Schroders will survive the storm

BLUE CHIP

It was a rough week for traders and investors, especially for holders of Schroders, the City's pukka merchant bank, writes Richard Phillips.

The last remaining quoted independent merchant bank of any significance in the UK, Schroders has been one of the stars of the bull market. So perhaps there is some justice in the fact that it has now become one of the heaviest fallers. After all, as a financial services business whose fortunes are closely linked to those of the City, it makes sense that the shares should be harder hit than most.

The rot set in early on for the firm, which manages many funds invested in Asia. In the week before the turbulence hit London stocks, Schroders fell 8.9 per cent. Last week, the falls had been extended by a further 7 per cent, to 1710p.

HSBC and Standard Chartered have suffered more because their businesses are more closely linked to the economies of Asia and the Pacific Rim. But the question investors need answered about Schroders is: has the reaction been excessive?

The company is one of Britain's few unquestioned success stories in the City. Earlier this month, a league table published by Acquisitions Monthly showed it was lying in second place for the value of takeovers it had advised on - 15 deals worth pounds 5.77bn. Perhaps the shares have suffered from the adverse sentiment left from the bungled sale of BZW. The timing of Barclays chief executive, Martin Taylor, could hardly have been worse. Last week saw Bankers Trust pull out of negotiations to buy the stockbroker. So the unravelling of the BZW sale may have turned sentiment against the sector.

Yet BZW is a different animal - and on any comparison of financial performance, it is a non-starter. While other entities have fallen by the wayside to be gobbled up by foreign predators, Schroders has ploughed its own furrow. And, unlike many investment banks, it has steadily increased profits. In large part, this has been because it has avoided the capital- intensive but volatile areas such as trading. Instead, it has concentrated on fund management and corporate advisory services.

Return on capital is a healthy 20 per cent, and the lion's share of income comes from fund management. The group had to take a provision of about pounds 5m for the earlier currency turmoil that had already racked South-east Asia. And the chances are there will be more to come. It would be fair to say that Schroders' growing funds management business in Asia may see some declines, both in fee income and in the value of the funds under management.

While the shares had been expensive before the most recent trouble, they richly deserved their premium. If that has declined, the shares remain a firm buy for investors prepared to take a long-term view.

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