Aberdeen Standard Investments
Matthew Chessum
30 October 2018
Matthew Chessum of Aberdeen Standard Investments runs through the businesses success since its merger in 2017 and provides an overview of the current market, where regulation and Brexit are hot topics
Image: Shutterstock
How has the business changed since the merger in 2017?
The merger between Aberdeen Asset Management and Standard Life Investments lead to the creation of the largest independent asset manager in Europe. Currently, the combined entity administers £610 billion of assets worldwide across a number of different asset classes. Aberdeen Standard Investments remains a high conviction, long-term investor seeking to realise the value of investments over time. This strategy filters all the way down to our securities lending programme. As an investor, we tend to hold fewer positions but in larger sizes compared to our competitors. As a result, we tend to try and lend only where it makes sense from a returns perspective favouring fewer stocks on loan but at above average fees.
The merger has given many teams the opportunity to cherry-pick the best practices from each heritage as well as increasing both the amount of assets under management and our range of asset classes that are invested in. This is therefore a great opportunity to improve upon past processes and ensure that we are well positioned for future challenges. We are expecting the lending book to grow as the heritage Standard Life fund ranges are not currently in any lending programme.
We are in the process of agreeing a new company-wide approval process for securities lending to ensure that as many funds as possible are given the opportunity to join our existing programme. Securities lending has now moved internally from the dealing desk into the liquidity management team sitting alongside the money market and collateral management functions. Putting these together will allow us to use securities lending and repo more efficiently to manage our collateral positions and to become more complex in the collateral management and securities lending solutions that we are able to offer to the other teams internally within Aberdeen Standard Investments.
How does your securities lending programme work?
We lend through multiple lending agents and divide our programme by fund ranges. We run both discretionary and exclusive programmes as we like to lock in guaranteed revenues on lots where we are being offered additional outperformance in relation to market benchmarking. We don’t do anything in-house but that’s not to say that we never would. The development of our collateral management competences may give rise to additional infrastructure that we did not previously have. This may give us the option of becoming a direct lender into the market for certain asset classes in the future.
At the current time, however, we still see a great deal of value in the services offered by our agent lenders especially when you start to think about the amount of heavy lifting they do on fairly slim margins. The indemnity that they provide also gives our fund boards an extra level of protection and comfort.
What is the main purpose of your securities lending programme and how risk-averse is it?
Securities lending adds additional incremental revenues to our funds and consequently the clients and customers invested in the funds. It adds a handful of important basis points to a fund’s performance in a risk adjusted manner. Securities lending isn’t a driver of investment decisions and is certainly not part of any complex strategy to add additional risk and/or high levels of return through convoluted reinvestment or synthetic structures.
All beneficial owners will tell you that their programme is risk-averse but given our lending style, our agent indemnification provisions, our BBB+ minimum counterparty rating, our collateral margins and finally our collateral profile, we do certainly look to minimise as much risk as possible. We are also actively involved in the oversight process and conduct regular review meetings with our agents to go through any issues. We run quarterly stress testing of our on loans versus collateral positions and work closely with our agents to ensure that they remain focused from both a risk and revenue perspective.
As the largest asset manager in the UK, what advantages does this bring?
Big is definitely better in the asset management world at the moment. The drive for greater economies of scale is leading to a number of mergers between previous rivals. Being part of a larger entity brings wide ranging advantages to an organisation. Understanding and working through the impact of regulation is one benefit of having access to greater resources as well as investment in new technologies. Specifically to the lending programme, however, the diverse range of assets that we now have in our programme and its overall size help us to attract better fee splits, access to indemnification at a cheaper price, and a seat around the table when new initiatives are being rolled out.
We also have better and more diverse expertise to aid in the oversight process. Finally, being a large organisation means that we have many teams interacting in many different areas of the financial markets. This interaction provides us with a broader access to financial and market information in general which helps us to keep agent lenders and borrowers honest in their dealings with us.
How has the European market been performing for you with all the Brexit concerns?
Europe is still showing value from a securities lending perspective. UK infrastructure borrows seem to be producing most of our revenues in this region. We recently started lending in Russia, which has been very profitable as demand is robust and fees are above average. Turkey is showing some value given the recent economic difficulties but within Europe we tend to concentrate on the scrip opportunities and those stocks that have the higher lending rates attached to them.
In terms of Brexit, so far we haven’t seen too much impact. Our agent lenders may face some degree of repapering with some borrowers and depending upon how the negotiations conclude there may be some stocks that may come under a degree of “Brexit pressure” but at the moment we haven’t seen anything to note.
Is Asia still an important market for you and how has that region been performing?
A lot of revenues for the funds over the last few years have come from Asian stocks. Singapore, Hong Kong, Japan and Thailand have all provided some strong revenue opportunities. Our stronger earning funds include our Asian small cap portfolio and our Chinese equity fund. Asia provides a good percentage of our overall revenues and holds a lot of potential for us. We would like to be active in Taiwan and Malaysia but the pre-sale notifications prove difficult for us to manage.
I understand that the Philippines stock exchange is looking into a securities lending solution for offshore investors and we would definitely be a keen participant in this if it does ever come to fruition.
What concerns do you have with current regulations?
In terms of regulation, I don’t see anything too prohibitive on the horizon. The Securities Financing Transaction Regulation (SFTR) is being covered mainly through our lending agents although we do have our own internal capabilities. The guidelines for this are already in place and were just waiting for the final trigger to be pulled. There has been a lot of talk about the Central Securities Depositories Regulation (CSDR) and the introduction of mandatory buy ins in Europe. Many participants seem to be quite concerned about this but I believe that the incoming SFTR reporting requirements will help to increase settlement rates anyway. When looking at CSDR it is also important to remember that we already successfully operate in a number of jurisdictions around the world where similar market practises already exist.
Any predictions for the market in 2019?
2019 will be an interesting year from a securities lending perspective. As pressures on asset managers fees continue there will be further consolidation in the asset management world. I therefore expect the increase in the amount of assets that are available in lending pools to keep increasing. I can see 2019 offering better market conditions for stock to trade more “special”. The rising interest rate environment is likely to take its toll on some corporations that have thrived on cheap debt in the past few years so some companies shares may start coming under more pressure. Brexit, depending upon the deal that the UK government negotiates, if at all it does manage to, will also have an impact upon the UK market. Much like the morning after the referendum result, if Britain slides out the EU without a deal, the FTSE 250 and AIM stocks are bound to see a lot of downward pressure. Once again it will be time for that old British adage to come into play: keep calm and carry on.
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