Aberdeen Asset Management
Matthew Chessum
06 October 2015
Aberdeen Asset Management is not a house that will to lend just for the sake of lending, says Matthew Chessum, who stresses the importance of risk versus reward
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Aberdeen Asset Management was one of the first managers to dedicate resources specifically to securities lending. Looking back, did you enjoy a first-mover advantage?
It鈥檚 very much in line with how Aberdeen Asset Management does things. Aberdeen wanted to ensure the best level of risk management possible was being provided for our clients. It was decided that value could be added by having someone within the organisation who fully understood securities lending within the wider context of the investment process.
Securities lending is considered an investment practice like any other within a fund so it鈥檚 vital to have someone with the relevant expertise to oversee the programme.
The way Aberdeen lends is very specific. Our funds tend to hold fewer positions but of a greater-than-average size, so we are conscious of how we lend them out.
We aren鈥檛 a big general collateral lender. We generally lend for specials only, although we are open to transactions where we can generate decent returns in a risk-adjusted manner. We鈥檙e not a house that鈥檚 going to lend just for the sake of lending. Risk versus reward is a very important concept for us.
How would you define Aberdeen鈥檚 lending strategy?
We鈥檙e always careful about what and how we lend. We lend where it makes sense to do so but we鈥檙e always conscious about how much we are lending in the market relative to the size of our positions.
We are very keen on stress testing the collateral received on a quarterly basis with a view to making any adjustments necessary. Our programme remains flexible, from restricting borrowers to changing haircuts or collateral requirements.
Flexibility gives us the upper hand in managing our risk profile. That doesn鈥檛 mean we make changes every month but we do review our programme regularly and make adjustments when needed so we can calibrate our risk profile as required.
Historically, we鈥檝e only ever accepted government bonds, but have recently expanded our collateral profile so that we can also accept main index equities. We will only look at specific trades, however, where we believe it makes sense and where there is a genuine premium available for lending versus equity collateral.
We are open for like-for-like lending, but we wouldn鈥檛 lend a fixed income instrument against equities because for us there isn鈥檛 a good risk-adjusted return being offered.
There is a very busy regulatory pipeline over the next 18 months. Do any of the new requirements concern you at all?
The collateral guidelines covered in the Alternative Investment Fund Managers Directive (AIFMD), which are likely be translated in the UCITS regulations, may lead to the segregation of collateral at the sub-custody level, which may affect the ability to hold collateral at a triparty collateral agent.
Managing collateral accounts will become very complicated and to me, ruling out the use of any triparty collateral provider, given that they are the entities that specialise in this area, seems illogical. Triparty providers are best placed to both price the collateral and manage it effectively with any restrictions you want to impose.
If you can no longer use triparty collateral providers, especially when you鈥檙e using an independent third-party securities lending agent, then you might come up against quite a few headaches with costs and operational risk increasing. There are also questions about who pays for these costs. Does it come out of our fee split or the agent鈥檚?
Securities lending has to stay relevant to the investment strategy and it has to generate acceptable returns for the funds, or there鈥檚 little point in doing it. Once you get bogged down with too many reporting and setup costs, it simply takes up too much time and the revenues become irrelevant to the funds overall performance.
Would you say that AIFMD will be a step toward over-burdensome regulation that could push people out of the market?
It鈥檚 possible. Securities lending is always going to be an up-hill struggle because it鈥檚 a very misunderstood and emotive practice. There will always probably be more fund managers that are anti-lending than pro-lending. You have to make sure you educate as many people as possible and keep those in charge well informed about the benefits of securities lending.
Ultimately, securities lending is just one of the activities that takes place in a fund to contribute to its overall performance. If lending simply becomes too cumbersome and expensive, then it will be replaced by an alternative activity or stopped altogether.
When you say securities lending is emotive, you鈥檙e referring to the implication that lending securities facilitates short selling?
Yes and that mindset never seems to move on. If you don鈥檛 know too much about the real drivers behind most securities lending transactions then making the association between securities lending and shorting seems like the logical conclusion. In reality, however, the situation is usually very different. A number of different factors are involved in the efficient pricing of stocks. In a nutshell though, if you see someone trying to short your investment that perhaps puts downward pressure on the price, instinctively you aren鈥檛 going to be happy about it.
That鈥檚 why we apply a number of controls and rely upon the flexibility of our programme to make adjustments where needed. We also work actively work with our fund managers to share information and manage their concerns.
Is there any expectation that Aberdeen will have to change its lending strategy in response to new regulatory requirements?
I don鈥檛 believe so. We鈥檙e very happy with the programme that we run and the amount of revenue we generate in relation to the level of risk we assume. If regulation or broker demands push us too far down the risk spectrum then I think we would rather leave the market than take on more risk.
What would you say to beneficial owners considering taking on additional risk to create more demand for their portfolios?
I would say make sure you understand all the risks involved and talk to your agent lender, but make sure you are not being led by them. I think some agent lenders think that their clients are the borrowers, not the beneficial owners.
It鈥檚 down to your agent lender to make your portfolio as attractive as possible. In days where revenue is more difficult to come by I can understand why an agent lender would focus on clients with the widest collateral parameters or the best fee splits, but ultimately they should be working on behalf of all of their clients to try to lend stock where appropriate.
Agent lenders shouldn鈥檛 be beating you up trying to get you to change your parameters. They should be exploring the best way to facilitate your strategy on your behalf, given that you鈥檙e generating their revenues out of your lending activity. Ultimately, securities lending is supposed to be a behind-the-scenes, relatively risk-free activity that adds incremental revenue. In my opinion, this should never change.
What about CCPS? Will 2016 be the year they take off?
I think we are a bit further away from it than next year. I can see how it could be a sell side to sell side tool, but at the moment I can鈥檛 see too many beneficial owners wanting to go through a central counterparty (CCP). It will have to be driven by the agent lenders and the borrowers.
Unless it becomes mandatory, at the moment, I鈥檓 not going to go through the time and effort it takes to add a CCP to my counterparty list given what I can currently lend through it.
For me, it鈥檚 a question of the CCP widening its parameters to ensure you can lend a greater spectrum of assets through the existing model, which will in turn make it more accessible to many more lenders.
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