Aberdeen has endured some difficult market conditions recently. What effect are these negative events having on Aberdeen’s securities lending programme, if any?
As a firm it has been a challenging three years for Aberdeen Asset Management given the weakness in emerging markets. However, we are fortunate in that we have a strong balance sheet and are a globally diversified business.
The securities lending programme within Aberdeen is designed to generate incremental revenues in a risk averse and flexible manner. It is a tool used by Aberdeen to ensure that a fund’s assets are constantly put to work for the benefit of our clients. Market conditions do not have any direct impact upon the programme from a risk/reward perspective as securities lending is always managed to ensure that risk management is of paramount importance.
Despite this, the programme remains open to change as long as any modifications meet our risk appetite (which is relatively low). Changes have been made to the collateral schedule and the funds now accept main index equities against equity loans with an increased haircut. The decision to modify the collateral schedule followed intensive research and stress testing of how equities behave versus our on-loan positions during periods of market stress.
Due to the strong positive correlation between the underlying loan and the collateral held, it was discovered that the fund was always covered with the haircut remaining pretty much intact. The decision was therefore taken to accept them on a trial period with continued monitoring. This trial period is now over and main index equities form an integral part of our collateral schedule. Revenues have increased as a result, as our funds are now more attractive for the selected borrowers that we agree to lend to.
How would you describe the health of Aberdeen’s securities lending programme? How would you rate its importance during times of stress?
Securities lending within Aberdeen is never going to be at the very top of any fund manager’s agenda even during times of market volatility. Securities lending is used as a tool to generate incremental revenues for our clients in a very risk-controlled manner.
The revenues are incremental in relation to the size of most funds so while being another tool in the fund management box, there are many others available that contribute to the funds’ overall performance. During periods of stress, as long as the lending revenues continue to justify themselves in relation to any implied risk, as they do during normal market conditions, then the message is very much steady as she goes.
European markets are being described as difficult in general. Would you agree, and why?
In respect to securities lending, it is true that there does seem to be less demand than in previous years. We have never been a large lender of European securities as we have never lent our securities for general collateral rates. Therefore, we have always been more skewed to the specials end of the market.
Given the composition of our fund ranges, we have always therefore seen more borrowing activity from our Asian, emerging market and small and mid cap funds. European markets from a specials perspective still have pockets of value. Scrip dividends are always in high demand and there are generally one or two specials that we hold in Europe. Given that we are value-driven investors, however, we tend to find that we do not hold too many securities that are special in Europe as they are outside the limited amount of corporate activity that has been going on. Currently, most European specials seem to be directionally driven and we very rarely hold them.
What do you think lending and repo desks need to do to adapt to these conditions?
Flexibility is key but beneficial owners should not be scared to stick to their guns if any proposed changes from their agents are clearly outside their risk parameters. Given the ongoing cost and increasing scarcity in government bonds, we have found that accepting main index equities as collateral at an increased haircut has worked out well. We insist upon full collateral segregation, daily reporting and quarterly stress testing to ensure that any risks inherent to accepting equities are well monitored. Up until now, despite running the stress test scenarios over several market events and several different time periods, all results have shown that we have remained over collateralised and within applicable tolerances.
Prevailing market conditions helped to nudge us into making this decision but the main driver was to ensure that the funds continue to hold good quality and above all liquid collateral. We were able to make these changes as we only lend to good quality brokers who are monitored daily and because we are still operating firmly within our agents indemnification remit.
How important is Asia proving to Aberdeen, in terms of securities lending and the wider firm?
Asia is important for Aberdeen from both a firm and securities lending perspective. Some 34 percent of all equity investments are in Asian securities and given that Aberdeen uses intensive first-hand research to find quality companies at the right price, Asia definitely seems to be providing a number of opportunities.
Aberdeen has had a presence in Asia since 1992 with our first office opening in Singapore. Today, the group now has offices in Hong Kong, Thailand, Malaysia, Australia, Japan, Taiwan, Indonesia, China and South Korea. As mentioned previously, our lending programme is more focused on intrinsic lending so owning securities in some less generic markets allows us to ensure that all loans generate meaningful returns as demand to borrow is usually greater or at larger spreads.
Asian securities have always provided a significant portion of our lending revenues in the past and given recent corporate and economic activity are likely to do so in the immediate future. Asia holds many opportunities for lending in relation to new markets and new, more intense pockets of demand. It’s an exciting place to be but it has its challenges as information flows and market structure means that securities lending is not as passive as it once was.