Defensive Schroders at a discount

Asset managers are highly cyclical, given growth in management fees – which are by far the biggest contributor to revenue – is dependent on boosting assets under management. When markets fall, not only does the value of assets go down, but customers also tend to pull their money out, too. The reverse tends to be true as markets rise. For that reason, diversification by client type and geography, as well as asset mix, is a sensible strategy and one that Schroders has been pursuing in recent years. Flows from retail clients are particularly volatile, given these investors tend to be more easily spooked by fluctuations in equity markets. During the first half of the year, retail net outflows via intermediaries were £0.2bn, but that was offset by net inflows of the same amount from institutional clients. Together, with £1.2bn of net inflows into the wealth management business, including £0.7bn from Benchmark Capital acquired in 2016, this meant overall assets under management and  administration were up marginally at £449m despite a negative market performance of £2.3bn.  

Given the additional volatility in equities at the start of the year, it’s unsurprising that the heaviest loss of assets during the period came from equity strategies, with overall net outflows of £5bn, primarily from UK and quant equities. However, Schroders’ efforts to broaden its asset mix continued to pay off, with multi-asset, and private assets and alternatives proving more popular with investors searching for yield in a low interest rate environment. Multi-asset, and private assets and alternative strategies gained £5bn and £0.8bn in net inflows, respectively, during the period. As part of the plan to gain more exposure to private assets, the group acquired pan-European hotels investment and management business Algonquin Management Partners in May, adding £1.6bn in institutional assets.

Expanding geographically has also been a management priority, particularly in Latin and North America, where the group has historically been underserved. That’s involved investing in sales teams to broaden distribution and developing the sub-advised Hartford range of mutual funds. During the first half, North American net inflows were £2.8bn and £1.2bn in South America. In fact, no region represented more than two-fifths of assets (the UK was the largest at 39 per cent) at the end of June.  

Given that intermediary assets made up 30 per cent of the group total at the end of June, while 40 per cent of the total was invested in equity strategies, it’s unsurprising that flows can fluctuate depending on the state of those markets. However, institutional investors – which also tend to offer lower margins – are also not immune from shifting their allocations based on market fluctuations. The £0.2bn in net inflows gained during the first half was down on the £1.4bn reported during the same period last year. The weaker first half this year prompted broker Numis to downgrade its earnings forecasts by 2 per cent for 2019 and 2019 to 249p and 269p, respectively. However, based on those forecasts that would still represent a compound annual growth rate of 6.3 per cent for the three years to 2020.