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Schroders holds predators at bay

How long can the leading merchant bank resist the drive for size?
SCHRODERS, the City merchant banking and investment management group that has been at the heart of a string of takeover rumours this year, has begun a strategic study of where it should be heading. It is the third in a series of six-yearly reviews, but of the three the latest one is being held at the most critical time for Schroders and the sector as a whole.

The Barings debacle and the ignominious takeover of Warburg by Swiss Bank Corporation have caused more uncertainty, self-doubt and heart-searching than any pair of events in the Square Mile for many years.

No merchant bank has been entirely free of speculative attacks - in Schroders' case, that it was going to buy the Smith New Court securities house and, only last week, that it was going to accept a takeover bid from the Dutch group ABN Amro.

But Schroders has avoided the worst excesses of the rumour-mongers for two simple reasons: it is 40 per cent owned by the Schroder family, and has steered clear of using its own money to trade in stocks or shares, let alone the more exotic varieties of derivative. The family stake protects the group against rogue predators, and proprietary trading was the downfall of Barings and - to a lesser but still decisive extent - of Warburg.

The question now is whether caution is enough, in an increasingly demanding climate where several of Schroders' rivals are finding it hard to resist the drive for size. Schroders could be in danger of finding itself stranded in that middle ground between the financial giants and the nimbler boutiques.

The group's share price graph is, however, telling two different stories: the roaring success of the fund management arm and, this year, the speculation that Schroders might be bought.

In the past four years, the amount of money under the wing of Schroders Investment Management has nearly tripled - with good reason. Last year the group won several performance awards, including Micropal Best Investment Manager of the Year.

Win Bischoff, who has just stepped up from chief executive to be Schroders' chairman, said: "The greatly increased contribution from fund management was a major factor in our resilience last year, and the efforts to extend both its presence in the major markets and its range of products have served us well."

So well, in fact, that it is in danger of upsetting the balance of the group. Fees and commissions, much of which come through fund management, rose by more than half in 1994 and accounted for three-quarters of total group revenue, compared with less than two-thirds in the previous year. Net interest, largely the banking operation, rose by just 14 per cent, clipping its share of total revenue to 17 per cent. Net dealing income slumped by more than a third, accounting for only 6 per cent.

Peter Sedgwick, head of investment management and the group vice-chairman, said: "It is Schroders' strategy to operate with a balance of businesses. This has been extremely beneficial to us in the past.

"The combination of our spread of international operations has meant we have been reasonably able, during the ups and downs of markets, to have a less volatile record than perhaps one would have had. That is something we continue to value. We will not be concentrating on any one business area."

It is simultaneously one of the charms and terrors of merchant banking that all its cylinders rarely fire together. Corporate finance, relatively dormant these days, was for years the spearhead as merchant banks raked in huge fees for helping to restructure British industry through takeovers. And if the traders read the market right, dealing can be another cash machine.

Mr Sedgwick admits that Schroders is fairly passive about which of its activities bring home the bacon at any one time, speaking about flexibility and responding to client demands.

But the latest strategic review will have to take account of the fact that foreign financial groups have become more confident about invading London in what is increasingly being seen as Big Bang Mk II. Mk I happened nine years ago, when the London Stock Exchange relaxed its rules to let foreign and non-securities firms buy in.

The newcomers made plenty of mistakes, some went away and now others are trying. They all want a ticket to the London financial party, because of Britain's position in the time zones and the City's talent pool.

Some analysts wonder whether Schroders might repeat Warburg's trick, and sell the merchant bank while keeping the fund management arm independent, but Mr Sedgwick is adamant that is not on. How long the Schroder family can resist the blandishments of would-be predators will depend on how steeply the price rises.

Schroders shares are reasonably valued, but their tiny yield rules them out for anyone wanting income. Yet the chart suggests that the price could be vulnerable to a change if the chances of a deal evaporate.