Margins will keep getting squeezed so it's time to exit
Thursday 06 Aug 2020 Author: Ian Conway

Schroders (SDR) £30.37

Loss to date: 9.2%
Original entry point: Buy at £33.46, 19 December 2019

OUR 2020 PICK has beaten the FTSE 100 since we recommended it late last year, having recovered significantly from its March lows, but we sense that further gains are likely to be limited.

Assets under management (AUM) grew 5% in the first half to £525.8 billion, more than expected, mostly thanks to the £29.5 billion Scottish Widows mandate but also driven by large inflows into the Solutions business which has a lower margin, and this is our issue.

Margins are down for most fund managers, and Schroders is no exception. Most of its businesses saw outflows except Solutions, which earns just 0.15% compared with mutual funds which earn 0.7% and Alternatives which earn just over 0.6%. Building AUM at the expense of margins isn’t what we bought into and ultimately not what we’re after.

The Wealth Management division generated net inflows but to get to scale needs a lot more time. Also, without a niche or an edge – like say Impax (IPX:AIM), Liontrust (LIO) or Lindsell Train – it’s hard for big firms like Schroders to differentiate themselves.

Fortunately management has a lid on costs, so first half earnings and the dividend were in line with forecasts, but pressure on margins is unlikely to ease and we think there are better investment opportunities.

SHARES SAYS: Cut your losses.

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