Aberdeen Group Plc (ABDN) Earnings Call Transcript & Summary

Good morning, everyone, and thank you very much for joining our Q3 call this morning. I'm actually delighted to speak to you today as it's my first time as your new CEO. And I'm pleased that I'm joined in the room today by our Interim CFO, Ian Jenkins. I'm going to give you a quick walk through of the key points, and then as usual, we'll open up to Q&A. So let me start with the key highlights. Assets under management and administration is up 2% year-to-date to GBP 507 billion, and this principally reflects positive market movements and net inflows in interactive investor. It's worth noting that interactive investor continues to deliver strong organic growth with customer numbers up 6% year-to-date to 430,000. Trends in investments remain similar to the half year with outflows in equities and insurance, but we did have a strong quarter in real assets. However, in Adviser, we had GBP 1 billion of outflows in the quarter, and we're taking action with urgence to address this. In terms of outlook, today, we are confirming we're making good progress in our transformation program and that we're on track to meet our cost saving commitment. So putting this all together, there is clearly more work to be done. But with strong foundations to build upon, we can create a lot more value for this company. Now just let me take each of the businesses in turn, starting with investments. Excluding the sale of the private equity business, AUM is up 2% year-to-date to GBP 368 billion, with positive market movements more than offsetting the net outflows of GBP 4.5 billion. This compares to net outflows of GBP 13.5 billion in the same period last year. And I'm picking these results in the quarter, which will be somewhat volatile as institutional businesses are. Institutional and Retail Wealth had net outflows of GBP 2.4 billion, primarily driven by equities, which reflects the continued challenging risk-off sentiment, particularly toward China and emerging markets. And after a strong first half, fixed income had outflows of GBP 0.8 billion in the quarter, largely reflecting a significant redemption from one client. Net inflows in fixed income are still positive year-to-date at GBP 0.4 billion. Given our positioning, strong performance and the one not funded pipeline, we remain confident in the outlook for our fixed income business. Other areas of inflow included GBP 0.3 billion in liquidity, GBP 0.4 billion in quant and pleasingly GBP 1 billion in real assets where our business remains well positioned. This included the extension of our real estate capabilities in the Japanese market with a new GBP 0.6 billion mandate. Insurance had net outflows in the quarter of GBP 1.1 billion, with AUM flat since the half year and up 2% year-to-date. Gross inflows in the quarter were GBP 3.3 billion with outflows primarily reflecting the heritage business in run-off. I'll now turn to Adviser. AUM at the end of September was GBP 75 billion, unchanged since the half year with positive markets offset by outflows of GBP 1 billion. Simply put, we have work to do. At the half year, I outlined actions that were needed: A strategic reprice; focus on the timely delivery of the in-flight projects; and consistently providing excellent service, which after all is our reason to be in this business. So we're redoubling our efforts in this regard with urgency and laser-like focus, adding resource with the aim of delivering better experience for all of our IFAs and their clients. I also mentioned our plan to strengthen Adviser's leadership team significantly. I can now confirm we've made 3 senior hires: A new Chief Distribution Officer, a new Chief Technology and Product Officer and a new CFO. I'm very pleased we've been able to attract top talent to the group. The full benefit of these actions will take some time, but our priority remains to return the Adviser business to net inflows as soon as possible. And finally, back to interactive investor. As I mentioned, it's been another strong quarter with customer numbers now up 6% year-to-date to 430,000. We attracted GBP 1.2 billion of net inflows in the quarter, bringing year-to-date net flows to GBP 4.3 billion. And to put this in context, that is 48% higher than the whole 12 months of 2023. And in SIP customers, which is a strategic focus area for us, we're now at just over 76,000, up 5% in the quarter and 22% year-to-date. In addition to net inflows, AUMA in ii also benefited from positive market movements and was up 2% in the quarter to GBP 74.5 billion, which is 13% higher than the end of 2023. Building on this very encouraging performance, we have significant further growth plans for ii in '25 and beyond, for example, including the launch of ii Community, which went live yesterday. At the group level, we continue to make good progress with our transformation program. As I've said previously, rightsizing our cost base is essential to move the group toward a more acceptable level of profitability. Transformation is about cost savings to improve profitability, but it also allows us to invest more in our people, technology, processes and controls, all so we can deliver better outcomes for our clients. We're on track to deliver approximately GBP 60 million of cost saves in the 2024 year of account and at least GBP 150 million of annualized savings by the end of '25. Given this, we continue to expect group costs for the year to be below GBP 1,075 million. To conclude, our overall performance this quarter is not where it needs to be and underlines the need to move quickly to deliver on the priorities I set out at the half year. While there remains much to do, I'm confident we have great talent and can make further progress toward a profitable and sustainable long-term growth business benefiting shareholders, clients and colleagues. With that, Ian and I are happy to take your questions.

[Operator Instructions] The first question comes from the line of Enrico Bolzoni with JPMorgan.

Just two questions from me, please. So one, in Adviser, can you just give us some color in terms of what the feedback from the IFA has been? In other words, what is driving this high level of redemptions? Is it specific feature of the platform that are not up to the standard? Or it's just pricing from competitors? Just keen to have some additional color on how to fix this? And then second question on the interest margin. Can you please give us an update in terms of what we should expect in outer years, so beyond 2024 as rates keep declining?

Okay. Thank you for that. I think in Adviser, there are multiple things. I would say price, which we announced, the reprice, is really about growth in new rather than loosing existing. Price is important, but it's not the pivotal factor in why people choose platforms. They choose platforms for service and for functionality. And it's in service that we can do better. And it's hard to say it's one specific thing. But what IFAs want is their orders to be processed within a reasonable time frame. And I think little things make a big difference. Normally, it's when the order is not quite filled in every last data field, we need to chase that down faster. We need to get things processed quicker. We need to get the queues knocked over before people go home in the evening, not literally, but you get the point. So we've added some extra resource, both to make sure that when the orders come in, when they're processed, we can execute them faster. And then when we have got the people that need to help and support the transfers, which is generally transfers or money out that we can do it faster. And that's a work in progress. We've added people. We've added resource, and we are laser-like focused on doing a better job. On margins, no major change. We get this one quite often. I think we've given guidance that predates me of around 2% sort of margin, which is kind of in normalized times, pretty comfortable with that. It will bounce around, obviously, depending on rates. We're above that this year. We'll probably remain above that as we go into next year. And -- but the split between how much we pay to customers is partly driven by the competitive environment, partly driven by the proposition and partly driven by how well we're doing investing the assets on the other side.

The next question comes from the line of Hubert Lam with Bank of America.

I got three of them. Firstly, in equities, any change in sentiment recently for EM and Asian funds after the market stimulus in China? Just wondering or is it maybe too early for this? Second question is on fee margin. Given you had still sizable outflows in equities, which are higher margin in the quarter, how should we think about fee margin in the second half? And last question on investment performance. If you can give us an update in terms of how both equities and fixed income have done so far this quarter on a 1- and 3-year basis. I guess the half year equities were still pretty much underwater, both 1-year and 3-year. Just wondering if there's any improvement in that and whether or not fixed income has still remained strong.

Sure. Let me deal with equities and performance, and Ian can comment on the margin, if I may. So no fundamental change to sentiment. Clearly, some of the macro things that are going on in China and elsewhere, and they do remain important. We're not seeing major change to sentiment towards China and Asia. But what we are seeing is slightly more interest -- in fact, considerable more interest in more narrow offers. So I would point to products like GEM ex China, single country strategies like India or GEM income strategies, in fact, which they're not as big for us. Of course, they're not as the major banner GEM and Asia Pac strategies, but they're not insignificant either. So we are changing the shopfront to be more relevant to what people are buying. That's a work in progress, but there's clearly -- we're seeing sales in those areas. But no major change to sentiment elsewhere, just to be clear on that. The investment performance, fixed income has got stronger. Actually, the 1-year performance is better, and it's sort of consistent. Usually, 3-year track record is pretty good. It's ticked up slightly. Equities, actually, the 1-year performance is better, which I'm looking at primarily. It's up from 23% to 30% of funds outperforming. It's still not where we'd hope it can get to. But across the board, active fund management is that sort of level. So the team has got my full support in what they're doing through Peter and Devon, and they're making, I think, the right steps. It will take a little bit of time for that to come through, particularly in the 3-year number. I think as everyone knows, 2022 was a very tough year for us.

And on fee margins, I mean, our guidance remains the same as it did at the half year. I think for the first half, we had 22 basis points. And on the second half, we will be below 22, and that's where we stand at the moment.

The next question comes from the line of David McCann with Deutsche Numis.

Three questions from me. First one may have already been partly addressed. But can you just touch on the Adviser platform, back to the very first question? So are these problems that I guess you're having there still fundamentally linked to the replatforming that you did last year? Or is there something else that's emerged since then that led to this because obviously we have seen most of your peers seeing improving flows here. So it does appear to be something internal. So that's the first question. I appreciate you're going to give us an update on the DB pension surplus in February with the results. But maybe you could just remind us what are the options that are on the table that you're actively considering in terms of that, just so you have a sense of that? And then finally, Jason, now you are full-time CEO, as you mentioned at the start of the call. When you were asked about this as interim CEO at the results, you did refer to 3 core businesses at abrdn. Is that still your view now you are CEO full-time?

David, thanks for that. Absolutely, in terms of strategy, we are totally committed to improving the performance of the 3 businesses. That is obviously, adviser investments and interactive investor. They are at very different stages of their development. I'll come on to Adviser again in a moment. But the growth in interactive investor, frankly, is for the taking, and we are taking it. The cost efficiency and the transformation going through investments and change of the product mix is there. Plans are there. There'll be sharper and better and more plans to continue to do that. And in Adviser, we remain very supportive of it. If I sort of segue from the strategy question into the performance question, I think it's hard to say it's one thing. I think the platform upgrade, which was whatever it was, 18 months ago or so, clearly did knock us off course. Getting back on course has been harder than we thought. I don't think you can say that there is any functionality or any software issues. I mean there aren't. But to take people's view of where we are, it just takes some time to shift it back to being that level of service and delivery that we aspire to be. And we've got to get better. In the last 2 years since we started that project, frankly, the market has moved. The market has got better. Abrdn needs to get better, and we need to do better. So the plans that Noel and his team have put in place are to achieve a much better service proposition for Adviser. And I mentioned a few minutes ago, getting better on queues, getting better on orders, getting better on delivery to IFAs are some of the basics in a way that delights them, not just meets an SLA, but actually, they think that was a good experience is what we're focused on doing. The DB surplus, well, nothing is off the table. So we could just leave it. We could look at a run-on, potentially some extraction or we could look at a buyout. Clearly, we partner with the trustees who are the ultimate decision-makers here to do that. Surplus remains very well funded. The fund remains very well funded with a significant surplus. So there is a block of capital in that, that could potentially be released either in the shorter term or over time, and we'll take steps to make sure that we make the right decision for members and for the plc. I will try and give you an update. What I was trying to say in the release, just to be clear, is no update today. If we can get the work done, and it's a bit out of my hands because it sits with authorities that, frankly, don't march to our orders, but we'll try and give an update as soon as possible. I'd expect that by the year-end results.

The next question comes from the line of Bruce Hamilton with Morgan Stanley.

Just one. On the -- I think I heard right that you're saying costs should be below GBP 1.075 billion because it also sounded as though the need to reinvest in advisory to sort out the problems was probably proving a bit more significant and some of the hires -- senior hires, I suspect, would be working in the other direction. So just to check on that and I didn't miss anything. And then secondly, just looking at the business, I mean what are the synergies you're currently driving from having the 3 divisions side by side? And what can you do further to improve that? Because it's not entirely obvious from the outside. I can see those 3 businesses working as silos with their own sort of growth opportunities. But what's the benefit from having the 3 combined in the group?

Okay. Well, on the cost point, we were taking out a material amount of costs, GBP 150 million, the sort of numbers we're talking about to get Adviser back up are kind of in the single -- small single digits.

And 80% of those costs are really coming out of the investments business, not the Adviser or ii.

Yes. So -- and we're not flagging any cost issue, just to be clear. We're reallocating some resource to focus on service. We might take away a little bit from change, but service, service, service. That is the clear message on that. But that business will, and, is very profitable. So it's really about delivery of a better product and a better experience for IFAs. On the group, we're all in the investment business, all 3. We share content. We share leadership. We share a number of systems. We have one regulator, one capital base. So we do operate as a family of businesses doing similar things. On the revenue side, there are some. I'm not going to overstate this, to be clear, but there are some benefits where we have managed products that interactive investor sell. For example, the managed ISA product, I talked about at the half year, which will be followed by a managed SIP product designed by abrdn with some abrdn componentry within that. That is a good proof point. On the Adviser side, again, we do have managed products that we actually offer to IFAs. Frankly, we're a bit -- we're well below where I'd like us to be in there. So there's definite upside potential in the MPS world through Adviser. There's also some data assets. We do get from interactive investor significant market insight and intelligence as to what customers want, and that allows us to tailor our products, obviously, on an anonymized basis, but we see huge flows. We were #1. I think we probably still are at Q3, #1 in U.K. D2C. And that's a phenomenal position to have, and you get real insight into what's going on in the market, and we can use that. So that's where we are. They are the businesses that we've got and the absolute focus is in improving all 3 of them.

The next question comes from the line of Nicholas Herman with Citi.