Aberdeen Asset Management was founded in 1983 in Aberdeen, Scotland, originally to lend money to Scottish farmers in Canada and currently has USD 500 bn under management (USD 190.9bn in Aberdeen Solutions offering tailored investment solutions and the rest in 3 main asset classes: USD 163.7bn in Equities; USD 107.5bn in Fixed Income and USD 26.8bn in Property); it has been a FTSE member since 2012 and has around 3,000 staff world-wide including 12 locations throughout Europe, with 30 based in Luxembourg.

The Aberdeen International Media Summit was held in London on Tuesday and Wednesday this week. CEO Martin Gilbert stressed the team-centric approach being at the core of the success of the company, utilising the collective wisdom of their investment teams. He stressed the legal obligation to their clients being the main difference between banks and clients. The regulatory obligations are a barrier to starting new fund management companies, but emphasised that moving from London to Singapore helped in this regard and being a big boost to the business. He added that the regulators have shifted their focus from banks and insurance companies to asset management companies.

He feels that it will be interesting to see how the markets cope following the first interest rate rise. With the acquisition of Scottish Widows, as well as moving into emerging markets in Asia, Aberdeen has been able to gain expertise, experience and diversification. However, he admitted that Aberdeen is struggling in certain areas –they were overweight in India and Hong Kong, and underweight in China and the US. China has not been a good performing market but he feels the long-term prospects are “superb” with a huge scope to make money there, partly due to corporate governance improving.

Emerging Markets

Devan Kaloo, Head of Global Emerging Markets, that that emerging markets underperformed developed markets by 6% up to March 2015, and lost 56% over 5 years; yet, over 10 years has gained 34%. Emerging markets are volatile and are less liquid than developed markets, yet foreigners are the primary buyers in emerging markets, where corporate profits has been one of the most disappointing issues of recent years.

Investors have been transfixed by the fall in oil prices and strength of the USD. If the US raises interest rates, costs increase and the economy slows; however, emerging markets are now less sensitive to the US raising interest rates than they have been. Spending (in Emerging Markets) will be redirected to infrastructure which will benefit the economy and encourage growth.

One of the problems in China now concerns labour strikes where employees are not demanding an increase in wages, but demanding to be paid. Reform has been put on the side-burner for now as china tries to boost the economy and address social pressures. Home prices in China fell in 2014 and deflation pressures hit. He is also sceptical about some companies in China, but not with the government. Corporate sector debt is high so he expects many companies coming on the market to raise cash.

He did, however, state that the fundamentals in emerging markets are sound and will continue for this year, at least. One reason for this is that governments are being squeezed out of business, with Brazil one such example, where private sector banks can expand their margins. This is due to the government not having the cash to fund state banks.

Global Equities

Bruce Stout, Senior Investment Manager, talked about value in financial markets, and defined what “value” means. At Aberdeen they focus on growth equities, with investments returning growth for investment and dividends.

In the real word, certainly in the developed world, reality is unrecognisable from what is presented in textbooks, such as negative yields in bonds. The developed world also has negative rates of inflation, with negative pricing making it very difficult for companies to invest. Movements in certain currencies are very volatile, with even the Swiss Franc moving 28% in one day in January. He also referred to debt outstanding is very harmful to long-term prosperity.

There is a real polarisation of the fundamentals of what is happening in the developed world as well as the perception of the comparisons between the developed world and emerging markets. We are currently in the 7th year of ultra loose monetary policy where printing money inflates asset prices. He stated that one can print as much money as one likes but this alone will not stimulate growth; in the long-term it is not sustainable.

Global interest rates are expected to remain low, reflecting weak inflation pressures, resulting in a weak incentive to invest. However, Aberdeen looks at companies with business models where earnings grow and invests in local people who know the markets and on whom they impress the Scottish investment mind-set.

At the time when prices and volumes are falling and consumers are leaving branded products for no-brand products as disposable income decreases, the challenge is to reduce costs to be able to deploy more capital.

Alternatives

Andrew McCaffery, Global Head of Alternatives at Aberdeen, addressed the concept of emerging opportunities and examined whether alternatives are really alternative. While some high-profile pension funds have abandoned alternative strategy, the long-term trend suggest that they will only grow in prominence.

The alternative investment landscape is changing and is fitting differently into investment portfolios where traditional market returns are more standardised. Moving from a traditional approach to a more risk-based approach means that there is more credit exposure. With over-valuation in both bonds and equities nowadays, more investors will contemplate the risks – what are the real risks they are taking? - and how to place them in the investor’s portfolio.

Taking four mandates of real estate, public equity, government bonds and investment grade credit, they lead to multiple underlying investments.  The broadening list of possible investments means that portfolios have more levers, but also more complexity. This then leads to implications for manager selection and asset allocation mix.

Most alternative investment areas have tactical opportunities and are growth opportunities, geared to long-term growth, with many such strategies creating liquidity.

Global Property

Andrew Allen, Global Head of Property Research at Aberdeen, talked about changing demographics to the density of population growth in our cities, leading to both short- and long-term drivers and why themes matter to long-term investors – examining global winning cities, (property) space and structural changes in retail.

He illustrated the huge gap between yields from property and from bonds and stressed the necessity to be very careful in analysing risk. He also emphasised that broad national strategies are not helpful when applying specific investment strategies which are based on long-term fundamentals.

Investors like to diversify away from their principle markets and normally go towards big cities that are large and high-profile that have strong population and economic growth and a large and highly-educated labour force. However, other cities such as Oslo and Stockholm can now be added to this grouping of “Winning Cities” that are growing rapidly. When entering these new markets, traditional investors would invest in office space, yet Aberdeen has found that residential in London as well as detached homes and regional malls in Sydney, for example, have shown that they consistently beat traditional sectors.

New developments are bringing improved efficiency – improved construction methods, technological advances and changes in working practices - with achievable space per worker standards in the UK meaning that 20m2/worker in the early 1980s to just 6m2/worker in 2015, as an example; however, in Germany and Denmark it is still 20m2/worker, with 15m2/worker in the US, Australia and New Zealand.

Structural changes have polarised the retail sector; it is not simply about the growth in online, it is now based on Experience and/or Convenience. Retail offerings are waking up to the needs of today’s youth and demographics, not business services.

Asian Equities

Hugh Young, Head of Equities at Aberdeen’s Singapore office, reported headline figures of 7% out of China; however, these are below that of China over recent years and India currently, and may be down as low as 5% in reality. Despite fiscal reform, Japan is still sluggish, with quiet reports on corporate earnings per share. India and Indonesia have progressive governments, so the future is bright there.

He said that reality is setting in and it is not easy, but Aberdeen still sees tremendous potential in India, with some of the best companies active in the region. Regarding Indonesia, the new leader wants to implement change but does not have a large majority so still has political opponents resulting in change happening at a slower pace than could be.

China’s economy is no longer booming, with the government pumping a lot of money into the stock market; the economy is quiet and so too are earnings. There is also the recent story of stock manipulation in which one share price plummeted 50% in one day. There are still speculative bubbles happening there.

Malaysia continues to have political issues and scandals but this does not seem to affect companies; Malaysia was one of the countries that benefitted from high energy prices, but is now losing that benefit as energy prices fall.

With the sharp fall in commodity prices, Western Australia’s mining industry is suffering too.

He clarified that Aberdeen is heavy in Hong Kong stock and light in China stock.

European Equities

20% of the world’s economy is in Europe where investors get exposure to world class franchises. The legal framework is robust, with highly developed Intellectual Property (IP) and skilled human capital and recurring revenue and strong corporate governance.

Europe has a history of doing business in emerging markets with brands that are deemed to be local.

Investment is less about where the listing is, but more about how the company makes its money. M&A are hotting up this year, helped by the strong dollar and weak euro.

In the Eurozone, the earnings momentum has turned positive after 48 consecutive months of downgrades.
Louise Kernohan, Investment Manager, presented a series of case studies emphasising Europe’s strengths in IP, global industry leadership, emerging markets growth, overcoming high barriers to entry.

European Bond Market

Partrick O’Donnell, Fixed Income Investment Manager at Aberdeen, estimates that policy rates will be low for the foreseeable future, with Neil Murray, Head of Pan-European Fixed Income at Aberdeen, talking about the European Central Bank’s bond buying programme. With banks now needing to hold more capital they are less able to extend credit as before, with the knock-on affecting borrowing, etc. the difficulty of liquidity is set to continue.

Stewardship

Paul Lee, Head of Corporate Governance at Aberdeen, explained that they operate a “buy and hold” mind-set, with them feeling that they are owners of the companies in which they invest, which brings with it a set of responsibilities and a sense of being a good owner.

There are a number of stewardship codes in different countries related to corporate governance already in operation, with others coming along.

He acknowledged the strength of family businesses where the owners feel an intimate responsibility to provide value, with stewardship built-in. unfortunately, there are some that do exploit shareholders, etc. So, in order to determine whether to invest in a company, dialogue with directors is crucial. He added that there is growing evidence that stewardship grows based on dialogue and there is real value to be unlocked by speaking with companies.

Photos by Geoff Thompson