Strategic risks

The risk of our strategy failing to deliver the expected outcomes, earnings, and profitability can be influenced by internal or external factors that fall into the categories detailed below.

Key risk

 

Description

 

How we manage risk

*

See glossary.

1. Changing investor requirements

 

Growth in demand for investment solutions that are not currently offered by the Group. This may include passive strategies such as ETFs or certain outcome-oriented products where Schroders does not currently have the investment capability.

Regulated clients de-risking due to the impact of regulatory capital* changes, where clients reallocate investments to classes that are not currently offered by the Group or at a lower margin.

Movement from defined benefit* to defined contribution plans in a number of countries such as the UK, Japan, Korea and Taiwan.

Consolidation of local authority pensions in the UK, reducing the associated fee pool.

An increase in demand for liability-driven investment (LDI) solutions, reducing the level of active risk management.

 

We have created a Product function, distinct from Investment and Distribution, to focus on product strategy, innovation, client engagement and managing our diverse product range to face the challenges posed by changing investor requirements and increased regulatory expectations.

We continue to focus on developing our investment capability, expanding into new asset classes and specific areas of expertise.

We have enhanced our structured product and LDI product offering for outcome-oriented and de-risking solutions and developed a fiduciary management offering. We seek to ensure our funds are included as part of third party DC offerings.

We adapt our business structure and cost base to manage the changing asset allocation requirements of our clients and the impact on our business model.

2. Low investment return environment

 

A lower investment return environment due to:

  • Lower interest rates resulting in a potentially lower income AUM and profits on a constant currency basis
  • Lower corporate revenue growth globally, impacting equities returns.

Both risks could impact upon investor demand, which is considered in changing investor requirements above.

 

Products that see demand in a low interest rate environment are income funds, absolute return funds and multi-asset funds.

We have increased our focus on operational efficiency through automation and the use of technology.

3. Fee attrition

 

A lower fee environment and the impact on our business model of margin attrition due to:

  • Changes in investor demand, driven by de-risking, a focus on lower fee margin products, or a transfer of AUM into products that are not offered by Schroders
  • Compressed investment returns leading to tighter fee rates for new and existing institutional mandates
  • Move towards vertical integration (advice, platform and investment management services) within the industry, increasing competition and pressure on fee revenue as active managers may be disintermediated
  • Rising costs within the industry driven by changing and increasing regulatory requirements and technological advancement which impact margins.

 

Where we can offer a competitive advantage, our business is increasing its focus on solutions and outcome-orientated strategies which diversifies our fee income.

Diversifying the product offering to address investor needs which supports overall profitability in the long term.

We have increased our access to private and alternative assets and strategies through acquisitions and strategic relationships (e.g. infrastructure debt and asset-backed securities).

We have made a strategic investment in Benchmark Capital which provides the opportunity for vertical integration.

4. Regulatory landscape

 

Regulators are moving their post-crisis focus from the prudential and misconduct issues affecting investment and retail banks to other parts of the financial system including asset managers.

There is an increased regulatory focus on transparency of pricing, fees and other indirect costs borne by clients and the associated operating costs of compliance, reducing net profits, e.g. MIFID II*, the potential introduction of minimum levels of fund liquidity and the outcomes of other regulatory reviews, such as the UK FCA’s asset management market study.

Changes to intermediary commission and incentive structures and obligations are changing intermediaries’ product selection processes. Regulation of distribution through digital channels and robo-advice may also change.

 

Regulatory and legal change is monitored by the Compliance, Legal and Public Policy teams. We engage with our regulators in relation to potential and planned changes in regulation.

Our increasingly diverse product offering enables us to meet the changing needs of clients driven by evolving regulation.

5. Business model disruption

 

The rise of technology solutions from competitors that disrupt our value chain including competition from quantitative investment technologies that have the potential to assimilate more data and make investment decisions, and that may be perceived to realise alpha more efficiently than active managers.

Increased investment and asset allocation through robo-advice* services, displacing active management and an increased asset allocation to passive investments.

Inability to meet demand for products and solution-based offerings due to our capabilities being inadequate relative to requirements.

Centralisation of providers including swaps and other clearing houses, custodians and transfer agents creates systemic IT based risk with market infrastructure throughout our business chain, coupled with a consolidation of key counterparties that support our business operations.

Challenges arising from Brexit resulting from disruption to and uncertainty in respect of current law and regulation.

 

We are driving increased efficiencies and insights through technology, including investment in data science to obtain investment insights from non-traditional data sources and upgrade of front office systems.

Digital initiatives are in progress to improve client experience, engagement, and servicing through our web and mobile platforms.

We are undertaking significant investment in our technology platform to support scalability, agility in product offerings, and the expanding alternatives business offerings.

We monitor the performance of key counterparties on a regular basis, as well as establishing processes for regularly assessing alternatives.

We are reviewing our operating model to ensure that post-Brexit we can continue to service our clients and investors.