broader trend in the asset management world. Paris says that many insurers are redefining their operations, moving towards business which is capital-lite and focused.

"Look at Prudential and M&G – and indeed Lloyds which has said it wants to get more into pension provision. You are seeing a reshaping taking place."

Scottish Widows

But, anyway, what about the big question on everyone's lips – Scottish Widows and its missing mandate?

It was only six months after the merger that the chiefs of ASI had to digest the shock of a loss of almost 20% of their asset-management funds. But the news did not come completely out of the blue. Standard Life and Scottish Widows are long-standing rivals and ASI bosses had been talking about the potential impact of Standard Life's insurance business on the merged entity, before the deal was done.

"Competition was clearly a risk which was laid out and we spent a lot of time speaking to Lloyds on these matters," says Paris. "It is not a performance issue – this is a strategic direction issue."

Some days after the announcement of cancellation, Gilbert said he had not lost hope that the mandate could regained.

But comments from Gavin Stewart, director of asset allocation at Scottish Widows last month, suggest conflict-of-interest issues still exist, referencing the close relationship between ASI and Phoenix, backed up by recent news reports.

So does Paris think there is any chance of ASI winning back the mandate?

"It is still a work in progress," he says. "It is fair to say that both sides are sitting down and rethinking the nature of the relationship. Both sides have a strategy that they declare as important. The issue is how alignment is possible."

And what about the conflict-of-interest problem?

"Conflicts of interest happen all over the place. What is important is the clarity of governance and how this can be managed. I think as a whole the industry is good at managing it. I think the conflict issues have been overstated."

In any case Scottish Widows was reported to have been a low margin business, accounting for some 5% of revenues, according to analyst estimates, which may soften the blow.

Fees

Fees, indeed, has been an area that the asset manager has had to grapple with in other areas--specifically, the amount it charges for some of its products. And this is nowhere more evident than with Gars.

Gars lost £10.7bn of assets in 2017, the lion's share of total SLI outflows. This followed £4.3bn in redemptions in 2016. As of the end of December 2017, the fund had shrunk to £43bn from a high of nearly £53bn.

Investors have accused Gars of charging high fees for the performance. Paris admits the issue around fees is one that ASI, like the rest of the asset management industry, has to deal with.

"The nature of the client relationship with insurers is changing. The regulatory environment is challenging all governance aspects and the industry is trying to regain trust. We are challenged, rightly, on cost.

"Gars is a good example. It is trying to produce returns for a particular risk level. We have found that institutional investors understand where it fits into the portfolio. Performance has been disappointing at times, but we are finding that clients understand how it fits into the overall context of investments."

In defence of the fund, Paris says the fees debate "confuses value against cost".

"If it is relevant to client needs then fee pressures are overstated. Clients will pay where they see value. They are a lot more discerning about value – where we can demonstrate value we can charge a premium price."

The net outflows do not tell the whole picture because the company also generated substantial gross inflows of £58.6bn in the final nine months of last year.

The co-chiefs of the new company have cited "huge opportunities" in the US, Europe and Asia, and the company has built up a strong multi-disciplinary expertise over all the major asset classes and some niche ones too.

Now if they could also win that £109bn back.