Berenberg has downgraded asset manager Schroders PLC (LON:SDR) as it thinks it is set for a period of lower growth in assets under management.
The new rating is ‘hold’, with a price target of 3,510p, down from 3,640p.
READ: Schroders reports quarterly decline in funds under management
As well as slower growth in assets under management (AuM), the German bank foresees faster declines in revenue margins and a greater reliance on cost containment to reach the profit & loss targets.
“This is a very different investment proposition from the AUM-driven growth story of recent years,” Berenberg said, as it abandoned its bullish position.
With equity markets trading on or around record levels and with central banks gradually putting less alcohol in the punch bowl – i.e. toning down the quantitative easing – Berenberg thinks the days of strong tailwinds for Schroders are in the past.
By Berenberg’s calculations, foreign exchange fluctuations have driven 22% of the growth in Schroders’ AUM growth over the last three years, which has “potentially masked the dilutive impact of lower-priced inflows”, Berenberg cautions.
“Our analysis also suggests that equity markets have driven 26% of Schroders’ AUM growth since 2014. Insofar as equity products possess twice the revenue margin of multi-asset funds, we believe equity market strength may also have helped mask any underlying decline in pricing,” it added.
In terms of the funds inflow, Schroders is already well above the top end of the target contained in its management’s long-term incentive plan, and on that basis, Berenberg does not see much scope for the firm to accelerate the growth of AuM, so the emphasis is likely to be more on expense management in order to preserve margins and earnings growth.
“We view this more proactive approach [to expense management] as a viable medium-term strategy for Schroders, but it is also a very different investment proposition from the AUM-driven growth story of recent years,” the bank said.