The blue blood that has coursed through the veins and arteries of Schroders for the past 215 years hasn’t exactly changed colour, but it has altered its hue of late.
In truth, the venerable FTSE 100 fund manager has had to adapt: its sector is under growing pressure from the rise of low-cost passive investment strategies, its performance has been stuttering and its share price has caught a serious dose of the doldrums.
Schroders, one of the best-known names in finance, offers banking services as well as fund and wealth management. Its history began in 1804 when John Henry Schroder became a partner at his brother John Frederick’s London firm.
Members of the founding family still control just under 48 per cent of the voting shares through a complex network of family trusts. Bruno Schroder, the great-great grandson of John Henry, sat on the board until his death aged 84 last month, and was replaced by his daughter Leonie Schroder, 44. Philip Mallinckrodt, 56, his nephew, is also on the board.
Schroders manages money for individual and institutional investors in the UK, continental Europe, the Middle East and Africa, as well as America and Asia Pacific. In March, it reported a 15 per cent fall in pre-tax profits for last year on a 4.6 per cent increase in revenues to more than £2.6 billion. It employs 4,600 staff and prides itself on active management of customers’ money.
Its most recent set of results were something of a disappointment. Assets managed or overseen fell 6 per cent to £421.4 billion and the previous year’s net inflows of £9.6 billion became a net outflow of £9.5 billion of customer’s money.
The level of performance fees Schroders earned fell in both asset management, down from £77.5 million to £54.6 million, and wealth management, where they dropped from £900,000 to just £400,000.
It shouldn’t come as a surprise that performance suffers when markets tumble; it is the nature of the game. However, the percentage of assets outperforming benchmarks over one year fell from 70 per cent to 43 per cent, but also dropped from 84 per cent to 76 per cent over five years.
Late last year Schroders added another pastel to its palette. In what looks to be a shrewd move into the wider — and less obviously affluent — wealth management market, the group struck a partnership deal with Lloyds Banking Group, in two parts.
First, the pair will establish a joint venture, 49.9 per cent owned by Schroders, into which Lloyds will inject £13 billion of assets from its wealth management business. The idea is to push heavily into the market for advice-led investing and financial planning, which both believe is underserved. Schroders’ Cazenove Capital high-end wealth manager will also advise Lloyds’ seriously rich customers.
Second, Schroders will take on the management of a further £67 billion of assets from Lloyds’ insurance arm, Scottish Widows, in a five-year contract that came up for grabs after the bank went into dispute with Standard Life and Aberdeen after their decision to merge. The sides are in arbitration but the money will come no later than March 2022 when the contract ends anyway.
The joint venture looks a growth opportunity against the backdrop of Britain’s ageing and increasingly wealthy population and it aims to be a top three player inside five years.
Like its peers, Schroders had a tough year in 2018 yet it is a highly diversified global player, of the calibre of Blackrock, and it has identified areas of expansion including North America.
The shares, down 3p at £27.15 yesterday, trade for 14.8 times earnings and yield 5.3 per cent. They are an extremely solid hold.
ADVICE Hold
WHY High quality and diversified business whose shares are off but represent good long-term value
Elementis
It’s actually quite rare that shareholder discontent breaks into the open, but that’s exactly what happened last year at Elementis. The speciality chemical company’s big institutional owners told it that it was overpaying for a business it planned to buy and sent it back for a renegotiation.
With $100 million lopped off the price tag and a successful rights issue but more debts in the bag, Elementis has secured its prize and, as the spiel goes, thinks it’s well placed to deliver.
Formed in 1844 as a tea and coffee trader, Elementis moved into chemicals in 1947 through a joint venture. It employs more than 1,600 people in 30 locations worldwide and operates five divisions: personal care, coatings, chromium, energy and, thanks to the acquisition, talc.
The company has been overhauled under Paul Waterman, chief executive, and Ralph Hewins, finance director, who both joined in 2016 from BP’s lubricants business. The pair scaled up in the less-cyclical, higher-growth and healthy-margin personal care business by buying Summit Reheis, which adds to its production of critical ingredients for use in make-up, skin care and dental products. The small scale and costly surfactants division, supplying shampoo makers, was sold last year.
Then came Mondo Minerals, the Dutch producer of industrial talcs that Elementis was going to buy from the private equity investor Advent for $600 million but got for $500 million plus some stretching performance-related payments.
Mondo gives Elementis a complementary new division and fits with the management team’s growth plan. They reckon that the personal care division is capable of annual growth of between 7 per cent and 10 per cent, that talc should increase by 5 per cent to 7 per cent, though the coatings division is offering less exciting returns linked to local GDP. Between them, these three are expected to generate 80 per cent of next year’s pro forma profits.
Enough to mask the performance of the chromium and energy businesses. The shares, up 5½p, or 3.4 per cent, to 165¾p yesterday, have been punished heavily. They trade for 10.7 times UBS’s forecast earnings and have a prospective yield of 4.7 per cent. That’s good chemistry.
ADVICE Buy
WHY Attractively priced with solid long-term potential
