Launches give Schroders sales lift

Following record inflows in the first quarter of 2006, Schroders has no firm plans to add further funds to its range, says Robin Stoakley, managing director of UK retail. Will Jackson reports.

Schroders added two retail funds – Income Maximiser and Global Property Securities – to its unit trust range at the end of 2005. The funds have contributed to strong overall sales for the firm this year, says Robin Stoakley, managing director of UK retail at the group. “We have seen record inflows in the first four months of 2006,” says Stoakley. “It has been the best start to a year in the 17 years I have been here. As for where the money has been going, there has been strong performance across the piece.”

Income Maximiser has accumulated 30m in assets since its launch in November. “We are very pleased with the fund,” says Stoakley. “It is doing what it was set up to do – that is, to provide capital growth and income – and there has been strong support from the IFA market. The target was for 50m or more after 12 months, so we are comfortably on target.”

The fund targets a gross yield of 7%, with a low level of volatility. To achieve this, the portfolio holds an equity income portion of 30-40 large-cap British stocks, selected by Nick Purves, manager of the Income fund. Call options are sold on the positions by Richard Lloyd, head of structured investments, and the premiums received are paid out as quarterly income, enhancing the yield. The options effectively cap quarterly capital growth at 8-10% in rising markets, says Stoakley.

Tony Lanning, research and investment director at advisers Origen, says the limiting of capital gains should not deter investors. “It is not a product we have looked at closely but it is a great idea,” says Lanning. “7% income is hard to find elsewhere and, if you want income at twice the market rate, you cannot expect to get something for nothing. In a flat market the fund will perform well.”

Despite the potential benefits, the complex nature of the product may be offputting to some investors, he adds.

The second addition to the range, Global Property Securities, was launched mid-December. The fund invests in a portfolio of property company shares and real estate investment trusts. “We wanted to offer an alternative to UK property funds,” says Stoakley. “This is a global product and offers real diversification. The fund has taken 20m and we are seeing good and growing demand.”

Management of the portfolio has been delegated to European Investors Incorporated, based in America. Schroders provides the macroeconomic “overlay” for the fund and EII’s investment team conducts security analysis and forecasting. Finally, a portfolio of 50 to 70 stocks is constructed by Jim Rehlaender, global fund manager at EII. The fund had just 47 holdings at March 31, with allocations of about 30% to both Asia and North America. Lanning is again impressed with the fund but also advises caution. “We met the manager and liked what we saw, although we are not actively buying it at the moment.” he says. “What makes me slightly nervous is that people view property as non-correlating and low risk. The fund is denominated in US dollars and this exposure is unhedged. Investors need to understand the risk levels of the different types of product out there.”

While it is too early to compare the performance of the new portfolios with their benchmarks, the picture for Schroders’ longer-established funds is mixed. According to data from Standard & Poor’s, just 14 of 29 funds are in the top two quartiles for the one-year period ending May 1. Performance over this timeframe tends towards the extremes of the spectrum, with 18 funds split evenly between the first and fourth quartiles. Relative returns for the range are stronger when viewed over three years, with more than 50% (12 funds of 21) in the top two quartiles.

As a result of recent fund restructuring and name changes, three-year S&P data is not available for Managed Wealth Portfolio, S&P Strategic Balanced Portfolio, Strategic Bond or US Small & Mid Cap. The most recent change was the conversion of the small and mid-cap fund, renamed from North American, in April 2005. “We had a relatively dormant large-cap product and a strong US small-cap team,” says Stoakley. “After the success of our UK mid-cap product [UK Mid 250] we wanted to play to our strengths in the US.”

The fund has made a positive start since its change in emphasis, with first-quartile returns over one year. The portfolio has returned 37% to May 1, against a sector average of 25%. The firm’s second American portfolio, US Smaller Companies, was soft-closed in April 2002.

Another fund that has seen significant changes is the European portfolio. As reported in Fund Strategy on April 24, Denis Clough has reduced the number of stocks in the fund from 72 to 64 since taking over from Adriaan de Mol Van Otterloo in October. This reflects Clough’s confidence in taking overweight positions, he says. Three-year performance figures for the fund are strong, with a first-quartile ranking and returns of more than 100%. But returns have dipped in recent times and the fund is fourth-quartile over one year.

Prior to a one-year sabbatical, Clough ran the Schroders’ Tokyo portfolio for nearly 20 years. Stoakley is confident he can adapt to the European markets. “If one has the skills to be a fund manager – that is, taking information and making stock decisions – that knowledge should be transferable across markets. The principles remain the same,” he says.

The Tokyo fund is one of the weaker performers in the range, with fourth-quartile returns over one and three-year periods. Returns are some 20 percentage points below the average over the longer timeframe and 10 points below over one year. Patrick Armstrong, co-head of multi-manager at Insight Investment, continues to hold the portfolio despite the recent underperformance. “We hold the fund to complement our holding in David Mitchinson [JP Morgan Japan],” says Armstrong. “The Schroders fund has a large-cap value orientation, compared with the small and mid-cap bias of the JPM portfolio. The two approaches have their ups and downs. For instance, we saw very good performance from Tokyo in 2004 but 2005 favoured small caps.”

Armstrong is also unfazed by the impending relocation of fund manager Andrew Rose from Tokyo to London. “In most cases I would have concerns,” he says. “But in this case, Schroders has a good group of people there [in Tokyo.] There is a well-established process that the team buys into wholeheartedly.”

Rose, head of Japanese equities since 2001, is due to move during the summer and Stoakley also expects a smooth transition. “The fund has been managed from both Tokyo and London over the years,” he says. “But the investment style has not changed at all. The key is where the analysts are based and Andrew will also be making regular trips to Japan on investment visits. With technology now, a manager can run Japan funds from anywhere. The world is a small place.”

Armstrong also holds Pacific, another of Schroders’ Far East portfolios. The fund has generated strong returns recently and is ranked second-quartile over three years and first-quartile over one year. Armstrong held the fund as it went through a fund manager change last year, with Robin Parbrook replacing Leong Wah Kheong in May. He again highlights a well-defined team process as the reason behind his loyalty. Three funds are ranked first-quartile over both one and three years. Of these, two are equity funds: UK Mid 250 and UK Alpha Plus. The portfolios are run by Andy Brough and Richard Buxton respec- tively, co-managers of Norwich Union’s new Special Situations fund, which launches later this month. UK Alpha Plus is the third Schroders fund held by Armstrong.

“Buxton has good stockpicking ability and a great knack for identifying great management,” he says. “He had a really strong 2005 but was weaker in 2004. Buxton took a lot of criticism for missing the oil story but he stuck to his process and did not lose his conviction. It is always going to be a bumpy ride, with a 25 stock portfolio, and the fund has a very impressive long-term track record.”

On the future for Schroders, Stoakley says there are “a couple of embryonic ideas” but no firm plans for further product launches in 2006. “Businesses do not stand still, and if they do they are falling behind.” he says. “We are having a good year at the moment and we need to make sure it is repeatable.”

He adds that the continued growth of assets under management, delivering fund performance and IFA sales are immediate priorities for the firm. “We are considered the market leaders in the discretionary business and probably top six or seven in the IFA market.” Stoakley says. “Our ambition is to go top three. We have the products, people, distribution and brand to do that.”

Schroders is a publicly quoted company with a market capitalisation of more than 3bn. The Schroder family, which established the group in 1804, controls just under half of the company’s voting shares. The firm has 2,500 employees worldwide, half of whom are based in London, and 300 portfolio managers in 26 countries. Schroders has 120bn in assets under management, with 15bn in its British open-ended fund range.