Schroders a safe 2017 bet

But while some asset management groups have seen business suffer, Schroders has defied the market's gloomy expectations. Indeed, after initial sharp broker downgrades in June, analysts have had to rapidly retract their pessimistic predictions and push earnings estimates back up (see table) as the company has delivered encouraging trading news. We think the risk of another downturn in retail investor sentiment could loom in 2017 as the UK government goes to the EU negotiating table, but based on recent experience Schroders should be able to profitably navigate these dangers.

Despite Brexit uncertainty, during the three months to the end of September Schroders grew its assets under management by £31bn to £375bn, assisted by the diversity of its customers and products. Net inflows were £2bn, while investment performance and currency movements accounted for almost £26bn of the increase. This was ahead of market consensus expectations and prompted the latest round of forecast upgrades - Numis, for example, upped its EPS forecasts for 2016, 2017 and 2018 by 3 per cent, 7 per cent and 4 per cent, respectively. Significantly, the result also marked progress on the first six months of the year, when the group generated £0.7bn in net inflows.

Part of the reason the asset manager has managed to withstand the volatility is due to its shift towards more institutional asset management. While institutional mandates tend to be lower margin, they also tend to be larger, more long-term and therefore less influenced by short-term market movements or sentiment. During the first nine months of this year institutional assets offset net outflows from intermediary 'retail' channels, gaining £5.4bn in net new business. Institutional assets accounted for almost 60 per cent of the group's total at the end of June.

Diversifying its strategies into multi-asset and fixed income has also helped maintain new business levels. These types of assets are particularly popular with institutional investors such as pension funds in the UK and Europe, seeking safer assets that can deliver necessary yield. Importantly, Schroders' funds continue to deliver good returns with around 69 per cent of group assets performing above the benchmark on both a one- and three-year basis.

Trading in the more precarious retail market has been less strong. Indeed, Schroder's wealth management business suffered net outflows during the first nine months of the year totalling £0.5bn. Intermediary channels have also been weak, suffering £3.3bn in net outflows during the first six months, although inflows of £1.1bn were reported in the third quarter. Given the volatility of markets, it feels premature to call this a turning point in retail sentiment.