How will Aberdeen emerge from the EM sell-off?


Emerging markets have suffered a tough few weeks after investors retreated from the space, which has coincided with a sharp fall in Aberdeen Asset Management’s share price.

The MSCI Emerging Markets Index has dropped 12.3 per cent since the end of May, when Ben Bernanke first suggested the Federal Reserve could start to taper quantitative easing later this year. The MSCI World’s decline, on the other hand, stands at just 2.75 per cent.

Aberdeen’s share price has fallen by about 21.5 per cent since 28 May 2013, according to FE Analytics. This is a sharper decline than has been seen in peers such as Schroders and Jupiter, leading Brewin Dolphin to “seriously question” its buy case on the company.

Brewin Dolphin equity analyst Ruairidh Finlayson says Aberdeen’s recent underperformance is “understandable” given how exposed the firm is to emerging markets. At the end of the first quarter, 46 per cent of the group’s assets under management were in emerging market or Asian equities and debt.

Finlayson says some of the concerns raised by market commentators about Aberdeen are valid, highlighting the move to soft-close large products such as the £3.8bn Aberdeen Emerging Markets fund as having an impact on flows and AUM.

“However, the reason these funds have had limiters placed on them in the first place is due to their enduring popularity, which in turn is due to Aberdeen’s excellent long-term track record,” he continues.

“Aberdeen’s funds typically outperform in bear markets; we can therefore assume these will hold up relatively well vis-à-vis their benchmarks over the next few months, despite some near term underperformance.”

Data from fund flow researcher EPFR shows that outflows from emerging market funds have been strong over recent weeks. In the five weeks to 26 June some $22bn was pulled from emerging market equity funds worldwide, although this losing streak was broken last week by fresh inflows.

However these figures include exchange traded funds, which are used to executive short-term, tactical trading decisions.

”Aberdeen’s funds typically outperform in bear markets; we can therefore assume these will hold up relatively well vis-à-vis their benchmarks over the next few months”

“Once these are stripped out, remaining retail and institutional outflows have not been as strong,” Finlayson continues. “Whilst we do expect Aberdeen’s emerging market flows to be negative during the last quarter, we do not expect them to be as negative as Aberdeen’s share price action would suggest.”

In addition, the analyst notes that Aberdeen has a relatively large number of institutional clients who are likely to have made a strategic long-term allocation to emerging markets and would be unlikely to reduce their holdings at the first signs of market underperformance.

“Having considered Aberdeen’s enduring long-term fund track records, industry fund flow breakdown and fund investor characteristics, we believe the market reaction towards the shares is overdone,” Finlayson concludes. Brewin Dolphin maintains its buy rating on the firm.

Hargreaves Lansdown senior investment manager Adrian Lowcock agrees that Aberdeen’s strong reputation in the emerging market space mean the asset management house is unlikely to suffer significantly from the subdued investor sentiment.

“Aberdeen is a very strong brand in emerging markets. The key is that its funds are very good at protecting capital and they’re very good at being defensive to protect investors from the full impact of falls. Its funds tend to do well when we’re not in a very strongly rising bull market,” Lowcock says.

“Generally speaking you may see some outflows in the near term but I think it’s only ever a temporary thing with somebody like Aberdeen. The firm has such a strong reputation in that space that if anyone wants to allocate to emerging markets or Asia, it is top of the list.”