Schroders shows its strengths

Investment Column

A slip in investment banking earnings and a sharp jump in costs took some of the sheen off record profits at Schroders yesterday. But as one of the few independent UK investment banks left it demonstrated the advantages of its fund management strength with a third year of near stable profits in a habitually volatile sector.

Pre-tax profits in 1995 inched up to pounds 197.3m, and Schroders increased the dividend by 17 per cent to 16p per share. Earnings were up 5 per cent to pounds 139m, or 71.5 p per share.

A strong fund management performance made up for a 5 per cent drop in investment banking profits to pounds 104m. A lot of merchant banks found the early part of last year tough going, and Schroders was no exception, with first-half investment banking profits down 33 per cent. But it pulled back in the second half.

The big worry was the 21 per cent leap in costs, well ahead of revenue growth at 14 per cent. Schroders insisted this was budgeted for, and reflected investment and restructuring right across the business. This year it wants to keep the rise in costs below the percentage growth in revenues.

The cost rise, partly due to Schroders building up a pan-European equity research and distribution capability which it feels is essential to maintain its corporate finance strength, does indicate a more risky strategy. It hurts the operating margin going forward, and makes the business more exposed to a decrease in revenues.

But the fund management side continues to impress, with a 16 per cent growth in funds under management to pounds 74bn. Schroders is looking here for significant opportunities in the UK and internationally, both on the retail as well as the wholesale side.

The group made another fierce declaration of independence yesterday, justifying the ebbing of the bid premium, which has taken about 25 per cent off Schroders' shares. Even after that recent underperformance, forecast earnings of 77p per share put the shares on a p/e of 16. That is not cheap in the short term given the uncertainty on revenues and the shares are high enough.