A ‘master of the universe’ faces his toughest test
A ‘master of the universe’ faces his toughest test
Inside, Martin Gilbert was extending the hand of hospitality to some of the glitterati who attend the World Economic Forum annual meeting. The 62-year-old Scottish financier welcomed new guests and back-slapped old ones with customary bonhomie, distributing refreshments to keep the Alpine cold at bay.
“Like it or loathe it, Davos is the only place where that many influential policymakers, political leaders and business people are in one place at one time,” said Gilbert.
The financier had done the same thing many times before in a 35-year business career that had seen him create one of the leading investment firms in the world, making himself wealthy enough to qualify as one of the Davos “masters of the universe.”
He counts US President Donald Trump, who also attended the event, as a friend due to their mutual interest in golf in Scotland.
But this time at Davos there were some important differences. For one, the sign outside the cafe now read Standard Life Aberdeen (SLA), in recognition of the merger last year between Aberdeen Asset Management and Standard Life that pooled assets under management of $870 billion.
Inside, though he showed no signs of it, Gilbert was embroiled in one of the biggest challenges he had faced in a life that had taken him from Malaysia, where he was born to expat parents, back to the family home in Aberdeen and then on to the financial hubs of London and Singapore, and most recently to Abu Dhabi in the UAE.
He was staring at the loss of $153 billion of assets under management, a threat that could signal a tipping point for the newly merged business.
Backtrack just under a year, when Gilbert had announced a tie-up with Standard Life and a move to co-chief executive status alongside Standard’s Keith Skeoch. There had been rumors that Gilbert might sell Aberdeen for some time, but it was always likely he would be the consolidator, as much as the target of consolidation.
The merger, alongside his continued involvement at the top, meant that industry logic could be presented as the reason for the deal. In a recent interview with Arab News, he said: “The cornerstone of the deal was the extent to which Aberdeen and Standard Life complemented each other, and by putting them together the combined business will continue to grow. They complemented each other in two key respects: a minimal overlap in investment capabilities, and significantly different distribution strengths, resulting in a business which is highly diversified by asset class, clients and revenues.
“The increased breadth of investment capability will provide clients with more choice. Various pension funds, insurers and financial institutions are increasingly looking to interact with a smaller number of fund managers from whom they buy a wider range of strategies. Many of the US fund management giants have been very successful at marketing multiple investment strategies to clients.”
Nonetheless, there was also the argument that something had to be done to halt the decline in Aberdeen’s business, with billions of dollars withdrawn from Aberdeen’s management.
“Of course, the asset management industry is also facing various challenges, including the rise of passive investing, downward pressure on fees and increased regulatory pressures. But as a combined business we are much stronger to face these challenges head on and to capitalize on opportunities created,” said Gilbert.
Those outflows continued even after the merger — with more than $30 billion withdrawn in 2017 — but Gilbert was sanguine about overall trends and optimistic about the future.
“The outflows the combined business experienced last year were in line with our expectations given the asset classes affected, and the structural outflows from our lower margin mature books. Importantly, though, the momentum in the business was good, with around $83 billion of gross inflows during the first nine months of the year.
“We continued to innovate, launching new funds with strong backing from clients and winning new mandates across a wide range of investment strategies. Standard Life, the pensions and savings business, had record flows during the first nine months of the year, demonstrating further our strength and diversity,” he said.
But what the new set-up did not need in its formative period was a big withdrawal of funds. As Gilbert extended his hospitality at Davos this year, that is exactly what he was facing.
One of Aberdeen’s biggest chunks of business at the time of the merger was the $153 billion it managed for the Scottish Widows insurance business of Lloyds Banking Group. The potential problem — highlighted as a risk in the course of the merger process — was that Aberdeen had a big competitor to the Widows operation, in the form of Standard Life’s own insurance business.
A couple of weeks after Gilbert had shaken the snow off his shoes, a thunderbolt struck. Lloyds announced that, after a review, it was going to terminate its Widows deal with Standard Life Aberdeen, citing competition issues. He faced the prospect of losing his biggest client — after a year’s notice that Lloyds was obliged to give — calling into question the logic of the merger and the strategic direction it was taking. The company’s London quoted shares bombed.
But Gilbert, the consummate deal-maker, had one card up his sleeve, and he played it last week. In a $4.5 billion deal, he and Keoch sold the Standard Life insurance business to Phoenix Group, the UK insurer in which it will also get a 20 percent stake, potentially ending the competition issue with Lloyds and leaving it in a position to retain the business it thought it had lost.
“The deal represents a logical next step in Standard Life Aberdeen’s journey to build a world-class investment company,” he told Arab News.
“It is also a great opportunity for wider collaboration as the asset manager of choice for Phoenix, which sees further significant consolidation opportunities. With the foundations of a world-class investment company in place, we look forward to capitalizing on the opportunities that we see ahead of us while continuing to deliver for our shareholders,” he said.
But will it be enough to get the Lloyds business back? That is not certain.
“In terms of Lloyds, we still have a good relationship with them; we will continue to manage money for them at least for another 12 months, if not longer, and will aim to deliver the strong performance and good client service they highlighted we provide. Whether the Phoenix transaction will influence Lloyds’ decision — they highlighted competition as the reason for carrying out their review — we will need to wait and see,” Gilbert said.
If the jury is still out on the final shape of the asset portfolio, it seems the Middle East will remain a high-priority destination for SLA. Gilbert has always been an enthusiast for emerging markets, opening an Aberdeen office in Singapore in 1992, and, in 2016, taking his first step in the Arabian Gulf with an office in the Abu Dhabi Global Market (ADGM) free zone in the UAE capital.
“We’re happy with how the business is progressing. We’ve got a long track record in opening international offices and believe that it’s important to have resources on the ground where our clients are. So opening a local presence in the region, and in Abu Dhabi, in particular, has been vindicated. We are seeing traction across a number of strategies, particularly emerging market debt and real estate,” he said.
When the ADGM office opened, Gilbert said that the low oil price was not a deterrent to doing business in the region, and his macro-outlook remains unchanged. “The global economy seems to be doing fine, with only a handful of countries in recession. This should support oil prices which the Middle East is so reliant on. But the focus needs to remain on diversifying economies and spending on infrastructure,” he said.
Gilbert believes that Saudi Arabia is the “key market” in the region, but does not have any immediate plans to open there, happy to serve Saudi investors from the Abu Dhabi base they are already familiar with. But he is aware of the opportunities Saudi will present under the Vision 2030 strategy to transform the economy away from oil dependency.
“The reforms seem to be going in the right direction and will create many opportunities if the implementation is done right,” he said.
Does he believe the recent anti-corruption drive in the Kingdom will deter foreign investors from involvement in the economic transformation, as some critics have suggested? “For now, no. It all depends on implementation. If they [Saudi policymakers] get it right, it will help foreign direct investment. If they get it wrong, there will be a risk,” he said.
But, whatever the investment opportunities at home, he thinks that Gulf investors will still have an appetite for the kinds of investment products they have traditionally sought.
“For our Middle East clients, we think European real estate, in particular residential and logistics assets, represent good value. I also think there’s still tremendous value in emerging markets, particularly emerging market debt,” he said.
There is a new spirit abroad in the UK and global financial sector, with pressure rising on executives with big salaries and bonus schemes. It looks like Gilbert and Skeoch will have to concede some ground to shareholder critics on that front.
But it’s unilikely the cost-cutting will extend to the Aberdeen Cafe in Davos, which Gilbert can surely write off as a problem-solving profit center.