Tuesday’s arbitral ruling over the disputed £109bn Scottish Widows Investment Partnership (Swip)/Lloyds contract is a mere “irritation” rather than a major setback for Lloyds Banking Group (LBG), according to an investor with interests on both sides of the row.
Standard Life Aberdeen (SLA) stated in May 2018 that it did not agree it was “in material competition with LBG” over the long-term investment contracts and on Tuesday it celebrated the “successful outcome” to the ongoing arbitration – ie it was right.
Scott McKenzie, fund manager at Saracen, holds both Lloyds and SLA in his UK Income fund, and says the rule in favour of SLA would have been “an unexpected bit of good news” for the group that has been plagued by negative newsflow and outflows for the past couple of years.
With Lloyds his top position at 5.4%, he says the group is so big and diversified, it will feel less of an impact than SLA: “It think it will have less of an impact for Lloyds than it would be for SLA. I think it’s an irritation for Lloyds but not a major setback.”
Ruling could ease pressure on SLI Gars
McKenzie says the outcome gives SLA – also one of his top 10 holdings, with 4.4% – a “stay of execution” for the next three years, shielding it from another immediate blow to AUM following the noteworthy £40bn outflows in its latest full results.
While many have focused on the one-time behemoth Global Absolute Return Strategies (Gars) fund as behind a significant portion of the outflows, McKenzie says by that consequence, Gars now has a less significant role to play and he hopes to have seen the worst of the outflows. He expects more to follow in this financial year, albeit to a lesser extent.
“I think with hindsight [Gars] grew too big, too quickly, and so had further to fall. But in my opinion, all those large multi-asset funds – Invesco’s, Aviva’s – have performed quite badly but because Gars was the first and the biggest it has attracted the most negative attention.”
Lloyds was naive to believe ruling would be in its favour
Sources close to Lloyds say the expectation was, naively, that the panel would rule in its favour.
While next steps remain to be seen, commentators are suggesting Lloyds will have to pay some form of ‘divorce settlement’ to compensate SLA and move proceedings on.
Portfolio Adviser asked LBG whether it was satisfied with the legal advice it was given and the time and it declined to comment.
A spokeswoman from Scottish Widows did say: “We are disappointed with the decision of the arbitration tribunal, and will look to discuss its outcome with Standard Life Aberdeen.
“Our strategy remains unchanged, which is to do the right thing for customers. We will discuss starting the process of an orderly transfer of assets to our new partners Blackrock and Schroders. We will continue to work closely with Standard Life Aberdeen to ensure there is no disruption to performance or service.”
Keith Skeoch, chief executive of Standard Life Aberdeen, adds: “Now that the arbitration panel has ruled in our favour, we will carefully consider our next steps, working constructively with LBG to bring the matter to resolution.”
While numbers have not yet been confirmed, one analyst estimate has suggested the compensation might be roughly £300m, which if returned to shareholders, either in the form of a buyback or a special dividend, would be be “reasonably significant”, according to Ian Forrest, investment research analyst at The Share Centre.
End investors must come first
The big question is whether end investors – many of whom would be Scottish Widows life and pension policyholders – will be better off under the new investment managers.
Forrest says he hopes that would have formed part of the decision-making process.
He says: “I would hope part of the rationale for moving the assets to Blackrock and Schroders is that it would be beneficial for customers and shareholders.”
Both stocks are currently on ‘hold’, he says, with a marginal preference in favour of Lloyds – Lloyds sitting at medium risk for investors with a balanced risk appetite and SLA deemed medium risk for income investors.
Forrest says the pressure from passive investing remains and suggests Martin Gilbert, in his new roles of vice chairman of Standard Life Aberdeen and chairman of Aberdeen Standard Investments, will focus on its key relationships and potentially even look at further merger opportunities.
A blueprint to follow?
But if Standard Life is a blueprint for Aberdeen’s merger activity, is it a good one?
McKenzie says not yet. He says: “So far, you could not describe the merger as a success; I think many shareholders would say that it’s been a pretty painful process. They still have a lot of cost-cutting to do, there are still a lot of people to leave the business. There hasn’t been much good news for [SLA] this past year.”
Forrest’s jury is still out. “It’s too soon to say if it’s a success or not. The deal is only around 75% complete and there has been a lot of money leaving the group – not just Lloyds – so they need to stem that.”
He adds: “This is potentially quite significant for them as the trend for passives has been working against SLA, so they need to try and hold on to all their big customers and it’s a case of how long they can do that.”
With Gilbert’s renewed sole focus on “strategic relationships with key clients, winning new business and realising the potential from our global network and product capabilities”, Forrest and McKenzie believe this is playing to his strengths.
