Aberdeen Asset Management Plc.(LSE: ADN) is a publicly owned asset management holding company. The company predominantly actively invests in the public equity, fixed income, currency, multi-assets and property markets Internationally. Aberdeen Asset Management employs fundamental analysis, including high quality first hand research to make all investment decisions.

1. Vigilant Leadership

Quantitively:

IMG_0255.PNGimg_0243

Source: Annual Reports

Qualitatively:

Performance metrics:

Annual performance

  • Based upon Profit. Before. Tax and operating profit.
  • Maximum amount is 2.5x the base salary for top level management.

Long-term performance

  • Based upon Earnings. Per. Share, Return. On. Capital. Employed and investment performance.
  • Maximum amount is 7.5x the base salary for top level management.

2. Long term Prospects

Persistent Products/Services:

Aberdeen Asset Management was founded in 1983. Since its foundation, large global institutions represented the vast majority of the company’s clients. However, this landscape is changing with growing needs for individual retailers to save for their retirement and other needs.

The move towards individual wealth management, creates long term prospects as well as challenges to access new and growing sources of assets.

Such changes will increasingly lead to greater buyers of asset management services by individuals rather than global institutions. This opens new channels for Aberdeen Asset Management to continue compounding long-term growth, whilst maintaining strong relations with listed investment companies, governments, private banks and other institutions.

Technological advancements:

  1. Digital technologies – Digital technologies has the potential to enhance and redefine relationships with clients and how they make transactions. Online platforms are emerging to fill the vacancy they have left, being cost efficient to the investor.
  2. Digital communication – Asset Management clients are demanding greater digital communication and ideas that can help them make better investment decisions not just sales pitches. Aberdeen Asset Management has invested in mobile technology and increased the sophistication of its operating systems.

Weaknesses/Risks:

  1. Brexit – It remains to be determined on what basis Aberdeen Asset Management will be able to provide investment management services from teams in the UK to EU member states.
  2. Loss of key personnel – Inability to attract and prevent the departure of high calibre employees.
  3. Market risk – Changes in market prices, exchange rates, interest rates and equity prices.
  4. Investment Process and Under performance – Pro-longed or significant investment under performance relative to competitors and benchmark indices.

Solutions to risks:

  1. Currently, Aberdeen Asset Management operates in over 26 countries and are experienced at adjusting their business world wide to service all clients’ needs.
  2. Aberdeen Asset Management does not advocate star fund managers; instead the company operates teams with complementary skill sets who discuss investment decisions and take collective responsibility. This team based approach seeks to avoid reliance on any one individual.
  3. The Group’s results are reported in sterling. Due to the geographically diverse locations in which Aberdeen operates, business is conducted in a number of currencies including the US dollar, Singapore dollar and Euro. Aberdeens Board reviews the currency profile of the Group, including cash flows and balance sheet.
  4. Aberdeen Asset Management adheres to disciplined investment processes, centred on team based decision making and high quality first hand research.

3. Stable and Understandable Business Economics

Stability

img_0248

Source: BuffettBooks

Understandable Business Economics

Industry:

The UK Asset Management and Fund management industries are the second largest in the world. Industry revenue predominately originates from management fees (a percentage of the assets/funds under management). The industry is expected to grow at 5.5% compounded annually over the next 10 years. Previous years growth has been supported by historically low interest rates and significant quantitive easing back in 2012. The Industry is now mature due to consolidation of firms and increasing globalisation. In addition, growth in passively run index trackers has shifted investment goals of many individual and institutional investors.

Rank in Industry:

img_0249Source: Relbanks

Ranked 52nd in the world based on Assets Under Management. Although, the ranking is low, it does imply exceptional room for long-term growth.

In addition, Aberdeen Asset Management solely operates as a asset management company, whereas many higher ranked competitor firms operate a multitude of other financial services.

Operating Segments:

* Asset Management business (Equities, fixed income, property and multi-assets)

Barriers to entry:

* Regulation requiring licences      * Fee structures create higher break-even points for new entrances     * Industry complexity     * High human capital skill required                 * High initiation and administration costs

Competitive Advantages (MOATS !!!): 

  1. Organic culture (Team based investing)
  2. Breadth of experience 
  3. High quality first hand research methodology
  4. Strong focus on value and risk
  5. Long-term view on Investing
  6. Global reach and local knowledge  

Major Competition:

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Revenue:

Revenue for Aberdeen Asset Management, like many others, is driven by management fees charged on the value of Assets Under Management. Product mix therefore has a significant implication on the revenue streams generated.

Assets Under Management (AUM):img_0254Source: Annual Reports 

A.U.M is grown organically and through selective acquisitions. Clients are gained and retained through Aberdeens investment processes, long-term focus, client service and track record.

Regulation:

The financial crisis changed the regulatory landscape for asset mangers. Globally, regulators are focused on protecting investors and trying to restore confidence in the integrity of the markets.

Aberdeens key response to the challenges, is to become a full-service asset manager with the breadth and depth of capabilities across active and passive management, multi-assets and alternative investments to serve all investors. Whilst investing in the company to remain competitive.

Growth Prospects:

  • Grow the money managed for existing clients and win new clients.
  • Supporting the business model to allow locally managed assets, while enabling global reach.
  • Selective acquisitions brought at competitive prices.
  • Growing with the industry.

4. Price to Valuation

From computing a discounted future free cash flow analysis, along with a earnings power model for Aberdeen Asset Management Plc. and discounting them back to today’s present value using a 7% discount rate and 12% perpetuity rate to be Intrinsically valued between £ 3 – £ 5 per share, equating to £ 3.9 Billion – £ 6.5 Billion for the entire company. 

5. Summary

Aberdeen Asset Management Plc. Is a International asset manager with a broad range of investment capabilities. As a pure asset manager, without the distractions of wider financial service activities, the company  is able to concentrate all resources on this core business. The evolving nature of the asset management industry and its globalisation is providing some challenges, nonetheless capital allocation is a fundamental function in the UK and global economies. Therefore, the long-term prospects for the industry and Aberdeen remains relatively strong, although heavily directed by the overall global economic sentiment.

Anything misunderstood, view the definitions here.

Thank you for reading,

Jordonlee W. Smith

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