Yielding 10.6% after a 20% decline, are abrdn shares simply too cheap to ignore?

Every investor loves to pick up a bargain, and after crashing 20% in just one week, abrdn shares (LSE: ABDN) look in serious bargain territory to me.

Falling net flows

In its Q3 update on 24 October, the company shocked the market by reporting further outflows of £3.1bn. For the first nine months of 2024, outflows totalled £2.1bn.

Driving the biggest decline was its Investments and Adviser businesses. Interactive Investor, its direct to consumer (D2C) offering, continues to grow and saw net inflows of £1.2bn in the quarter.

For far too long the company has failed to arrest outflows. In 2023, clients pulled £13.9bn from its funds. This was following £10.3bn in 2022.

Passive investing strategies

There are many reasons why customers have withdrawn billions from its investments over the years. One key one for me has been the rise of passive investing.

During the past year, the S&P 500, by far the largest and most important index, has risen an astonishing 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 passive investment vehicles driven by the likes of Vanguard and Blackrock.

Measured over a one-year timeframe, only 23% of all abrdn’s active equities funds have beaten a stated benchmark. Over three years, the figure is a woeful 14%. Why would anybody pay a premium for active management when one can simply buy an index?

Sustainability of passive investing

Passive investing strategies may have trounced active approaches over the past decade, but that doesn’t mean they will continue to do so.

Today, everyone has embraced passive investing, including large capital allocators like institutional investors and pension funds.

The vast majority of passive investing flows find their way into US equities, notably the S&P 500. Foreign holdings (by non-US residents) of US equities today are at record levels.

I don’t believe the trend of capital flowing into the S&P 500 is sustainable, particularly when only a handful of stocks are driving all the action.

I envisage a similar thing happening to equities as we have seen in bonds recently. There, off the back of rising yields, active managers have really started to shine. abrdn has real expertise in the bond market, and that explains why 89% of its funds in this space has beaten the stated benchmark, over a one-year timeframe.

Juicy dividend

Trying to catch a falling knife is fraught with risk, but arbdn’s falling share price has pushed up the dividend yield to an eye-catching 10.6%. But is it sustainable?

That I don’t know the answer to. Dividend cover sits at a precarious 1.1 times. Nevertheless, the business has a strong balance sheet with cash and liquid resources of £1.8bn. The company wants to see dividend cover of 1.5 times before it will consider increasing shareholder returns.

Buying low and selling high is easy on paper, but hard in practice. I don’t know if we have seen the lows, but I recently took a small position, with the intention of adding over time.