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Record high stock prices among FTSE 100 stocks means that investors need to start looking further afield in order to construct a portfolio geared toward generating a healthy passive income.
However, picking stocks in the FTSE 250 does have its drawbacks, notably that the index tends to be more volatile than its larger cousin. That is why I have a bias toward looking at more established names, with proven business models.
Fund outflows
Aberdeen (LSE: ABDN) is a giant in the asset manager industry, with a total of £500bn of assets under management or administration. Like so many of its competitors, however, it has been beset with outflows from its funds, resulting in falling earnings.
The latest blow to the company came from Phoenix Group, which pulled £20bn of annuity-backing assets from Aberdeen, to manage in-house.
The loss will hit its Investments division the hardest. However, that said, the business has known for sometime that Phoenix was planning strategic changes. The partnership between the two companies remains, with Phoenix having no intention of becoming a fully-fledged asset manager.
Adviser business
Returning its Adviser business to net inflows remains the company’s top priority. This business builds relationships with independent financial advisers, who recommend funds to their own clients.
Net outflows here were £900m. Although disappointing, an improving trend is emerging, with four consecutive quarters of improving net flows. Net outflows are now 50% lower than they were in 2024.
Part of the success is undoubtedly down to its strategy of reducing fees across its various funds. Although this has led to a short-term hit to revenues, I believe it will likely prove to be the right strategy in the long term.
Dividend yield
The main attraction of the stock for me remains that juicy 7.9% dividend yield. Cover currently stands at 1.2 times adjusted capital generation. Although below my preferred number of two times, that figure is on an upward trajectory.
I do not expect a dividend cut, but I am not expecting a raise, either. The business has a stated policy of not increasing the dividend until covered at least 1.5 times by adjusted capital generation. This is unlikely before 2027.
However, as a long-term investor, I remain unconcerned. I am much more interested in locking in an attractive rate now, in the expectation of future increases as earnings improve.
Earnings
Despite its many documented problems, I still remain bullish in the long term. The asset management industry is in the midst of a significant transformation.
One of the prominent reasons behind the change has been the rise of passive investing strategies, which has put pressure on revenues and margins. This is forcing Aberdeen to come up with innovative new investment strategies.
One strategy that is showing early signs of promise is its Quants proposition. These are sophisticated trading strategies that use advanced mathematical tools. I continue to believe that heightened market volatility will help juice long-term returns here.
Yes, there are significant risks. But I view Aberdeen as one of the dark horses in asset management with the potential to even return to the FTSE 100 in the years ahead. For passive income-chasers, it is definitely a stock to consider.
