Speculation that the business could see its workforce shrink by some 10% was first published by Sky News yesterday afternoon, with a source telling its city editor Mark Kleinman that 500 of 5,000 employees could lose their jobs.

Now, CEO Stephen Bird has confirmed that Abrdn is targeting an annualised cost reduction of at least £150m by the end of 2025, with 80% of these savings being made in the Investments part of the business. The target does not include any previously-confirmed divestments, but does include the “removal of management layers” which will “increase spans of control” for employees. This will be across group functions and support services.

Abrdn added that the front office of its investment arm will “see a modest adjustment”, although it stressed that the firm’s focus “remains on delivering excellent client service” and “strongly competitive performance” to its clients.

The firm will make further “efficiencies” in outsourcing and technology capabilities, with Abrdn stressing that “a bulk” of the savings will be not be made across staff costs.

It was also confirmed yesterday that Abrdn’s ABS managers Scott Duggal and Janaka Nanayakkara are due to depart the firm, as the fund moves to a new team.

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CEO Stephen Bird said: “Market conditions have remained challenging for our mix of business, and this is reflected in our year-end AUMA, flow numbers, and margins. The board and I are committed to taking these significant cost actions now to restore our core investments business to a more acceptable level of profitability.

“Although our business model benefits from the diversification that comes from operating three businesses, we will not rest until all of them are contributing strongly to group profitability, as Adviser and Interactive Investor have done in 2023.”

He added the transformation plan will deliver a “step change” in the firm’s cost-to-income ratio.

“We exceeded our £75m cost reduction target for 2023 for Investments, but we recognise more needs to be done. After a root and branch review, we are now re-engineering and simplifying our business model to remove at least £150m of costs – mostly from group functions and support services.

“The programme will largely be implemented in 2024, completing in 2025. These changes will allow us to continue our focus on building a growth business.”

A saving of £60m expected by the end of 2024, while the remaining £90m is due to be slashed next year.

Outflows

The redundancies follow outflows of £12.5bn for the Investments arm of the business during H2 last year, with assets under management and advice standing at £366.7bn. This represents small reduction from £367.6bn at the end of H1 2023, with losses partially offset by positive investment performance.

Abrdn said investor sentiment suffered due to “high inflation and geopolitical uncertainty”, which “continued the trend to cash and de-risking of client portfolios”.

“The industry saw continued net outflows in H2 across global active mutual funds. The changing dynamics and challenges within traditional asset management are well known and we continue to reshape our business to take account of these factors.”

Elsewhere, the institutional and retail wealth part of Abrdn suffered gross outflows of £11.2bn in H2, but net outflows of £8.3bn which the firm said was driven by negative sentiment towards equities and fixed income. The arm also suffered £6.7bn gross outflows in H1, with assets now standing at £211.2bn.

See also: Why investors need to take outlooks with a pinch of salt

Interactive Investor saw an inflow of £1.4bn in H2 2023 with assets at £61.7bn, while the Personal Wealth arm saw saw outflows of £300m. Assets here now stand at £4.3bn.

Overall, Abrdn’s AUMA is £494.9bn as at 31 December 2023, which includes a £6.9bn reduction due to “corporate actions”, including the disposal of its discretionary fund management arm – which contributed £6.1bn in AUM, and its £4.1bn US private equity business. It also acquired healthcare fund management business Tekla for £2.3bn, and four closed-end funds from Macquarie for £700m.

H2 2023 net outflows of £12.4bn represented 3% of the business’s opening AUMA. Net outflows excluding liquidity amounted to £9.5bn.

Abrdn has been hampered by lacklustre performance for some time, having been relegated from the FTSE 100 to the FTSE 250 index twice in 2023. In its H1 2023 results published in August last year, profits for Abrdn’s investment arm fell by 66% and fund flows plummeted 83% year-on-year.

Credit ratings issuer Moody’s downgraded Abrdn’s long-term issuer rating from Baa1 to A3 due to “idiosyncratic weaknesses in its profile” as well as “industry-wide headwinds.

CEO Stephen Bird has been streamlining the business’s product range and services in a bid to improve profitability, announcing a strategic review in July last year. The operation involved the launch of Abrdn’s Multi-Asset Investment Solutions franchise, which aimed to simplify the company’s product suite, improve performance and clarify performance objectives. This included folding the once-behemoth GARS fund into the firm’s Diversified Assets suite of funds, as well as closing three “other “liability-aware” absolute return funds.

Abrdn has also proposed merging several of its investment trusts over recent months, either with other internal investment companies, or with portfolios outside of Abrdn’s management. These include merging Abrdn Smaller Companies Investment Trust and Shires Income; the winding up of Abrdn China Investment Company into Fidelity China Special Situations; and folding Abrdn Property Income Trust into Custodian Property Income Reit.

This article was written for our sister title Portfolio Adviser

The Ucits fund will be managed by the Global Convertible team led by David Keetley (London), and Steve McCormick (Connecticut), supported by David Sugarman and Jake Collins in London along with Uttkarsh Lal in Connecticut.

The Irish-domiciled fund will invest predominantly in convertible securities, with the flexibility to invest in both corporate debt and equities. Most positions will be hedged.

It is “targeting a 5-8% net return with limited downside and a return volatility of around 6%”.

Characteristics

David Keetley, global convertible portfolio manager at Polar Capital said: “This new fund has characteristics of a long/short equity fund, except that the long exposures are generated through long convertible positions.

“It also has some characteristics of a convertible arbitrage fund. The investments we make are split into five categories: equity hedged convertibles, asymmetric profiles, put trades, income/defensive investments and covered convertible call writing.

“The current market environment is creating many excellent investment opportunities for teams with the right skills. These are ideal market conditions for this team and for this fund.”

Availability

The Global Absolute Return Fund has been launched due to investor demand.

It will be available in France, Luxembourg, Austria, Germany, Switzerland, UK and Ireland.

The term ‘absolute return’ should not to be confused with ‘unconstrained’ even though they are often used interchangeably – the former refers to an outcome, the latter to a style of investing.

Unconstrained bond funds have had two successive quarters of negative European fund selector sentiment, according to Last Word Research.

However, fund selector appetite for absolute return strategies has remained consistently high over the last three years.

Last Word Research’s latest asset class survey found that in Q2 40% of pan-European selectors said they were looking to increase their allocation towards the asset class over the next 12 months.

Another 35% said they were looking to hold their allocation, 4% to decrease, and 22% did not use the asset class.

These numbers have been remarkably consistent since Last Word Research began surveys in 2015 and there has never been more than 7% of selectors looking to decrease absolute return allocation (in Q2 2016 and Q3 2016).

“Appetite for the broad absolute return asset class is showing little sign of disappearing with 40% to 50% of respondents saying they expect to buy more in half of the countries surveyed,” the survey said.

“Even in countries with below average usage, you would find keen buyers.”

Longest bull market ever

Tim Peeters, head of securities portfolio at Belgian multi-family office Portolani, told International Adviser’s sister publication Expert Investor that he was looking to increase his absolute return strategy allocation to help cushion the next downturn.

This week marks the longest bull market on the S&P 500 in history and Peeters said that likely portends tighter financial conditions.

“As asset classes like bonds and equities rise to unsustainable levels it means investors need to search for places to hide, as both asset classes might fall together,” he said.

“In traditional funds the bond part of the portfolio is meant to cover some of the equity side losses in case of a stock market collapse. With nearly no yields left, bonds cannot provide this ‘cushion’ role as they did over past decades.”

Correction risk

As the risk of a correction in bond and equity markets rises, absolute return funds provide the ability to diversify across asset classes and go short to hedge risks, Peeters said.

“Absolute return funds can have uncorrelated investment strategies which can perform on a standalone basis – the performance of a fund is the sum of these different uncorrelated strategies,” he said.

However, while such an approach sounds attractive on paper in the kind of “late stage, low volatile, low yielding market” we are in at the moment the results of many absolute return funds have been poor.

Paris-based founder of Iodda Advisors, Vincent Batailler, said his family office clients in Europe and Asia were keen on absolute return strategies because they provided an alternative to equity and bond funds.

“With absolute return funds [clients] are able to invest for a long period of time and put trust in the managers to get through difficult periods,” Batailler said.

“Absolute return funds can not only mitigate market movements but make nimbler and more interesting investments.”

July outflows

Looking at Morningstar fund flows data, the absolute return sector (including hedge strategies, multi strategy, volatility, arbitrage, currency, and event driven funds) since the beginning of 2018 has had inflows of €21.7bn.

Over the last 12 months to July 2018, inflows were at €50.1bn.

However, July 2018 experienced outflows for the first time since December 2011 at €834m. Multi-strategy funds experienced the largest outflows in the sector at €1.3bn, followed by long/short debt at €891m.

The largest inflows were from global macro funds at €910m and European long/short equity funds.

The multi-strategy fund with the highest outflows was Standard Life Aberdeen’s flagship UK-domiciled Global Absolute Return Strategies (Gars) fund at €600m. The fund’s Luxembourg-domiciled version came third in outflows at €400m.

UK-domiciled Newton Real Return fund came second with outflows of €457.9m.

While these outflows precede the Gam debacle, absolute return funds were already on a downward trajectory with June experiencing the lowest inflows at €720m since November 2016 (€565m).

Morningstar data showed that the Gam Star Absolute Return Bond Plus fund had outflows of €1.04m during July.

However, the Gam Star Absolute Return Bond and Gam Star Absolute Return Bond Defender funds had inflows of €82.5m and €26.6m respectively during July.

Since January 2007, almost every month the sector has been dominated by inflows with its highest in December 2015 at €10.2bn. The highest contributors during the December 2015 high were multi-strategy funds (€5.4bn) and market neutral equity funds ($2.5bn). The lowest being currency funds with an outflow of €226m.

Ucits due diligence

Batailler said the fact that absolute return funds were Ucits-accredited led to some investors concluding there was no risk.

“[The Ucits stamp] means some people invest in absolute return funds without any due diligence – without knowing what the managers do, what the risks are, and how the fund performs in different market environments,” he said.

“The biggest challenge for absolute return managers is if they have a portfolio which is not balanced. They have to pay attention to how the portfolio is constructed, and how to ward off any disillusions.”

Peeters said selectors should spread their investments over a number of different absolute return managers to mix up the strategies they are exposed to.

Poor absolute returns

While many absolute return strategies have not delivered stellar returns in recent years, Peeters said he expected this underperformance to be temporary, and said he expected the next market downturn would highlight the merits of diversification.

Multi-strategy funds would help investors survive the next market downturn, Peeters said, while long/short equity funds should create value.

Despite the asset class’s popularity, returns over the three years to 31 July 2018 have been abysmal.

The absolute return sector within the Offshore Mutual and FCA Recognised universes had losses of 4.8% and 6.4% respectively, according to FE Analytics.

Absolute return sector returns three years to 31 July 2018

Source: FE Analytics

The largest absolute return strategy funds, by assets under management (AUM), is Old Mutual Global Equity Absolute Return I Accumulation fund at €14.2bn.

The fund has performed the best out of the top 10 largest absolute return strategy funds at 11% over the three years to 31 July 2018.

However, the second largest fund, Standard Life Aberdeen’s Gars fund has lost 9% over the same time period.

According to Morningstar, this year alone the fund has lost €2.1bn in flows. Over the three years to June 2018, the fund has lost €4.7bn.

Standard Life’s Gars fund was the UK’s largest fund before it suffered massive outflows in 2017 after three years of underperformance. Last year, its Luxembourg domiciled version lost €6.4bn in net assets.

Despite the huge losses, the Gars fund is still among the largest funds in the asset class with €7.4bn.

Largest absolute return funds by AUM

Source: FE Analytics

However, over the three years to 31 July 2018, only four out of the top 10 funds by size returned above 2.5%.

Among the largest funds that had five-year return figures to July 2018, all returned in positive territory, highlighting the merits of much longer-term investment horizon with absolute return funds. The Gars fund scraped through at 1.3%, and the Old Mutual fund at 44.8%.

The Jupiter Merlin Real Return portfolio had 71% in absolute return funds as at 31 May 2018, including holdings in Old Mutual Global Equity Absolute Return, Jupiter Absolute Return and Polar Capital UK Absolute Equity.

The remainder of the UK version of the fund will be invested in equity funds (27%), gold (5%) and physical cash (5%). However, the fund will have the flexibility to invest in fixed interest, commodities and property.

Punchy allocation

Darius McDermott, managing director at Chelsea Financial Services, finds the fund’s expected equities weighting “quite punchy” for a product that is supposed to have an absolute return mentality.

“Clearly if markets go very bad then people would get a negative return,” he said.

The Sicav version invests 27.4% in equity funds, spread out across global equities (13.9%), Asian and emerging market equities (6.8%) and US equities (6.8%). It has a cash weighting of 1.7%.

Commenting on the launch Algy Smith-Maxwell, a manager within the Jupiter Merlin team, said the Real Return portfolio “should be very well placed at a time when equity and bond markets have enjoyed a nine-year bull run”.

The UK version of the fund aims to deliver a return of 3% net of fees above the consumer price index over three-year rolling periods.

McDermott admitted that having an “equity kicker” has helped the Sicav fund’s recent performance.

Since launching just over five years ago, the Jupiter Merlin Real Return portfolio has returned 45.28% compared with the FO Mixed Asset sector’s 26.95%, according to FE Analytics.

Over one and three years it has returned 7.2% and 38% respectively, while peers in the sector have returned 1.7% and 21.9% over the same time frame.

Re-profiling

Jupiter global head of distribution Nick Ring said the rationale for launching a unit trust form of the Real Return portfolio was the “clear demand” from clients for a product that offers “exposure to the growing universe of absolute return funds, while leaving fund selection in the hands of an experienced team of investors”.

Fundscape CEO Bella Caridade-Ferreira agreed the Merlin team are banking on the fact “investors will be looking for absolute strategies and safe pairs of hands” when volatility picks up.

But she suspects the real reason for launching a UK version of the fund is about re-profiling the fund amidst considerable competition from multi-manager groups like Architas, Old Mutual and Hargreaves Lansdown.

Currently sitting at €163m, the Sicav fund is small compared with many peers and even other fund of funds from the Jupiter Merlin range.

“Jupiter has a track record in the multi-manager arena and so normally wouldn’t need to launch a UK version of the fund … unless it’s targeting end consumers directly,” Caridade-Ferreira said.

“However, according to our data, the Luxembourg version doesn’t attract any sales in the UK, so this might be about re-profiling the fund and the team.”

Not cheap

Still, McDermott notes the Sicav fund “is not super cheap” with an annual management charge of 0.75% and an ongoing charges figure of 1.63%

Caridade-Ferreira said fund-of-funds products will always be expensive, not least of all a fund of absolute return funds. But she said fees will be an issue given it is going up against similar fund of funds products from Janus Henderson and GAM.

It will also have to compete with other real return funds like Newton Real Return, “which has the benefit of not being fund of funds,” she added.

Despite its dear price tag, McDermott said the Jupiter Merlin outfit led by John Chatfeild-Roberts (pictured) is a “good fund researching and multi-manager team” that is “very, very experienced”.

“They certainly have the credentials to do it,” he said.

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