As DB pensions went into decline, so did Schroders. But memories of lost pension clients are evermore distant as a new client base emerged. Angele Spiteri Paris speaks to executive vice chairman Massimo Tosato
Last year, Schroders’ institutional business saw a spectacular amount of new business, grossing £31.4bn (€35.6bn) and netting £16.8bn. Executive vice chairman and head of distribution, Massimo Tosato, is realistic and knows that these figures cannot be expected every year, yet the firm has a plan to keep growing its business around the globe with a particular focus on the United States and potential entry into the Indian market further in the future.
The success achieved by the institutional part of the firm’s business did not happen overnight. Rather, it was the culmination of years of work.
Tosato says: “Around 2005 and 2006, our gross business struggled to get to £8bn of gross new business a year and [had] net negative flows.”
Schroders set itself a target to gross £10bn, £12bn and £14bn over a period of four years.
“We did exactly that but the year we were due to post £12bn, we posted £14bn, and the year we were supposed to gross £14bn, we had £18.6bn, and so on. So that really accelerated our growth.”
Tosato says that last year’s results were due to a combination of the past five to six years of work which saw the company evolve its product range, its resources and its distribution capabilities. “It has included a complete re-haul of the institutional business under the leadership of John Troiano,” he says.
The reason Schroders hit bumps in the road in the mid-noughties was that its institutional business had been built around a defined benefit (DB) pensions world. Schroders’ product offering was geared towards servicing this market.
Tosato says: “The business was built around traditional balanced, mainly in the domestic market, around the Caps benchmark. A large part of our product offering was in core equities, and within core equities domestic equities had a strong relevance. In 1998 and 1999, the UK DB business represented around 70% of our total assets.”
But the world is now a very different place as the growth of DB schemes has been stunted and DC (defined contribution) plans are proliferating. This meant that the strategic allocation of institutional investors changed drastically and, therefore, Schroders’ product offering was no longer relevant.
The firm recognised that it had to change in order to avoid being left behind. And that metamorphosis was not easy.
“Having suffered for three or four years, we developed a completely new range of investment strategies,” says Tosato. “We invested in new in-house capabilities around global and regional equity, fixed income and multi-asset. We chose to focus on higher alpha products, and an LDI [liability-driven investment] offering.”
The change was vital because as DB pension schemes began to disappear, two new types of client became more important: insurance companies and sovereign wealth funds.
“The engine of the firm, the essence of what we were offering to the new clients, was completely different to what we had before, so we had to change our offering and our strategies,” he says.
And the figures for 2010 show that the journey was worthwhile.
But Tosato has no fancy that there will be a repeat of this in 2011 – he is keenly aware that such high numbers are not sustainable in the long-term.
“£31bn gross and £17bn net are quite exceptional, but this is not what we would expect every year,” he says. “On a multi-year phase, our estimate would average around the £10bn mark in net new business. For our size and our footprint, that is what we can aspire to. If we were able to do that, it would be a very good result.”
To maintain the firm’s upward trajectory, albeit more muted than last year’s, Tosato says that building on Schroders’ already significant global presence will be key.
“Last year, about 75% of our net new business came from international markets [ex-UK]. So although Schroders is a [relatively] medium-sized independent company, it is really a global franchise,” he says.
Eyes on America
One of the top priorities for the firm is to expand its presence in the United States. “The US will absolutely feature highly on our priority list going forward, especially in global strategies like global equities,” Tosato says.
The US asset management market is huge and broadly dominated by the banking behemoths such as JP Morgan and State Street. But Schroders has found a way in.
“We’re positioned as a complementary house to the US large powerhouses. You have to be smart to be present there because it’s so competitive and so crowded.
“We’ve been in the US for many years but slipped behind at the end of the 90s. We’ve gone back with clear-focused strategies, with a limited number of products that tend to be either very specialist or complementary to the large US players.”
For example, in equities, the firm’s New York-based fund management operation has focused on small- and mid-caps, while in fixed income it concentrated efforts on corporate credit and high yield.
The plan is to build on this at the same time that Schroders has also begun to focus on different client bases in the US. “We really re-started the US business in 2005 and for the first time in our history we also began to focus on an intermediary strategy into the US,” says Tosato. “Both have taken time to see growth but now the US is becoming a significant contributor in our development and our American position is back in profit.”
But Schroders may also have other geographies in its future sights.
The firm’s global presence is strong, with 32 offices in 25 countries. However, further expansion may be possible.
“There are only three geographies that could be of significant size over time where we currently are not present and those are India, Russia and Turkey. We constantly review the opportunity set there and we have frequent audits about each of these locations, India above all,” he says.
“If you asked me for a forecast, I wouldn’t exclude that over the next couple of years we will enter the Indian market. Russia and Turkey are going to be more of an opportunistic decision, but there is no question that ten years down the line we will be in both those countries, in one form or another.”
©2011 funds europe