Schroders struggles to diversify in 'challenging' year

Active fund managers did not have a vintage year in 2023, most of which was spent competing with the renewed attractiveness of cash as an option for many investors. Management at Schroders (SDR) described 2023 in broad terms as: “One of the most challenging years in recent times.” In this respect, the well-heeled asset manager had to work hard to grind out a reasonable set of full-year results.

Schroders, along with the rest of the industry, faces the difficult dilemma that a small number of shares, the so-called Magnificent Seven in particular, are driving the bulk of returns, making active management exceptionally difficult in the process.

Despite this backdrop, favourable market returns, along with net inflows of £12bn into the solutions business, meant that total assets under management (AuM) grew by 2 per cent to £751bn, despite an adverse foreign exchange headwind of £25.8bn.

Wealth management was one area that stood out in an otherwise mixed performance for the group. Net new business grew by £6.6bn to give AuM of £110bn for the year, equivalent to a growth rate of 6.7 per cent. Overall, this meant that net operating revenue was 7 per cent higher at £423mn. The resulting expanded net interest margin helped offset the increased allocation to cash in most investor portfolios.

The other area where Schroders has expanded aggressively is in private markets, where it attracted funds of £9.3bn (2022: £12bn). A lower contribution from real estate transaction fees meant the segment margin fell by 3 basis points to 57 basis points.

The major headwinds were in public markets, where the appeal of cash, combined with wider market volatility, was most noticeable. Schroders’ exposure was in its mutual funds and institutional businesses, which saw £4.2bn and £9.2bn of outflows, respectively, which collectively were broadly similar to 2022.

According to Numis forecasts, Schroders maintains a small premium to the active asset management sector at a forward price/ earnings ratio of 14.6 for 2024. The company’s size and reputation suggest it has the means to switch over from its under-pressure mutual fund and public markets business into higher-margin areas, although the former still make up over 50 per cent of total earned management fees. As the broker puts it, the question is whether investors would not be better off investing in specialist players, rather than a struggling giant. As far as we can tell, that question remains unanswered in these results. Hold.

Last IC view: Hold, 462p, 27 Jul 2023