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Ride out volatility with Schroders

The asset manager is growing despite recent rocky markets.
June 23, 2016

Schroders (SDR) has been increasingly shifting towards institutional asset management and multi-asset and fixed-income strategies. As a result the asset manager is arguably the most diversified of its peer group. This strategy means despite recent volatility in a sector that is highly sensitive to the broader performance of the stock market, Schroders has continued to win new business. What's more, while good earnings growth is expected over the next two years, the forward price-to-earnings ratio looks attractive by historic standards and a decent yield is on offer for investors. We reckon this presents a buying opportunity for investors seeking long-term growth from the sector's standout quality play.

IC TIP: Buy at 2410p
Tip style
Growth
Risk rating
High
Timescale
Long Term
Bull points
  • Diversification benefits
  • Institutional mandate wins
  • Growing assets under management
  • Positive investment performance
Bear points
  • Margins eroded
  • Highly sensitive to stock market performance

Schroders' core asset management division generated £13bn of net inflows last year and a further £2.7bn during the first quarter of this year. This meant that at the end of March assets under management (AUM) for this division were £292bn, up from £287bn at the same time the previous year. Inflows of institutional assets were the reason for the gains. Last year institutional assets accounted for £8.8bn of new business at the asset management division. This was concentrated in multi-asset and fixed-income strategies and within the UK and Asia Pacific regions.

 

 

During the start of the year Schroders continued its winning streak with institutions, which ploughed another £4.5bn in. This offset £1.8bn of net outflows from intermediaries during the same period, as retail clients grew jittery over precarious equity markets. The smaller wealth management business is also more at the mercy of retail investor nerves. Last year it suffered £0.1bn in net outflows, although flows were flat in the first three months of the current year. What's more, a positive investment performance and transfers from the asset management division meant AUM was up slightly during the first quarter.

Investment performance has also held up well, despite some rocky trading conditions. In the final three months of 2015 the group generated £14bn in investment returns, £8.4bn of which came from institutional assets. The group made a further £8.7bn during the first quarter of this year. The combination of winning new business and a positive investment performance meant Schroders was able to grow its pre-tax profit by 14 per cent to £589m last year. This is in comparison to some dire results from the rest of the asset management sector, and only Liontrust (LIO) and Henderson (HGG) boasted greater profit growth during the same period.

Schroders' bent towards managing institutional assets makes it a more defensive investment when compared with peers, such as Henderson, which earns a higher proportion of its fee income from retail investors. This is because institutional investment mandates tend to have greater longevity and, as a result, are less exposed to fluctuations in short-term sentiment. These mandates from pension funds or the like also involve much larger sums of money. The good news for Schroders is institutional assets make up more than half of the group's total AUM and around two-thirds of those within its asset management business.

However, a consequence of Schroder's shift towards serving an institutional client base, as well as managing more fixed-income and multi-asset mandates, is that margins have been eroded slightly. Undertaking this lower-margin work meant net operating sales margins excluding performance fees fell to 49 per cent last year from 51 per cent. However, we reckon the benefits of diversification outweigh this slight decline in margins.

SCHRODERS (SDR)

ORD PRICE:2,585pMARKET VALUE:£7bn
TOUCH:2,584-2,586p12-MONTH HIGH:3,342pLOW: 2,320p
FORWARD DIVIDEND YIELD:3.6%FORWARD PE RATIO:14
NET ASSET VALUE:990p  

Year to 31 DecTurnover (£bn)Pre-tax profit (£m)*Earnings per share (p)*Dividend per share (p)
20131.4050614458
20141.5256516278
20151.6061017287
2016*1.6362217689
2017*1.7465418794
% change+7+5+6+6

Normal market size: 750

Matched bargain trading

Beta: 1.34

*Numis Securities forecasts, adjusted EPS and PTP figures