Group Chief Executive’s statement
Schroders had a good year in 2016, despite the headwinds the industry is facing.
It is a privilege to have taken over responsibility as Group Chief Executive in April, having first joined Schroders as a graduate trainee and having spent my whole career in the asset management industry. I am grateful to both the Board and the senior management team in supporting a very smooth transition.
Schroders had a good year in 2016, despite the headwinds the industry is facing. Profit before tax and exceptional items increased by 6% to £644.7 million and net operating revenue* grew 7% to £1,712.8 million. Assets under management and administration reached a record level of £397.1 billion, up from £313.5 billion.
Subdued market returns, low interest rates and volatile markets are difficult for our clients to navigate and delivering good outcomes for them is our key priority. Investment performance* continued to be strong in 2016 with 74% of assets outperforming their benchmark or peer group over a three-year period. Over one year, 75% of assets outperformed and over five years, the figure was 85%. We strongly believe that active asset management adds real value to our clients’ portfolios and I am proud that we have managed this.
I have taken on this role at an interesting time. Aside from the remarkable developments in the political environments of both the UK and US, the asset management industry is changing rapidly. Asset flows into active managers, like Schroders, were negative for the first time in eight years in 2016. Despite this, we achieved positive net inflows of £1.1 billion. The rapid growth of passive products and the continued derisking of pension funds will likely continue as will the widespread pressure on industry pricing. Regulation of the industry remains intense, while technological change offers the possibility of new opportunities and significant productivity improvements.
My priority has been to develop our strategy to meet these challenges. We will continue to develop our business by both evolving our structure and investing in a clear range of growth initiatives.
I am fortunate to have inherited a diverse and talented group of employees across the world.
In a recent employee survey, 94% of employees globally said that they were proud to be associated with Schroders, more information on which can found in chapter Our people.
Changing client demand
As our clients find it increasingly difficult to meet their financial objectives in a low return environment, we have seen a persistent shift in product demand.
We see the opportunity to offer enhanced value for money and more tailored solutions. We have adapted our business model to create a distinct Product division. This will help us to remain at the cutting edge of product innovation, development and management. We have provided more information in chapter Asset Management – Product.
We have also created a stand-alone Solutions business. This business is asset class agnostic and solely focused on building solutions to meet our clients’ changing investment goals.
The use of technology has disrupted many industries, including within financial services, and I strongly believe that it can transform many aspects of asset management.
We believe there are significant opportunities to enhance how we analyse investment data and to provide better services for our clients. For Schroders to be at the leading edge of these changes, we have been investing in technology throughout the firm.
We have continued to grow our Data Insights team with more people from data science backgrounds embedded amongst our investment teams. We have also been constructing a best-in-class technology platform, most notably through the ongoing implementation of a new front office investment management system. We also made a strategic investment in Benchmark Capital, a technology-led high quality adviser support business in the UK. This relationship has the potential to significantly enhance the service we provide to UK Intermediary and Wealth Management clients.
We are a globally diverse business, with 41 offices across 27 countries. Whilst we see opportunities across all the regions in which we operate, we see good opportunities in North America. It accounts for almost half of the world’s investible assets and there is significant scope for us to grow the £49 billion of assets we manage on behalf of our clients in the region.
In October, we established a strategic relationship with Hartford Funds to further develop our mutual fund presence in the US. Through this relationship, we have greatly increased our scope and reach in the US intermediary markets and we are already seeing the benefits through new business flows.
In the North American pensions market, we believe there is a significant opportunity as pension schemes in the US and Canada embark upon the same derisking journey that we have seen in the UK. With our long and successful track record of providing investment solutions for schemes in our home market, we are well placed to grow our business in other regions.
We have expanded our investment expertise with the acquisition of an asset-backed securities team based in New York. They have come with a strong track record and we are already seeing positive client momentum.
In the current environment of sustained low interest rates, many of our clients are looking to invest beyond public markets. Private markets can, in some cases, offer higher returns than traditional asset classes. It is an area where we have been building our business and expanding our investment capabilities.
We have a long-established Real Estate business with investment centres in 10 locations, managing £11 billion of assets for our clients. In 2016, we increased our stake in Secquaero, a Swiss-based insurance-linked securities business, whose assets have now grown to £1.6 billion. Our Infrastructure Finance capability, which we established in late 2015, has seen strong growth this year and now manages assets of over £700 million on behalf of our clients.
In 2016, we entered the direct lending market as we took a stake in NEOS Finance Group. NEOS is a direct lending firm based in the Netherlands that provides institutional investors with access to an alternative debt financing platform for Dutch small and medium-sized enterprises.
Basic earnings per share
In my first year as Group Chief Executive, the external environment has been dominated by market uncertainty and industry challenges. Although these look set to continue as we go into 2017, I believe Schroders is well placed to take advantage of these challenges.
As I travelled between many of our global offices this year, I have been struck by the depth of talent and the strength of the culture that we have in place across all the regions in which we operate. Protecting the integrity of this culture, which puts our clients at the centre of everything we do, is critical to our ongoing success. In order to do this, retaining and developing our people is a key priority and there is more information on this in Our people.
Throughout 2016, there has been much focus within Schroders on developing our collaboration across the firm and on broadening our diversity of thought. This has been evident not just at senior management level, where we have increased the scope and membership of the Group Management Committee (GMC), but throughout all functions of the Group.
With the support of the Board, we have made a number of decisions this year to strategically develop our business, including the acquisition of C. Hoare & Co.’s wealth management business in February 2017. We have a highly diversified business model, a strong financial position and we have demonstrated the willingness to invest in the future growth of the business.
We see interesting long-term opportunities across the world, both organically in our core business and inorganically in new opportunities, and I look forward to leading Schroders’ continued growth.
Group Chief Executive
* See glossary.
† Before exceptional items.