Schroders gets pandemic boost

A combination of a big inflow of client funds from lockdown savers, generally positive market volatility and a big contribution from joint venture partner pushed Schroders' (SDR) interim results into positive territory as the asset manager’s share price recovered to pre-pandemic levels. The results left the impression that good fund managers are benefitting the most from an increase in saving rates as customers turned away from savings accounts to invest their extra cash in search of yield.

Although Schroders doesn’t deal directly with retail investors, its mutual funds are sold via intermediaries to the retail investor market. The division saw net inflows of £6.4 billion, compared with outflows last year of £4.8bn. Total assets under management in mutual funds were £115bn, an increase of 10 per cent. Fortunately for Schroders, the demand for higher mutual funds offset fee pressures and led to net operating revenue margin in the division increasing to 74 basis points, compared with 71 basis points in 2020.

Chief financial officer Richard Keers said that the positive performance had been replicated evenly across the board. But he did describe the increase in performance fees in the half as “unprecedented.” These were approximately £31m, more than double the amount at this stage last year, with the company guiding towards at least £70m fees for the year. He explained that most of Schroders’ products don’t attract performance fees, which is why booking so many in the first half is so unusual. “We would usually see these coming in at the end of December,” he said.

In terms of overall investment performance, Schroders claims that 87 per cent of its assets are outperforming peers on 12-month average, 75 per cent for three years and 82 per cent over five years. Schroders keeps approximately £590m in seed capital at hand so that it can start new funds to market to intermediaries. 

Schroders stands out among the asset managers for the relative diversification of its business, though the ownership of a bank does make reading the balance sheet a bit complicated, though it is rock solid. Consensus estimates give a P/E for 2022 of 15, which is a premium for the sector, but looks deserved based on the company’s operational performance and clear evidence that margins have improved in the right areas after swallowing up the Scottish Widows mandate. The dividends also keep flowing which is another plus for income seekers. Buy.

Last IC View: Buy, 2,959p, July 30 2020.