Recovery beckons for this venerable City stock

Shareholders of asset manager Schroders (SDR) will sympathise with this dilemma after a torrid couple of years. Punishing market conditions and a misfiring acquisitions policy have brought the share price to its lowest level in roughly a decade – indeed to the point where a change of management and a new direction is prerequisite for a turnaround.  

Investors won’t need to wait long. Schroders’ chief financial officer, Richard Oldfield, will take over as chief executive in early November, following the retirement of Peter Harrison. The question is whether this will be enough to trigger a change in the company's fortunes.

New broom

In the short term, Oldfield could make a difference to the share price without a huge amount of effort. If he presents a clear plan, for example, the market is likely to reward his effective communication. The specific contents of the strategy is a problem for later. 

This is backed up by quantitative research. Researchers at Saïd Business School, led by Professor Richard Whittington, studied hundreds of S&P 500 companies between 2000 and 2010, focusing on businesses with new chief executives. They concluded that an incoming management team that gives a prompt, clear strategy presentation will typically be rewarded with a five percentage point increase in their company's share price.

In Schroders' case, Oldfield’s appointment after only a year at the company is already a considerable departure from usual practice. Former chief executives have tended to be company lifers with long careers working up through the ranks. Harrison, for example, who has led Schroders since 2016, joined the company in 1988 as a graduate trainee, before going out into the world for a few years. By contrast, Oldfield has come up via the consultancy/accountancy route after a long stint at PwC.

Oldfield’s appointment seems to strike the right balance for a company as traditional as Schroders. He has enough knowledge of the business to be able to make a positive impact, without necessarily carrying the baggage of a venerable and still family-controlled entity.   

What can new management do?

Before new management can offer solutions, however, it must first understand Schroders' problems.

These are fairly wide-ranging. The investment manager has struggled to expand organically in recent years, cost growth has been out of kilter with revenue growth, outflows have been high, acquisitions have backfired and – according to one broker – “reporting has been confusing, patchy and designed to flatter more than inform”. 

Panmure Liberum analyst Rae Maile sums up the current situation well: “Rather than pretending that it is better than it is, the company needs to get better at being what it is and get the focus back on shareholders rather than noble deeds."

The good news is that the macroeconomic environment appears to shifting in Schroders’ favour as interest rates fall slowly back to more benign levels. This should remove some of the competition from cash that asset and wealth managers have faced since the Bank of England started increasing rates in 2021.

The mass movement of pension funds, which have transferred their liabilities to life insurance companies in increasing numbers, also reflects the higher interest rate environment and better returns on cash and bonds. Schroders’ forte is handling very large mandates from institutional clients, and it would benefit from a slowdown in the bulk annuities market next year (because of looser macro policy), as funds look for new managers. However, it is a basic fact that this core market is in structural decline as funds offload liabilities, so management is unlikely to wait for a rising tide to lift the company’s leaking boat.

While management can do little about stemming outflows, however – which were £3.9bn in the first half of 2024 – it can get on top of costs, and this will be a priority for the incoming chief executive. In its interim results, Schroders declared total operating costs of £860mn, which represented 73 per cent of its net operating income. This compares with 69 per cent in 2019.

Part of the reason for this is that the company has tried to rapidly buy growth at the same time as attracting and retaining the talent to run its investment strategies. This has had a negative impact on margins; since 2013, the headcount has almost doubled, but revenues have risen by only 80 per cent.  

According to analysis by Panmure Liberum, staff costs now represent a bigger chunk of revenue at Schroders than at Abrdn (ABDN), Liontrust (LIO), Jupiter (JUP) or Ashmore (ASHM).

Buyer's remorse

This means that sorting out underperforming acquisitions is an urgent priority. Part of Harrison’s strategy was to diversify into areas as such private finance, crypto and private equity – none of which is currently making the organic returns to justify the initial outlay. Most of the major deals happened in the aftermath of Covid, and included the purchase of River and Mercantile’s solutions business for £230mn and a majority stake in renewable energy specialist Greencoat for £358mn.

In addition, there have been at least a dozen bolt-on deals in more niche and esoteric areas. The fact that these were hardly mentioned again in the 2023 results speaks volumes about their underlying performance, analysts have suggested.

The R&M and Greencoat deals reduced cash by nearly £600mn and resulted in almost £700m of goodwill and intangible assets being capitalised on the balance sheet. Should any of these assets need to be written down, non-cash charges could disfigure Schroders' income statement in the short term. 

One source of potential comfort is that the size of the Schroders family stake – it owns approximately 44 per cent of the shares via a series of trusts. It is generally accepted that family-controlled companies take a longer-term view when it comes to business decisions and the new management can expect the support of the shareholder base as long as the family remains onside.

This will be crucial as the debate over whether Schroders can remain an independent asset and wealth manager grows louder. Banks have been notable buyers of wealth management businesses in recent years and have the spare capital to add a marque wealth management name to their operations.

The company might even repeat the coup of 25 years ago when it sold its banking operation. Perhaps it will get out of asset management altogether and focus on the wealth side, using the proceeds of any potential sale to build scale in this area. The balance sheet would support a large financial restructuring if needed.  

If management can figure what Schroders is “for” then the loss of its long-term premium to the rest of the asset management sector starts to look like an opportunity.

The shares have underperformed the broader market by 50 per cent since 2021, according to Panmure Liberum, and the broker values Schroders on a price/earnings ratio of just 11 times for 2024 and 10 times for 2025. If new management gets a grip on what is now a special situation, then the value investment case starts to look interesting.