£100m cost-cutting leaves Aberdeen well-placed for expansion

Martin Gilbert will flex his new-found financial muscles tomorrow when he is likely to signal that Aberdeen Asset Management (AAM)is ready to handle its next big acquisition only a matter of weeks after taking full charge of an extra £35.3 billion funds from Credit Suisse.

AAM’s chief executive is expected to confirm that AAM’s finances have been transformed by a cost-cutting programme which yielded savings of almost £100 million, and that the group now has economies of scale needed to take it to the next stage of its ambitions to become a serious global player.

Already there is speculation that AAM has joined a pack of potential buyers to show interest in the £30bn fund management side of Royal Bank of Scotland, although gossips insist that its next major deal is likely to be on the other side of the Atlantic and could involve a hedge fund business.

Analysts at Noble agree that the time is already ripe for another deal.

“With Credit Suisse’s assets fully integrated into the business by September, Aberdeen’s management has sufficient bandwidth to integrate another business,” said a Noble analyst.

“A look-through analysis suggests that US equities is a big hole on Aberdeen’s portfolio and there are a number of US financial institutions which view their asset management business as non-core, and hence want to dispose of them.”

The Credit Suisse deal meant that AAM was crowned the UK’s biggest independent fund manager although it is possible that it could be about to lose the title to rival Schroders which has seen some hefty inflows in recent months.

Brokers believe AAM’s funds under management are running at between £138bn and £140bn, while Schroder’s total stood at £138.9bn at its nine-month stage.

Both are still mere tiddlers compared with some of the US giants – Blackrock, the world’s biggest, currently manages funds estimated at $2.7 trillion (£1,630 billion) following its latest acquisition from Barclays.

Confirmation of AAM’s continuing growth ambitions is expected at this week’s results presentation when analysts are likely to hear of a sharp turnaround in the closing months after a poor first half, although pre-tax profits are still likely to dip from £96m to around £86m.

The returns mean that dividends will be only just covered by earnings after taking account of the new shares issued for the Credit Suisse deal but brokers say the company can easily afford the payment with profits set to surge to £160m or more in the current year.

Despite the expectations of bumper times ahead, AAM’s share price has proven a disappointment this year, rising only around 10% while others in its sector have doubled in value.

That is largely down to share sales by major investor Tosca which sold down its holding from 18% to less than 5% in little more than a month, while there are also concerns about fresh share issues to come from the group’s convertible bond issue and further acquisitions.

It is likely that directors will address some of the concerns by stressing that they will not be chasing growth for the sake of it and any future deals will have to pay for themselves by boosting earnings per share.

They have already pulled out of a number of potential acquisitions, including the sale of the Lloyds TSB Insight assets side which eventually went to The Bank of New York Mellon and the auction for the New Star business.

Followers believe that AAM’s shares are overdue a recovery, pointing out that the group’s current stock-market valuation of around £1.4bn represents just 1% of funds under management.

In contrast, the imminent flotation of the smaller Gartmore business is expected to see the company valued at approaching 5% of its funds.

But that difference can be explained by Gartmore’s larger involvement in hedge funds which attract much bigger fee income.

Meantime, there are hopes that the company could reap further benefits from its links with the Mitsubishi UFJ Trust and Banking Corp which appointed its own non-executive to the board on Friday after taking its shareholding past 15%. The Japanese have reported brisk sales for an AAM managed merging markets fund aimed at pension funds and is expected to top steer more cash in the Scottish company’s direction now that it is in a position to include a notional share of profits into its own accounts.