Research for the Individual Investor
And Aberdeen Asset Management
"Research holding the torch of knowledge" by Olin Warner, Library of Congress, courtesy Wikipedia
Research material has never been more abundant for the individual investor. As far as information is concerned, the diligent individual investor is now on an equal footing with the institutional investor. This may seem unlikely but consider:
1. Publicly listed companies in the UK make available a wide range of information on their websites. The individual investor has the same access to raw company data as the institutional investor.
2. Company specific news is available from online brokers, financial websites, and from publications such as the Financial Times or the Investors Chronicle.
3. Online broker websites provide information on broker forecasts and recommendations. Many provide free advice.
4. Credit rating agencies offer credit ratings on the debt of bond issuers. Pay a small price and you can get the full report.
5. Newspaper business sections, the financial press and bloggers offer tips on a wide range of companies and asset classes.
All this is available from the internet without moving from one's desk.
Institutional investors are reckoned to hold two significant advantages over the individual. They have access to company management and they have financial models that can churn through large amounts of data. But are these really advantageous?
Meetings with company managers are fraught with problems. Naturally, management see an investor meeting as an opportunity to promote their company. As managers are invariably enthusiastic and optimistic exponents of their company's activities, the fund manager or researcher may well leave a meeting with a good narrative to tell about the company. It looks good, but a narrative obscures the rational approach required of a good investor. Benjamin Graham avoided such meetings, as they might have clouded his judgement.
Company analysis is a cottage industry. It does not require the processing of large quantities of data. Indeed, the danger of processing large amounts of information is that the investor will lose sight of what is important and will ignore what cannot be quantified.
It is useful to know the opinions of other investors. The weekly magazine and website, Investors Chronicle (IC), is the best source of new, interesting investment opportunities I know of. And it covers a very wide range of companies, provides basic data and a summary to support its Buy, Hold or Sell recommendations.
If the individual investor feels that he is labouring at a disadvantage to professional fund managers, he should think again. Robert Schiller, in Finance and the Good Society (2012), writes:
"Professional investment managers do not seem to do particularly well in selecting their own portfolios either. A 2011 study by Andriy Bodnaruk and Andrei Simonov obtained data on the personal portfolios of mutual fund managers in Sweden. (It is possible to get these data in Sweden because the country levied a wealth tax until 2007, and so wealthy people had to report their entire personal portfolios to the government.) They found that the investment managers did no better on their investments than the average investor, nor were they more diversified."
Aberdeen Asset Management
Where are the yachts of Aberdeen's clients? (Cover of Aberdeen's 2012 Annual Report)
Aberdeen Asset Management (Aberdeen) was selected by the Investors Chronicle (18 January 2013) as the best of the ten pure asset managers that are large enough to be included in the FTSE 350.
Aberdeen has grown, via a series of acquisitions, to be the 67th largest asset manager in the world. Pooled funds, from retail investors, account for 45% of Aberdeen's business. The remaining 55% come from institutional investors such as pension funds, insurers, sovereign wealth funds and governments. 54% of assets under management are in equities, with the remainder in fixed interest, hedge funds, property and money markets. Aberdeen does not offer any Exchange Traded Funds (ETF).
The UK, with 41% of Aberdeen's revenues (fees and commissions), is its prime market, though Singapore (25%), Europe ex-UK (16%) and the Middle East (12%) are also important sources of business. It has a small US operation, which accounts for 7% of its annual revenues of 869 million pounds.
In its 29 April 2013 edition, the Investors Chronicle rated Aberdeen a Buy at 456p a share. "Risk-hungry punters have sunk so much cash into equities recently that first-half profits at Aberdeen Asset Management (ADN) smashed City forecasts and propelled shares in the fund manager to an all-time high. Underlying pre-tax profit rocketed over a third to £222.8m and analysts at JPMorgan have upgraded their full-year underlying EPS estimate by 9 per cent to 30.9p (from 22.6p in 2012). Even that, they say, may be too cautious."
And, "Earnings upgrades have helped drive Aberdeen's share price recently. But a forward PE ratio of under 15 still looks attractive given the likelihood of a cash return and estimates of double-digit profit growth for at least three years. Buy."
Aberdeen's share price (in blue) has fluctuated wildly when compared to the FTSE All Share Index (in green):
Graph courtesy of Yahoo, click to enlarge.
Is Aberdeen a good long-term investment, and if so, at what price?
Aberdeen is financially in good health and it has a good trading record in recent years:
1. Gross debt declined from 256 million pounds in 2009 to 82 million in 2012. At March 2013, net cash stood at 638 million pounds after a fund-raising of 322 million pounds.
2. Operating cash flow, once share purchases to compensate for employee share awards and capital expenditure are deducted, covered the dividend by 1.8 times these past 5 years. This left 337 million pounds for debt reduction and acquisitions.
3. Earnings per share have increased by a compound 12% since 2005-6, equity per share by 4.5% and the dividend payout by a compound 18%.
4. Return on equity has averaged 9% since 2005.
Using these figures and projecting them for the period 2013-17, with a discount rate of 11.3%, values Aberdeen's shares at 232p. This compares to the current price of 405p, which is on an historical P/E ratio of 23 and a yield of 2.8%.
Aberdeen's business is highly leveraged to the stock market. Costs are fixed while income from fees and commissions are highly variable. A 13% increase in the FTSE All Share between September 2012 and March 2013 translates to an increase of 22% in Aberdeen's earnings per share (H1 2013 compared to H2 2012). Funds flow in and the increase in the value of the funds managed generates higher income. As a result, the present estimate for 2013 earnings is 37% up on 2012. So, at the current price of 405p, the shares are on a prospective P/E ratio of 13 and yield 3.7%. Aberdeen might well be a trading opportunity at 405p.
However, unless we are in for a sustained period of growth in the stock markets, for the long term the present share price is well ahead of fundamentals. Consider:
1. The CEO notes in the 2012 Annual Report, "a battle between active and passive managers is taking place in developed markets". Passive funds (in grey), such as ETFs, are taking market share from managed funds (in orange). And Aberdeen has no passive funds:
Courtesy of Thomas Powers, click to enlarge
2. Asset Managers rely on their performance to gain new customers, and Aberdeen is not currently in the top ten UK asset managers by performance, according to City Wire Global (JP Morgan leads the pack).
3. The UK's recommendations from the Retail Distribution Review, which requires greater transparency of fund charges, are likely to put pressure on the commissions earned by asset managers.
4. Between September 2010 and March 2013 Aberdeen's funds under management have increased by 18%. The FTSE All Share has increased by 13% over the same period and Aberdeen has steadily acquired new businesses. What might be called organic growth is tiny.
5. Two directors have sold 15 million pounds of shares between February and June 2013 at prices between 402p and 466p a share.
6. Aberdeen's shares are trading at 69% above their 12-month low of 241p (in July 2012).
[NOTE: The next article will be published on 3 July]