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Schroders cannot rely on tailwinds any longer, warns Berenberg
Analysts at Berenberg believe Schroders is set for a period of lower assets under management, faster margin declines and a greater reliance on cost discipline to achieve profit targets, leading the broker to change its stance on the investment manager.
With assets under management growing 13% per year over the last three years, thanks to FX tailwinds and market moves, Berenberg said Schroders cannot assume that these will persist as equity markets are trading at around peak valuation multiples, while quantitative easing was slowly being withdrawn.
"This is a very different investment proposition from the AUM-driven growth story of recent years. We see less upside from current levels and we remove our 'buy' rating on Schroders as a result," Berenberg said on Thursday.
Berenberg stated that Schroders' management will need to work harder to maintain profit margins, with slowing tailwinds likely to increase pressure on its revenue margins while simultaneously increasing the stubbornness of the group's expense margins.
"With little capacity to materially accelerate flows (Schroders is already well above the top end of the flow target contained in its own long-term incentive plan), we expect management to adopt a more proactive approach to expense management in order to maintain profit margins and EPS growth," the analysts noted.
Reflecting this outlook, Berenberg lowered its 12-month price target to 3,510p, from 3,640p, and with the "more modest upside" from its current levels, the broker downgraded Schroders to 'hold'.