Profits up despite institutional outflow

Schroders continues to lose institutional funds under management, yet profits continue to improve. This year saw £4.6bn (e6.2bn) in institutional outflow in the first six months, although Schroders also received £2.3bn in new retail money over the same period. Institutions withdrew another £1.8bn in the third quarter and retail investors redeemed £100m. The money has been flowing out, primarily due to a move away from balanced mandates in the UK market. A more serious performance issue in Japanese equities has been tackled with the appointment of Shogo Maeda, previously at Goldman Sachs Asset Management, as head of equities in Tokyo. “We have made some changes in Japanese equities in 2006,” reveals Schroders’ Graham Ralston. “We can now get research ideas into the portfolio much quicker.” Outflows from clients are not a good thing, admits Mr Ralston. However, he says the fees on institutional money being lost are generally less than those on the higher margin retail products being sold in greater numbers through distributors in Europe. “Fee margins are steadily rising, as we are moving away from balanced business,” says Mr Ralston. Today, the average margin on assets is 52 basis points, compared to 42 basis points in 2001. The fee trend also reflects a diversification in geographical source of business, with European banks more likely and able to sell high margin products in industrial quantities. “We are nowhere near as dependent on UK business as we were in the 1990s. We now have a foot in each camp in reality,” says Mr Ralston. “We have a strong footprint in Asia and Continental Europe. “We are by no means abandoning the UK pensions market, but there are lots of other growth opportunities we are following. We have a much less dominant position in the City of London than we once did,” adds Mr Ralston, referring to the 1990s and before, when Schroders was an investment bank, as well as an asset manager. “But now we are much more geographically diverse than we ever were. That’s how we want to position it – we want to become just as well-known in other parts of the world as we are in the UK.” Sub-advisory business is a strong target for Mr Ralston’s team, which recently won a £200m mandate to manage equities in special situations products, to be distributed by UK life insurer Norwich Union. While the team recently lost a £400m brief from wealth manager St James’s Place, Mr Ralston says that in general, sub-advisory business may provide lower fees, but is less volatile and more sticky than branded funds. “Sub-advisory business is typically more stable,” he says. “Once we are signed up as a sub-adviser, the bank justifies their investment in Schroders to their customers, and this is very difficult to unwind. With branded funds, it is very easy for a customer to switch from one provider to another.”