Schroders values stability

Schroders (SDR), the bluest of the blue-blooded asset managers, has been trying to readjust its business model over the past 18 months to allow it to access areas with higher margins than its traditional management mandates from large institutional investors. Solving the conundrum over where future growth is going to come from means understanding the issues that must be confronted. The manager’s sheer size – assets under management (AuM) in these results were £726bn – means that achieving growth through scale is now an impossibility, so specialisation in niche areas is the route to greater profitability that management has chosen. This strategy is not without controversy, but the evidence from these results is that at least general market conditions have moderated enough to allow Schroders the time to change around its business focus.  

The results offered a clue that the punishing outflows that had affected all asset managers over the past year have started to moderate in the face of better stock market performances for key indices and more benign foreign exchange (forex) conditions. Total net inflows of £6.3bn, flat compared with 2022, suggest that sentiment has remained at least steady and that the attraction of staying in cash in a higher interest rate, high inflation environment has certain limits for investors. In this context, the overall £11bn fall in AuM to £726bn can be attributed mainly to market and forex volatility, rather than skittish investment flows based on sentiment.

One area that did prove difficult was the company’s institutional business, where lower-margin mandates contributed to net outflows of £5.3bn, which is itself an improvement on the £7.6bn seen last time, with AuM ending the half marginally down at £135bn.

One area where management has placed great faith is wealth management, where net new business growth translated into a 7 per cent increase in the segment’s operating income to £216mn on AuM of £116bn – which represented 4 per cent growth on 2022.

The choices facing Schroders are, in a sense, forced on the company because the existing fee structure and emergence of nimbler specialist players means that standing still is only to invite a slow decline, even for a firm of its size and heritage. The 'work-in-progress' nature of this transformation is reflected in the forward price/earnings ratio, based on Numis’s forecasts, of 17. Hold.

Last IC View: Hold, 480p, 3 Mar 2023