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Every investor likes to make a profit, and after a 20% crash in just one week, abrdn shares (LSE: ABDN) are heading towards critical territory for me.
The falling net flows
In its Q3 update on 24 October, the company shocked the market by reporting another outflow of £3.1bn. In the first nine months of 2024, cash outflows were £2.1bn.
This resulted in a significant decline in its investment and advisory businesses. Interactive Investor, its direct-to-consumer (D2C) offering, continues to grow and saw net inflows of £1.2bn in the quarter.
It has been a long time since the company failed to arrest the people who left. By 2023, customers will spend £13.9bn on their money. This was followed by £10.3bn by 2022.
Passive investment strategies
There are many reasons why clients have withdrawn billions from their investments over the years. One important thing for me has been the rise of passive investing.
Last year, the S&P 500which is the largest and most important indicator, increased by 40%. Very few, if any, active investment managers can boast such returns.
Indeed, since the end of the global financial crisis, we have seen a steady rise in investment vehicles driven by things like Vanguard again Blackrock.
When measured over a one-year period, only 23% of all abrdn active equity funds beat the specified benchmark. In three years, the figure has worsened by 14%. Why would anyone pay a premium for active management when one can simply buy an index?
The stability of the investment made
Fixed income investment strategies may have started to work in the past decade, but that doesn’t mean they will continue to do so.
Today, everyone has accepted passive investment, including large capitalists such as institutional investors and pension funds.
Most passive investments go into US stocks, especially the S&P 500. Foreign (non-US resident) holdings of US stocks are at record levels today.
I don’t believe the trend in money flows in the S&P 500 is sustainable, especially when only a small number of stocks are driving all the action.
I think the same thing is happening in equities as we have seen in bonds recently. There, after the yield increase, the active managers have really started to shine. abrdn has a real expertise in the bond market, and that explains why 89% of its funds in this space have beaten the specified benchmark, in a period of one year.
Juicy dividend
Trying to catch a falling knife is fraught with risk, but the fall in arbdn’s share price has boosted the dividend yield to 10.6%. But is it sustainable?
That I don’t know your answer. Dividend cover remains at 1.1 critical times. However, the business has a strong balance sheet with cash and liquid assets of £1.8bn. The company wants to see a dividend cover of 1.5 times before it can consider increasing shareholder returns.
Buying low and selling high is easy on paper, but difficult in practice. I don’t know if we’ve seen the bottom, but I just took a small space, with the intention of adding more later.
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