Everyman fit to take on all comers

Schroders, the UK’s sixth-largest fund manager, offers something for everyone as it responds flexibly to changes in the market with launches of new ‘component’ and income funds

Schroders Investment Management may have started life as part of a Franco-German banking dynasty, but it has become a very British institution.

Headquartered in London, a FTSE 100 constituent, it is now the sixth-largest fund management group in the UK market with £26bn under management. It has been loud and proud, with big marketing budgets and high-profile advertising campaigns, but has suffered with the rest of the industry as the investment climate has weakened and fund selectors have battened down the hatches.

Robin Stoakley, the managing director of Schroders’ intermediary business, has been at the group for 23 years and says this year has been the most difficult for the UK mutual fund industry that he can remember.

He says: “We have had several years of weak stockmarket performance. The eurozone crisis reached its nadir in the summer and sentiment was extremely bad, particularly in August and September. Discretionary clients were very defensively positioned and not moving their portfolios.”

However, he sees sentiment starting to shift. “We have been seeing an increase in buying of equity funds over the past six weeks and I believe we may be at the start of investors putting risk back in their portfolios. For us, this has been seen in buying of our US, UK and Asian funds. To date, there has been minimal buying of mainland European funds, but this could pick up next year.”

Having weathered that particular storm, the group faces another challenge with the implementation of the RDR in January. This is changing the market. The group has two business lines – an adviser business and a discretionary business. In the adviser market almost all its business comes through platforms. But as the RDR approaches the group is seeing an increasing amount of outsourcing of portfolio management from IFAs to discretionary managers. This means that a lot of its business is moving from advisory to discretionary.

This has some unintended consequences. “The average adviser holds a fund for 5.5 years, whereas the average discretionary fund manager holds a fund for just 2.5 years. We also find that there is an increasing demand for ‘component’ funds – single-country or single-strategy funds, for example.”

This has been reflected in fund launches. For example, an emerging market and Asia fund – the Small Cap Discovery fund – was launched in March for Matthew Dobbs.

The other prevailing theme among Schroders’ new launches has been income. In April it launched the Managed Monthly High Income fund, a fettered fund of funds with a fixed asset allocation of 50 per cent equity and 50 per cent bonds. Stoakley says the main difference between the current product range and that of five years ago has been the focus on income. Previously the group had just one or two income strategies, now it has seven on the equity side alone.

Stoakley reckons the environment is getting better, or at least not getting worse. “We may be in the foothills of a new, more positive phase for equities. 2013 could be a surprisingly good year for the stock market and new business.” However, he is worried by the amount of money still going into fixed-income strategies. He points out that investors are still net buyers of fixed income and net sellers of equities, in spite of the outperformance of bonds. He says investors may be positioning themselves for the last five years rather than the next five years.

Schroders manages to incorporate a range of styles under one roof. The equity income team of Nick Kirrage and Kevin Murphy are deep value; they have invested in some of the most unloved parts of the UK stockmarket, including banks. Richard Buxton focuses much more on quality growth businesses.

Stoakley says: “If I had to define our style it is that we are research-driven, fundamental investors, but we have 36 different investment desks and each team decides their own investment style. Nothing is imposed from the top down, there is no CIO. It usually means that at any given time we will not be firing on all cylinders, but we will be firing on some. It means that we are not dependent on one style that may or may not be in fashion.”

This is reflected in performance. Over three years, the group has plenty of top- quartile performers – its Asian range, its UK smaller companies funds, its quant-driven QEP range, its diversified growth and European funds. But it also has some weak spots – notably the Schroder UK Mid 250 fund, run by Andy Brough, which has lagged the mid-cap index and its mid-cap focused peer group. The group’s Income and Recovery funds are weak over three years, though both have recovered strongly this year.

The multi-manager range has also had some difficulties. The group hired Rob Hall from Russell last year to help turn around the performance of the funds and stem outflows, but this has not been seen yet. Former head Andrew Yeadon left in 2011 after the merger of the multi-asset and multi-manager teams.

Darius McDermott, the managing director of Chelsea Financial Services, has been a long-term supporter of the group. He says: “Schroders has so many funds, there is always something of interest. We have a number of funds on our buy list including Richard Buxton’s UK Alpha fund. We know that he has good and bad years, but his long-term performance is great.

“The European Alpha Plus fund is also on our list, run by Leon Howard-Spink, who has proved himself a steady and consistent manager. The Schroder Asian Alpha Plus fund, run by Matthew Dobbs, is also a favourite – it is the top Asian fund over one year.”

Although most of the funds on the Chelsea buy list are equity funds, McDermott says the group also has skill in fixed income, particularly in the strategic bond arena. He mentions Bob Jolly and Gareth Isaacs.

However, he has replaced the Income Maximiser fund with RWC Enhanced Income, run by Nick Purves and Ian Lance, who previously ran the Schroder Income fund. This is simply because the latter has taken a lower risk stance, using cash more aggressively than the very “deep value” approach taken by the Schroder value team .

Gary Potter at Thames River holds several Schroders funds, including the Income and Asian Maximiser funds. He says: “The maximiser style suits our Distribution fund. We also use the group’s Income fund, which has had a very good start to the year. Performance tends to be lumpy because of the deep value style, but in general we like the style – it is an interesting approach.”

Ultimately, Schroders is the everyman of the UK fund management industry. It has something for everyone, housing a wide variety of styles. This presents certain challenges, but means that the group is ready to face a range of market conditions.

table