How did the City let itself be blindsided by the sale of Schroders?

Surrendering this former jewel in the City’s crown to a US bidder looks like a metaphor for London’s decline, writes James Moore

‘To avoid Schroders’ slow slide into irrelevance, action is required. There won’t be any deep-pocketed rescuer wading in if it isn’t taken’ (Reuters)

Goodbye then, Schroders. The family-controlled British fund-manager, with two centuries of history and a fine name behind it, has surrendered its independence by selling out to US rival Nuveen in a £9.9bn deal. The founding family, still in possession of a controlling stake, are cashing in their chips with the firm’s other investors.

It is another loss for London, another company taking its shares off an increasingly threadbare-looking London Stock Exchange, a one-time jewel chipped from a tarnished crown. One could easily see Schroders’ surrender to an American bidder as a metaphor for London’s wider decline as a financial sector. A sad reflection of the current state of the City.

Having played a key role in the privatisations of the 1980s, Schroders saw the way the wind was blowing, with the corporate finance business increasingly dominated by giant American bulge bracket firms. So it sold its famed investment bank to one of them, Citigroup, in 2000. Its future would be in the less choppy waters of asset management. Now, even that has raised its hands in surrender. Why? Well, the company stuck to its guns as a traditional, old-school money management firm focused on stock picking, trying to beat the market by betting on winners. In pursuing this path, it turned a blind eye to the way the market was developing around it. Sound familiar?

Picking winners to deliver market-beating returns to your clients is hard to pull off. It is also expensive, and consumers and institutions such as pension funds have increasingly been asking why they’re paying so much for funds that underperform after charges are taken into account when there are low-cost index-tracking funds that offer more for less.

It is a fair question. The top talent at businesses like Schroders command high rewards. Too many simply don’t deserve them when set against what they deliver to clients. In October, broker AJ Bell trumped what looked like a win for funds like the ones it offers. “Humans have been punching above their weight with UK funds so far this year. In both the UK All Companies and UK Equity Income categories, the top 10 performers were dominated by actively managed funds," it declared.

However, there was a caveat: “It’s incredibly hard for fund managers to beat their benchmark year in, year out, and many people are happy to simply track the market. The challenge now for active funds is to sustain this year’s outperformance. That’s easier said than done.”

Indeed so. And that’s just for the good funds. There is also always a long tail of dross. By the way, Schroders was not represented among the top ten in the UK all companies sector. A business like this still ought to be able to at least keep pace with the market, especially when it is flying, as has recently been the case, which encourages investors. It has good relationships with financial advisors. There is still ISA money interested in actively run funds. There is pension money to compete for.

But Schroders has failed to do that. It has underperformed like a badly run fund for some time. It promised cost cuts to perk things up, which is the sort of thing that makes investors happy. But that had little impact on its bargain-basement shares.

Without any good answers, and in a strategic bind, management surrendered, with the group falling into the hands of a business that it insists has “shared values” for a knock-down price. The headline number is less than the company was worth at its peak in 2021. Even the supposedly moribund FTSE 100 is worth half again as much as it was over the same time period.

Schroders does have some good people, and keeping them will be a key task for Nuveen’s management. They’ll also have to convince clients with itchy feet to stay put. Perhaps those “shared values” will help. We are told that it is planning to retain a sizeable presence in the capital, so there’s that. But many will see this as slim comfort in the wake of another British blue chip surrendering to the Americans, like so many before it.

As for that metaphor? Well, the City isn’t in quite such a slough of despond as it might sometimes seem. There’s more to it than London’s struggling stock exchange, which actually saw a modest revival in new companies joining it last year. It remains a highly ranked financial centre.

But to avoid Schroders’ slow slide into irrelevance, action is required. There won’t be any deep-pocketed rescuer wading in if it isn’t taken.