Schroders buoyed by private assets and thematic funds

Bosses at Schroders (SDR) felt able to increase the annual dividend by 7 per cent on the back of a year of strengthening net inflows, although that may not be enough to match the expected rise in the consumer prices index in the second quarter. Nevertheless, the asset manager revealed an 18 per cent increase in net income through 2021. That should be seen in context with a commensurate rise in operating expenses. The most encouraging momentum was visible in the private assets and alternatives arm, where managed assets increased by 16 per cent to £53.7bn. Net new business in Schroders Capital, its private assets business, hit £7.4bn (2020: £1.7bn).

Adjusted net income from the asset management segment was up by a fifth to £2.14bn, driven by increased performance fees and carried interest. Net new business came in at £35.3bn, leading to a 10 per cent hike in assets under management to a record high of £731.6bn. Mutual fund products drew in more investors, with net inflows of £8.1bn, set against an outflow of £3.1bn through 2020, partly a reflection of the thematic equity products. Management notes that “demand for higher-margin equity products offset industry fee pressures”, so margins in the mutual segment were broadly flat on the prior year.

With one eye on the future, it was no surprise that Schroders brought Greencoat Capital within the fold last year via a £358m deal to acquire a 75 per cent stake in the renewables-focused investment manager. Apparently, this reinforces its “leadership position in sustainability”, although one might be justified in questioning what various forms 'thematic' investments will take following the Ukrainian crisis, particularly if the quest for energy security regains primacy over the somewhat nebulous dash towards net-zero. On which note, events in eastern Europe, and perhaps even the reaction of UK oil majors, could conceivably result in a recalibration on the environmental, social and governance front, an area which has always been open to subjective interpretation.

The consensus view is that costs will fall as a proportion of income, while assets under management and net inflows will increase by 4 and 6 per cent, respectively, between 2022-23. However, prospects for Schroders, like those for industry peers, are bound up with the trajectory of interest rates, inflation, and wages through 2022. This unholy trinity will probably give way to negative real returns on risk assets, so it will be interesting to see whether this will force a rethink on strategies. With uncertainties on the rise, back to hold.

Last IC View: Buy, 3,641p, 26 Oct 2021