Below is the transcript of a CNBC Exclusive interview with Martin Gilbert, Chief Executive Officer, Standard Life Aberdeen. The interview was first broadcast on CNBC's Squawk Box Asia on 17 September 2018.
All references must be sourced to a "CNBC Interview'.
Interviewed by CNBC's Nancy Hungerford
Nancy Hungerford (Nancy): We are here on the eve of ten years since Lehman Brothers and as you were at Aberdeen, we're watching this all unfold stateside, but eventually what came to the U.K would eventually affected Aberdeen. How bad did it get? Did you ever take a step back, and say we could go in the way of Lehman?
Martin Gilbert (Martin): No, I don't think so. I think the asset management businesses are sort of different from insurance and banks. We don't have the risk on our own balance sheet. I knew we would suffer a profit hit but I knew we would we would survive. And we sort of knew it was coming because I always remember in June of that year speaking at a conference in Monaco and actually saying you know the big risk out are CDOs and they remind me so much of split capital investment trusts and the crash that we were sort of slightly prepared for it. But we learnt a lot from it about risk in our own business which we didn't actually think would be an issue i.e. where do you put your cash, and remember asset managers were sitting on billions of cash. We were worried where to put the cash every day. So we did learn a lot from the crisis.
Nancy: Many people here have said the risk environment is different. You've said yourself that there is a greater understanding of prudence in the business too. But does too much prudence carry its own risks as well, when you look at what shareholders demand in the way of returns?
Martin: Yeah, I think one of the things and if you speak to the governor of the bank of England or regulators around the world, they've shifted the risk from bank balance sheets to really onto the funds that asset managers manage. So they've now become gigantic and of course, that's where they see the risk coming but be under no illusion the regulators want the banks to be safe and almost utilities and so do the shareholders to a certain extent. All we want is a steady dividend stream. We don't want too much excitement. If we do want to excite we can go and buy Goldman Sachs for instance. But for the domestic banks like Lloyds, we want just nice safe well run banks.
Nancy: When you talk about the fact you did see some cracks emerging in the early days, before the financial crisis really took off, is there anything you see today that gives you cause for concern?
Martin: Nothing specific. I think you know they always say bull markets climb a wall of fear. I think the good thing today is people are worried and I think that's good. Now a crisis comes from somewhere you haven't foreseen normally. So I'm always worried when we're too complacent. So I think we're too complacent about a lot of things - geopolitical risk, all of these things so. There is a bit of complacency and I'm worried asset prices are too high as is everyone else but that we're in this very low interest rate environment at the moment so the only place to put your money are equities or whatever they might be and bonds so there's a wall of cash chasing assets at the moment
Nancy: It seems to me that you see a correction is coming, when?
Martin: Yeah, I think we're already seeing a mini correction in emerging markets. We're obviously very positive about emerging markets. I was looking at that statistic even if China didn't export any, had no exports it would still grow at 5 percent a year on just the domestic growth. So I think they are really growing and I think we've got to remember from the west that we'd be so envious of these growth rates even four or five per cent or whatever are just really outstanding numbers.
Nancy: Speaking about expectations for China's exports, I mean that's another big risk. Investors and asset managers have told us they're watching the current trade fight between the U.S. and China. Do you think President Trump is fighting the right way when it comes to his strategy on China?
Martin: I think it's the only way he knows and it probably comes from how he's dealt all his life, which is the art of the deal or whatever - ask for five billion when you want one billion. So I think he probably is using the right tactics. I suspect he'll always settle for less than he's asking for but I mean even after [Merkel's] meeting with him, [she] went back to Germany and said he does have a point on certain things like percentage of GDP that Germany spends on NATO. So I think he'll achieve probably a lot of what he what he wants.
Nancy: You spent a lot of time working with China, looking at least at the Chinese market in terms of how you could expand there. They have their own way of fighting as well. Do you have any indications of how they're worried there? Whether or not the Chinese government is ready to give in to any of President Trump's demands?
Martin: Inevitably it's neither country's interest to have a trade war. I think they will reach some sort of compromise. Now certainly from Trump's point of view, he is used to compromise. Now whether China will do that I think is the bigger risk. I think the bigger risk of a trade war lies in the Chinese side rather than the US side.
Nancy: Talk to me about your own China strategy at the company. You're looking to benefit really from some of the globalization, the reforms underway in China but how do you compete when so many others are trying to go after the same clients?
Martin: Let's start by saying China is difficult. If you're going to go in there and think you're going to short term do really well, you're going to be very disappointed. So I think you've got to first of all have a really long time horizon. You've got to be prepared not to make huge amounts of money there for quite a long period of time. But I think it's a market you've got to be in because of just the sheer size of the population, the growth, the growth in wealth that you need to be there. It's a bit like America. America still has half the world's wealth. So you've got to be in America and you've got a long term, you've got to be in China as you do in India and potentially Indonesia as well. So you've got to be where the large populations are.
Nancy: Do the domestic players still have their own advantage? Do you think China is making good on this rhetoric of opening?
Martin: China's very clever at getting you in and probably making sure you don't make too much money. So I think the domestic players especially the banks have a huge advantage over the foreign asset managers. Now, why would someone go to a foreign asset manager because perhaps the perception is that better perhaps the perception is that global. So I think those are the sort of things we have to play on in China, really convince people that they are better coming to us because of just the sheer global nature of a company like Aberdeen Standard Investments with our 46 offices fund managers in 24 countries. Now that is a huge, huge investment that we've made and in managing people's assets.
Nancy: Let's talk more about your home markets in the UK and certainly some political headwinds down there as well especially what's going on with Brexit. Bank of England governor Mark Carney has some pretty serious warnings apparently to the UK government about the outlook for no deal Brexit and what it would do to housing prices, and also the fact he may need to raise rates. Is this a smart move for governor Carney to be making these warnings given the independence of the Central Bank?
Martin: I suspect he was indicating that would be the worst case scenario. Now a lot of what he said hasn't come about, hasn't happened and you know the last quarter growth gone up again. My personal view is that there will be a deal. We may not like the deal but I think the prime minister will go to parliament sometime in the first quarter of next year and say look this is the deal, you either accept this or you vote for no deal. It must be in Europe's interests to negotiate a deal because of the balance of trade surplus the Europeans have with the UK so it doesn't make sense not to have a deal for Europe. Financial services to a certain extent can look after themselves and the government. So we've already prepared for a hard Brexit. We've opened in Dublin. Barclays have opened in Dublin. All of us have actually pushed the contingency back and actually have actually done it now so financial services are probably okay.
Nancy: Even in a no deal?
Martin: Yeah. Even in a no deal because we've really planned for a no deal and that we've really moved our operations from London to either Dublin or Luxembourg. I think the other thing to remember about asset management because it was as if we were never in Europe because we always ran our funds businesses from Luxembourg and sold funds to the UK from London.
Nancy: I want to talk a little bit about the business as well. When you look at the stock performance on a 12 month basis, off more than 20%, clearly underperforming the FTSE here, what is your message to shareholders who might be concerned?
Martin: The company is in great shape. I mean we're sitting here with after selling the life company. We're sitting there with close to five billion pounds of cash, five billion pounds of listed equities. So we've got probably one of the strongest if not the strongest balance sheet in the world in asset management. But the market's tough. So I'd look at relative how we perform relative to other asset managers and we're down last this year obviously than some of the others. I think the great news is we think we're a couple of years ahead of everyone else and having seen this tough times for asset managers, fee income going down passive attacking the active fund managers. So hence the reason January 2017, Keith and I decided let's merge these businesses form a form a bigger company so that we can withstand these headwinds going forward. It's going to be a tough time for asset managers.
Nancy: Have you been satisfied with the cost, the synergies coming through in the merger so far, or is there more work to be done?
Martin: We're very satisfied I think we've achieved what we wanted 350 million; we will achieve our 350 million. We may achieve slightly more than that. So we're very satisfied with that. I mean clearly we'd love the share price to be higher but I'm a great believer in not worrying about the share price, worry about the business and what you're doing and the share price will follow is the adage I've always sort of tried to follow. And I believe that that will happen when people realize the value every single analyst virtually has us on a buy because of the unrealized value. Now we've got to realize it.
Nancy: Finally, since you talked about fee pressure, cost, I am interested to see that you're now launching this fund by AI, machine learning. Is this the way of the future? We're going to be looking at machines that are better at investing, one day?
Martin: I don't think they'll ever replace the fund manager per se. Some people do use machines to invest. I think where I see it is really helping the fund manager make that decision taking a lot of the work, manual work around and so on the fund managers were doing. And I certainly see a lot of hope in the middle and back office is to take away the boring jobs that people were doing, in the future. So I really see it helping in those areas of the business.
Nancy: That means job cuts though, doesn't it?
Martin: I think people will learn different skills and hopefully the type of jobs we're talking about the really boring ones that the people are just doing are repetitive and the problem is if we make a mistake in that repetitive task it cost us serious money. So that's why we both need it to relieve people of that dreadful job and we can avoid the mistakes.
Communications Manager APAC, CNBC International
D: +65 6326 1123
M: +65 9852 8630
CNBC is the leading global broadcaster of live business and financial news and information, reporting directly from the major financial markets around the globe with regional headquarters Singapore, London and New York. The TV channel is available in more than 410 million homes worldwide.
CNBC.com is the preeminent financial news source on the web, featuring an unprecedented amount of video, real-time market analysis, web-exclusive live video and analytical financial tools.
CNBC is a division of NBCUniversal. For more information, visit www.cnbc.com