Company Reports

Narrow-moat Schroders reported a disappointing 1% increase in assets under management for the first quarter of 2024 compared with end-2023. If we exclude the growth from Schroders’ wealth management operations, the core asset management business’ AUM would be flat. Considering that most asset class valuations increased in the quarter, this would suggest that Schroders suffered net client outflows in its asset management business. Our current estimate of client net inflows of 4% of starting AUM looks optimistic, but Schroders still has nine months to make up lost ground. At this stage, we are not changing our earnings estimates or our GBX 500/share fair value estimate for Schroders. It does not report earnings every quarter. For the first quarter, it only discloses AUM. The subsequent full earnings disclosure will be in its interim results in August.

We increase our fair value estimate for narrow-moat Schroders to GBX 500 per share from GBX 470 per share to reflect resilience in assets under management, or AUM, inflows compared with peers in challenging market conditions. Schroders focuses its strategy on alternative asset management products that allow it to slow down shrinking margins and keep them relatively high although gradually declining. We believe that restructuring charges incurred in 2023 will also allow for further cost discipline that is crucial for Schroders' profitability in a shrinking margins environment.

Margin pressure sums up the challenge and investment case for Schroders. Like most of its U.K. peers, Schroders has seen a material decline in its management fee margin. To halt this decline, Schroders has laid out a strategy that hits all the right notes. It aims to focus its resources on higher-margin asset classes, increasing ownership of client relationships, and investing heavily in technology to compete in a digital world. Schroders is executing well on this strategy and early signs are that the decline in margins is at least slowing down. Schroders has made some judicious acquisitions that support its strategy

Narrow-moat Schroders increased its fee-generating assets under management, or AUM, by 4% year on year to GBP 751 billion by the end of 2023 supported by reasonable net new inflows of GBP 10 billion. Considering the challenging market conditions, this is an acceptable outcome. Flows remained the strongest in Schroders’ targeted growth areas of wealth management and private equity/alternatives. Schroders enjoyed another strong year in its private equity operation with inflows of around GBP 5 billion in 2023, equal to 7% of the segment starting AUM. The traditional active equity and fixed-income portfolios continue to suffer from net client withdrawals. Schroders managed to maintain its fee margins in the asset management business at 35 basis points, defying industry pressure. Executing its strategy of focusing on higher-margin assets, Schroders redeemed low-margin institutional mandates within its asset management business, which offset margin contraction in other areas. Wealth management margins improved in 2023 compared with 2022, reaching 41 basis points as this business segment is less dependent on market values.

Margin pressure sums up the challenge and investment case for Schroders. Like most of its U.K. peers, Schroders has seen a material decline in its management fee margin. To halt this decline, Schroders has laid out a strategy that hits all the right notes. It will focus its resources on higher-margin asset classes, increasing ownership of client relationships, and investing heavily in technology to compete in a digital world. Schroders is executing well on this strategy and early signs are that the decline in margins is at least slowing down. Schroders has made some judicious acquisitions that support its strategy

We are dropping coverage of some of our European banks and asset managers. We will no longer be reporting on Santander, Credit Agricole, Julius Baer, Unicredit, Intesa Sanpaolo, Mediobanca, Amundi, KBC, DWS Group, BBVA, and Schroders. We provide broad coverage of more than 1,500 companies globally and periodically adjust our coverage according to investor interest and staffing.

Narrow-moat Schroders recently reported excellent results for its 2021 fiscal year, with a 25% year-on-year increase in net income. We have updated our model, and we now expect flat earnings growth for 2022. While acquisitions will provide a tailwind to assets under management, Schroders guided for lower performance fees and elevated non-compensation costs for 2022. The decline in management fee margins has started to slow down, and we anticipate this to continue. Mainly due to some technical changes in our model, we reduce our fair value estimate slightly to GBX 4,000 per share from GBX 4,100 previously. Schroders is currently trading at 0.8 times our fair value estimate, and at 15 times 2022 earnings it is trading at a discount to the 18 times earnings it has traded at over the past 10 years.

Margin pressure: two words that sum up the challenge and the investment case for Schroders. Like most of its U.K. peers, Schroders has seen a material decline in its management fee margin. To halt this decline, Schroders has laid out a strategy that hits all the right notes. It will focus its resources on higher-margin asset classes, increasing ownership of client relationships, and on investing heavily in technology to compete in a digital world. Schroders is executing well on this strategy and early signs are that the decline in margins are at least slowing down. Schroders has made some judicious acquisitions that support its strategy

Narrow-moat Schroders reported aftertax profits of GBP 305 million for the first half of 2021, 37% higher than the GBP 223 million it reported a year earlier for the same period. Reported revenue was slightly higher than what the company-compiled sell-side consensus expected, while cost growth came in marginally lower than expected. We are likely to increase our fair value estimate of GBX 4,100 per share on the back of these results and maintain our narrow economic moat rating.

Narrow-moat Schroders reported net attributable profits of GBP 486 million for its 2020 fiscal year, this is slightly lower than the GBP 496 million it reported a year earlier, but also 3% ahead of the GBP 472 million we anticipated. We do not expect to make wholesale changes to our model and we maintain our GBX 4,100/share fair value estimate and our narrow moat rating. Schroders remains in 3-star territory but its share price has pulled back slightly recently and at 0.85 times our fair value estimate it is not far from moving into 4-star territory. Schroders declared a GBX 114/share dividend for 2020; this translates into a 3.3% yield at Schroders' current valuation, which should be attractive for dividend-focused investors.

We have updated our model for narrow-moat Schroders to take into consideration changes in its assets under management, or AUM, due to market movement and client flows. We estimate Schroders will finish the year with AUM of GBP 569 billion, a 14% year-on-year increase, 10% driven by continued strong client inflows and 4% by the broad recovery in markets since the lows of spring 2020. We increase our fair value estimate to GBP 41/share compared with GBP 35.50/share previously. We maintain our narrow moat rating. Despite the increase in our fair value, Schroders now trades in 3-star territory with a price/fair value estimate of 0.9 times suggesting limited upside potential. For dividend-focussed investors a 3.3% dividend yield may however, look enticing compared with the broader market--the Morningstar Developed Europe Index currently offers a dividend yield of around 2%.

Margin pressure: two words that sum up the challenge and the investment case for Schroders. Like most of its U.K. peers, Schroders has seen a material decline in its management fee margin. To halt this decline, Schroders has laid out a strategy that hits all the right notes. It will focus its resources on higher-margin asset classes, increasing ownership of client relationships, and on investing heavily in technology to compete in a digital world. The proof will be in execution. While client flows for Schroders generally remain above industry levels, it does seem that they have not yet been successful in halting the slide in margins. This is at least the case for the consolidated margin; part of the decline in margin is due to a shift in business mix to lower-margin asset classes. However, within product/asset classes, margins remain under pressure.

We recently initiated coverage on the three largest, separately listed European asset managers: Amundi, DWS Group GmbH & Co., and Schroders. We believe Amundi and Schroders benefit from economic moats, based on switching costs and intangible assets. DWS' long history of client outflows argues against a moat rating. Amundi's captive distribution agreement with parent Credit Agricole lends strong support to its moat rating. The diversity of Schroders' business, with increasing success in noncommoditized products like multimanagement and alternatives supports a moat rating.

Margin pressure: two words that sum up the challenge and the investment case for Schroders. Like most of its U.K. peers, Schroders has seen a material decline in its management fee margin. To halt this decline, Schroders has laid out a strategy that hits all the right notes. It will focus its resources on higher-margin asset classes, increasing ownership of client relationships, and on investing heavily in technology to compete in a digital world. The proof will be in execution. While client flows for Schroders generally remain above industry levels, it does seem that they have not yet been successful in halting the slide in margins. This is at least the case for the consolidated margin; part of the decline in margin is due to a shift in business mix to lower-margin asset classes. However, within product/asset classes, margins remain under pressure.

We initiate coverage of Schroders with a fair value estimate of GBP 35.50 per share, which is 23 times the earnings we estimate Schroders will generate in 2020. We expect an 11% earnings decline during 2020 followed by a 12% rebound in 2021, our medium-term expectation is for a 3% earnings CAGR over the next five years.