OREANDA-NEWS. Aberdeen Asset Management's (AAM; A/Stable) performance continues to be pressured by net asset outflows largely due to negative market sentiment towards emerging markets (EM) assets where AAM has a strong franchise, Fitch Ratings says. However, due to sizeable non-EM asset acquisitions since 2013, notably Scottish Widows Investment Partnership (SWIP) in early 2014 and various bolt-on acquisitions since then, AAM is now better positioned to weather challenging market conditions in EM assets, which we expect to continue into 2016.

As reported by AAM yesterday, net asset outflows in its equities businesses in the year to end-September 2015 (GBP16.4bn) were around GBP3.4bn higher than in FY2014. Net outflows in equities were particularly high in the three months to end-September 2015 (GBP7.9bn). Equities accounted for 28% of AAM's assets under management (AuM) at end-FY2015 but generated 58% of the firm's FY2015 revenue. Asia Pacific (33% of equities AuM) and EM (32%) are AAM's dominant equity strategies.

Apart from equities, net asset outflows in FY2015 were also higher but to some extent expected in AAM's acquired SWIP businesses (GBP8.4bn net outflows in FY2015). Total AuM dropped to GBP283.7bn at end-FY2015 from GBP324.4bn a year earlier with acquired AuM (GBP3.3bn) and positive FX movements (GBP0.6bn) insufficient to compensate for net outflows (GBP33.9bn) and a negative market and performance impact (GBP10.7bn).

Net outflows were exacerbated by sovereign wealth funds (SWF) repatriating some of their funds during 2015. According to AAM management, SWF represented a smaller proportion of AAM's client base at end-FY2015 compared with a year ago and clients from the Middle East and Africa dropped to 2% of total AuM compared with 4% a year earlier. Management expect SWF asset outflows to continue as long as oil prices remain low.

AAM's profitability has held up reasonably well in FY2015 supported by a strong and resilient operating margin (42.7% in FY2015 compared to 43.9% in FY2014). While diversifying into fixed income, alternatives and property businesses has supported AAM's profitability in FY2015, fee margins in these businesses (with the exception of property) are significantly lower than in AAM's dominant equities business. Consequently, any meaningful profitability improvements at AAM will still hinge on a changing investor sentiment towards EM assets. Due to its EM bias (and underweight position in well-performing US equities), AAM's equities performance continues to lag benchmarks, notably in global equities. In view of this, Fitch believes that profitability is likely to fall somewhat in 2016.

Other financial metrics, notably capitalisation and leverage, compare well with similarly-rated peers. AAM's maintains an adequate cash surplus above regulatory requirement (around GBP138m pro forma for recent bolt-on acquisitions).

To further improve diversification, AAM has stepped up its seed capital programme, notably in its multi-asset and diversified business, and total seed capital increased to GBP148.9m at end-FY2015 (from GBP58.1m a year earlier). In light of ongoing revenue pressure, AAM has announced a cost-cutting programme with the aim of reducing operating expenses by GBP50m (around 7% of its FY2015 cost base) with effects to feed through later in FY2016 and notably FY2017.

Fitch upgraded AAM in April 2014 following its transformational acquisition of SWIP, which improved product and geographical diversification and reduced AAM's reliance on its EM businesses. We affirmed AAM's ratings in June 2015.