Should you buy shares in Schroders, Abrdn and Liontrust?

British asset managers are squeezed in the middle. They lack the scale of big American firms such as BlackRock that can afford to charge much lower fees on a huge range of passive funds. They do not have the same depth of niche expertise that specialist funds can use to justify their much higher costs. And, just to make things worse, big investors are simply not as interested in British shares as they used to be.
It is not surprising, then, that shares in the likes of Schroders, Abrdn and Liontrust are trading at such low levels. Schroders, the largest of them all by market capitalisation, has delivered a negative total return of 16 per cent in the past five years, while Abrdn has lost 15 per cent. Liontrust has managed to gain 6 per cent, but they all still pale in comparison with the FTSE All-Share index, at 32 per cent over the same period.
The stocks are clearly unloved by the market, with their recent falls warping the dividend yield to an average of 9 per cent, compared with a historic five-year average of 6 per cent. Yet the lowly valuations of these long-established City names prompt the question: is there a screaming value opportunity for investors?
Both Schroders and Abrdn named new chief executives this month, hiring former chief financial officers as their new heads. At Schroders, Richard Oldfield will take over from Peter Harrison as chief executive in November. Meanwhile, Abrdn gave the top job to Jason Windsor, who has been managing the company on an interim basis since the exit of Stephen Bird in May.
Both men have big jobs to do. The core of the problem for most London-listed asset managers is the rise of passive investing and the relative fall of actively managed assets in Britain. There is now more than £300 billion invested in tracker funds, according to the Investment Association, a trade body for fund managers. That makes up 23 per cent of funds under management, compared with 11 per cent a decade ago. In the United States, the trend-setter for global markets, that figure is around half of all mutual funds.
Schroders, the asset manager founded in 1804 and one of the oldest names in the City, has been pushing into high-growth areas such as private markets and wealth management. Assets under management have risen in recent years, but profits have fallen and costs are higher. Shareholders, including the founding Schroders family who own roughly 40 per cent of the business, have suffered.
The FTSE 100 group has invested heavily in mergers and acquisitions to diversify its business, including the 2021 acquisition of River and Mercantile Group’s solutions business for £230 million and a 75 per cent stake in Greencoat, the renewable energy specialist, for £358 million. But this push into growth areas has been expensive: its cost-to-income ratio typically has been higher than its European competitors, according to analysis by Jefferies, the broker.
Abrdn, which has been ejected from the FTSE 100 twice in the past four years, has had to pivot its strategy, too. Since Bird joined as chief executive in 2020, it has sought to cut costs and boost profits by expanding its wealth management business and selling investments directly to consumers via its £1.5 billion acquisition of Interactive Investor in 2021. The company restructured under-performing parts of the business by merging or closing more than 250 investment funds, as well as offloading some of its non-core businesses and joint ventures, including one with Virgin Money, the bank, although this was for less than half the amount that it had paid.
Still, Abrdn’s costs have remained stubbornly high. The company started off this year by announcing 500 job cuts, about a tenth of the workforce, as part of efforts to save £150 million.
Ultimately, both companies cannot escape the secular decline across their industry. At Schroders, fee margins have declined by a third over the past decade, analysis by Morningstar, the research firm, has found and there are no signs of this decelerating as competition from passive investment and regulatory pressure eats into its margins.
At the smaller end of the market, consolidation may be the route to survival. Alongside Liontrust, there are a number of smaller asset managers, such as Jupiter, Premier Miton and Polar Capital, all of which trade at lowly price-to-earnings multiples of 11 to 12. Reports this year suggested that Liontrust was in discussions with Artemis, a smaller rival, about a possible tie-up.
This may be a less likely route for bigger outfits. In any case, at Schroders a large family holding makes a takeover more difficult. The group’s strategy to transition away from traditional active funds and towards areas where there is structural growth — private markets, complex investment solutions and wealth management — looks the best course of action. Bulls are hoping that as interest rates fall, the appetite for Schroders’ private market investments could grow.
So far, results have been mixed. Its solutions business suffered a £7.8 billion outflow in the first half of the year. Wealth management looks the most promising, especially given the growing market for defined-contribution pensions, but there are plenty of other ways for investors to buy into this growth without having to buy the rest of Schroders’ asset management story.
The company does have some key markers of a high-quality holding. It is a well-known brand with a market capitalisation of £5.7 billion, £774 billion of assets under management and a high dividend yield to boot. It is certainly enough for Nick Train, the closely followed fund manager, who counts Schroders among the top ten holdings in his £1.6 billion Finsbury Growth and Income Trust.
Shareholders are also rewarded with a chunky level of income: Schroders is expected to yield 6 per cent over the next 12 months and cash payouts are healthily supported by profits, with a forecast dividend cover of 1.3 times this year. At this lowly valuation and high income, the shares are hardly worth selling now, but a decent and reliable rate of growth could help the stock to re-rate quickly.
Advice Hold UK asset managers
Why Sector in decline; building up new growth areas or consolidating is best way forward