Process of change suits schroders

“As an Italian living in London, I am always surprised by the difference of the perception of my company in its domestic market, the UK, and the perception of the house in the rest of the world,” says Massimo Tosato, global head of distribution at Schroders.

“In London, we are perceived as a traditional, conservative, balanced player, serving only pension funds. But that was the picture of Schroders in 1995. In Milan, Frankfurt and Tokyo, however, we are seen as a thriving company with specialist equity, bond and alternative capabilities.”

The changing face of Schroders’ asset and client bases, with over half of clients now located outside the UK, means Mr Tosato is in the comfortable position where revenue margins are increasing, even when his business is losing institutional assets.

In the first six months of 2004, UK pension funds chopped mandates worth £4bn (E6bn). But Mr Tosato knows this is easily eclipsed by higher revenues attached to the £2.3bn which flowed from his favoured continental distributors and European institutions with specialised needs.

Overall responsibility

In September last year, Mr Tosato, previously head of retail, took overall responsibility for selling both institutional and retail business. This reflected the increasing proportion of assets generated by the wholesale division.

Clearly no fan of the low-fee, balanced business which dominated the 1990s, he sees his key competitors as houses selling retail-style products through distributors, across borders: Invesco, JPMorgan Fleming and Fidelity.

Since Mr Tosato joined Schroders in 1995, his passion has always been for product distribution. He refers to the securing of a berth on BPCI’s Italian platform that year – shortly after Scottish Equitable – as “the sunrise of the business”.

“Nobody called it ‘open architecture’ in those days,” says Mr Tosato. “It was just a way for international houses like us, with asset management capability, but no distribution strength, to make some headway.”

Even five years ago, communications from Schroders always related to how many distribution agreements had been struck up in a variety of regions by Mr Tosato’s team of salesmen.

“In almost every country, the key part of the game was to plant flags with as many distribution channels as possible,” recalls Mr Tosato, describing a fierce battle for market share between 20 to 30 fund houses. “Until 2001, none of us looked much to account profitability.”

Schroders entered what Mr Tosato calls the “second phase” of the distribution movement in 2002. Searching for the best partners, he started a drive to maximise efficiency.

“We began to introduce areas of industrial management, measuring revenue and profitability costs for each account. But this is not easy in our business, as management information systems are still quite primitive, and we need to invest significant amounts internally in order for this to work.”

Quality over quantity

Today, with 300 distribution agreements, there is a much clearer focus on quality rather than quantity. “We still use a large number of distributors, as you need to diversity your business channels,” says Mr Tosato. But he points to an on-going cull of under-performing outlets

“There are those left-over distributors who did not deliver asset management volumes, or who worked more with other players, and delivered only marginal volumes. They were not profitable for us, so we started to close them one by one.

“We want to be the key partner only of a limited number of players for whom we can provide the key service with the best product mix. For these people, we are happy to work with a joint marketing campaign and any other initiative in the right spirit.”

Rather than pulling in upwards of £1m from hundreds of distributors, many of them independent advisers selling a huge range of funds, Schroders has moved to embrace its preferred “guided architecture” model.

“Large players are selecting three to 10 key players with complementary skills,” says Mr Tosato. “There is a golden circle of partners. There is more volume, more client focus, more information and as a result, more business.

“If you are a private banking employee of a large bank or a branch manager, it is difficult to understand the capability of 20 to 30 players with 60 funds each. How can you handle a portfolio of 1500 funds when there are so many other things you need to be doing all day?”

Two channels

Schroders operates through two channels in the wholesale arena. Firstly there are own-branded products, sold through relationships such as the partnership with Deutsche Bank’s private and business clients division. Schroders was one of eight external companies chosen for Deutsche’s preferred provider list in May 2003.

It was also chosen as one of five groups whose funds will be provided to retail banking clients of HSBC, once depolarisation regulations allowing banks to sell external products are finalised in the UK.

Schroder funds are also sold off-the-shelf through branches of Citibank, Credit Suisse and the Allfunds platform of Spain’s Banco Santander.

International clientele

Secondly, there is the white labelling/ sub-advisory type relationship.

One of the most important European clients is the Italian Post Office, for which Schroders runs E1.9bn in global equity, euro fixed income and European short-term bonds.

Schroders also manages $8bn (E6.5bn) in international equities and international small cap in two segregated portfolios for US group Vanguard.

“Margins in branded products are better than sub-advisory,” says Mr Tosato. “But you have costs for branding, operations and administration. You don’t incur these costs for white labelling, but you have lower margins. They are two different ways of doing business and we like both of them.”

Power of distributors

Outside the UK, Massimo Tosato believes 70 to 90 per cent of the investment market is controlled by distributors such as banks and insurance companies.

“I am not saying the institutional business is going to disappear, but the individual is going to have a bigger influence in the selection process for long-term investments than in the last 30 years. And if you want access to individuals, you need to work up a relationship with their financial distributors. They are your gate-keepers, but they play a different role to the traditional pension funds.”

These institutions are becoming so powerful, believes Mr Tosato, that they can command an increasingly large share of fees paid by investors. “It is obvious to everyone in the value chain that the biggest share of the pie is in the hands of those who control the client. I smile when I hear about the greediness of asset managers. People should devote more resources to an assessment of costs levied by insurance companies and other distributors.”

He believes it is much easier for these institutions to make money from selling products than from manufacturing them.

Until 1999, banks and insurance companies and their clients could still make a reasonable return buying just French franc or Italian lire bonds. But the post-Euro downward trend in interest rates, an equities boom and development of alternative products have changed all this.

“A lot of these banks have started to say – if we do proper cost accounting, we don’t make any money from asset management, we make it from distribution. They realise their strength comes from a 10m book of clients across 1000 branches. They can sell customers an insurance policy, a mortgage or a mutual fund.

“You need a much more sophisticated engine today if you want to provide good returns, including analysts and risk management tools. If you had $3bn (e2.4bn) to $5bn in assets 10 years ago you could profitably run the money in-house. Today it is impossible to do so.” But for manufacturers such as Schroders, the way towards increased profitability is to embrace the new asset classes, whose products can attract much higher fees than the bonds of old.

Schroders’ balance sheet shows that average asset management products generate 43 basis points in revenue.

But alternatives such as hedge funds, private equity and property account for just $14.5bn out of the group’s $181bn total, generating between 100 to 300 basis points.

Mr Tosato will increasingly gear his distribution machine to increase sales of these and other high-alpha, high-cost products. “But our business model is in response to changes in client’s needs,” says Mr Tosato. “It is not just a case of us saying: ‘have some of this’.”

‘We want to be the key partner only of a limited number of players for whom we can provide the key service with the best product mix’
Massimo Tosato, Schroders