Schroders’ results point to strategic answers

In the circumstances in which asset managers currently find themselves – struggling to recover after a rollercoaster year – results for big beast Schroders (SDR) were entirely acceptable, if not the definitive evidence of recovery that might have been expected.

There is something about the sheer scale of the company, with its highly diversified business model encompassing wealth and institutional asset management, that makes turning its performance around as difficult as manoeuvring an oil tanker. The fundamental question for investors is whether taking a voyage with Schroders into specialist areas such as wealth management and private markets is worth the fare if it is easier to simply buy other companies with an existing single specialism.

Prior to the year end, investors had to digest a 5-for-1 stock split that has radically simplified the share structure while bringing the share price back down, at least in monetary terms. The move should help to improve the attraction of holding Schroders in the eyes of retail investors.

Operationally, the market was mainly unimpressed by the company's key metrics. A combination of market volatility and negative investor sentiment meant that flows went in the wrong direction for the year at a negative £7.6bn. Total assets under management (AuM) of £738bn came in well under consensus forecasts despite the company adding £52bn of assets via various acquisitions.

If Schroders is to successfully complete its pivot away from large-scale traditional fund management – an area that is seeing considerable fee pressure and commoditisation – then wealth management and specialist private markets have to perform better. Wealth management and private assets, together with the solutions business for pension clients, now account for 53 per cent of Schroders' total AuM. The wealth business generated revenues of £450mn in the year, and the asset management arm - which incorporates the private asset and pension businesses - brought in £2.4bn.

Analysts agree that it makes strategic sense for Schroders to break out of its asset management niche, but disagree as to whether the company offers investors the right exposure to faster growing areas.

Numis analysts said in a note that “when the strategy was first explicitly mentioned in 2019,  circa 63 per cent of management fees came from traditional areas, it is now 55 per cent and we forecast 49 per cent in 2025."

They added that "some of this has been accelerated by recent acquisitions, but we note a lower level of surplus capital now available for this in the future and the challenge of desired businesses likely trading at higher multiples than Schroders' own.”

At 18 times Numis’s EPS forecasts for 2023, Schroders is still priced to deliver on what it has promised the market. We share the view that achieving this will be difficult. Hold.

Last IC view: Hold, 2,830p, 28 Jul 2022