New Schroders boss has ‘big calls to consider’ #NewsMarket

Peter Harrison was nicknamed “The Prince of Wales” when he rejoined Schroders as head of equities in 2013, such was the conviction among the FTSE 100 asset manager’s staff that he was the anointed successor to chief executive Michael Dobson, who he replaced three years later.

Harrison’s own succession, announced this week, was not so smoothly orchestrated. The appointment of Richard Oldfield, who joined as chief financial officer in October after three decades at PwC, followed a “full and extensive global search” by headhunters Russell Reynolds that one insider said had made the business seem “on hold” for the past five months.

The transition is not the only thing unsettling Schroders, which was founded in 1804 and remains one of the great dynasties of UK finance. Oldfield, who will step up to the top job in November, is taking the reins of a business in a sector that has struggled for growth.

While assets under management have risen over 140 per cent under Harrison, boosted by several acquisitions, profits have fallen, costs have surged and the group’s market capitalisation is lower than when he took the job.

Some have even questioned what would once have been unthinkable — whether Schroders should consider if it can stay as an independent business. Others wonder if it is trying to do too much, stuck between scale and specialism.

A disappointing set of half-year results in August showed it had missed profit forecasts and that margins had come under further pressure, sending shares down almost 10 per cent to an 11-year low. Excluding joint ventures and associates such as its partnerships in China and India, net new business — a measure of an asset manager’s health — has been inconsistent for the past few years.

The company suffered several senior departures as the search played out. Kevin Murphy, co-head of the global value team, left in June; Andrew Chorlton, head of fixed income, in July; and Emma Holden, global head of human resources, last week.

One London-based rival said that for the first time his firm was receiving incoming CVs from Schroders staff.

All of this rattled the company’s directors and its founding Schroder family, which remains its largest shareholder with a roughly 44 per cent stake and two board representatives.

As the summer drew to a close, internal calls for clarity on Harrison’s successor gave the search renewed urgency.

Three internal candidates were competing for the role, as well as at least three serious external contenders. Among them was Ralph Hamers, former chief executive of UBS who left soon after its takeover of Credit Suisse. Hamers impressed members of the board, according to people familiar with the matter, but the prospect that he was in the running was poorly received by the market.

While one person close to the succession process said it was normal for the replacement of a large and complex company’s CEO to take several months, another insider said that “uncertainty around Harrison’s replacement hasn’t been healthy. Decisions are not being made in the same way.”

The board ultimately decided to promote former Big Four accountant Oldfield to try to steady the ship, an appointment Schroders said had followed “an orderly and comprehensive succession process”.

“The board was unanimous that Richard was the standout candidate,” the asset manager’s chair Dame Elizabeth Corley said in a statement.

One top-10 shareholder said that while Oldfield was inheriting “a cash-generative business with a pristine balance sheet and a still highly respected brand”, there was “more to do to restore the company to growth — the new CEO will have some big calls to consider”.

Among these is evaluating the group strategy that Harrison set out early in his tenure, weighing up its future in China — and, along with the board, deciding whether the company’s independence is sustainable.

Harrison sought to pivot the business to capture future growth, acknowledging that its core mutual fund business was under pressure from the march of passive investing and observing a global shift in momentum from public to private markets.

The company’s fortunes illustrate the “buy it or build it” dilemma that mainstream asset managers face as they try to expand in faster-growing areas to offset the decline of their traditional businesses.

“If you try to do it organically it takes ages and it’s hard to lure talent when you’re a start-up in that area. Or you have to pay an awful lot of money,” said David McCann, analyst at Deutsche Numis. “Schroders tried to do both. This comes with significant financial cost and significant time cost.”

Harrison staked the future of the business on three areas of what he called “fast flowing water”: private assets, wealth management and so-called solutions, the business of offering outsourced chief investment officers and liability driven investing to pension funds.

With the exception of the £424mn purchase of Cazenove in 2013, Dobson had largely grown the business organically. But Harrison ramped up acquisitions, including the 2021 purchases of River and Mercantile Group’s solutions business for £230mn and a majority stake in renewable energy specialist Greencoat for £358mn. Roughly a dozen bolt-on deals, minority acquisitions and partnerships were struck in the three growth areas during Harrison’s tenure.

“Valuations were at the high end for the Greencoat and R&M deals,” said a top-20 shareholder, although they added that this was “not to say that they were wrong strategically”.

Excluding joint ventures, Schroder’s public markets business — best known for its active equities strategies — has like the broader sector experienced net outflows in all but one year since 2018. Harrison’s three growth areas have grown from 35 per cent of overall assets under management in 2016 to 56 per cent at the end of last year. But this is yet to be reflected in pre-tax profit, which dropped from £618.1mn in 2016 to £487.6mn last year.

Long-term investments in the three priority areas, as well as in ESG, China and migrating to the cloud, have pushed the group’s cost to income ratio above its European peers, according to Jefferies. Harrison has been paid more than £50mn since 2016, including £6.3mn in 2023, although he waived some of his deferred income and donated part of his bonus to charity during the pandemic.

“Schroders moved the business quite well, but they’ve got to demonstrate superior growth from the different business mix and cut costs,” said another top-20 shareholder. “So far the greater business mix has not led to more resilience.”

Pursuing newer business lines also runs the risk of making those in the core business feel neglected. “Pushing into private markets poses strains on the mutual fund business, which was the heart and soul of the company,” said a third insider.

The second insider said “Schroders ran the right strategy but execution let it down”, adding that “it hasn’t yet grown into the strategy to offset the decline of the traditional business — it hasn’t been focused enough on costs”.

With Schroders Capital, its £77bn private markets division, it has ended up with a series of diversified but so far subscale bets across private equity, renewable infrastructure investing, private debt and real estate.

The division recorded £3bn of net new business in the first half. Schroders recently launched a venture with Phoenix Group, the UK’s largest savings and retirement business, to channel more pension money into fast-growing private companies.

Higher interest rates have made the fundraising environment in alternatives more difficult, especially for newcomers and smaller players in private markets. This poses a challenge for mainstream asset managers such as Schroders, T Rowe Price, AllianceBernstein and Franklin Templeton that have pushed into this area and found that private assets are no less competitive than their core mutual-fund business.

Within the solutions division, Schroders has won outsourced-CIO mandates from the likes of Tesco and Centrica, but it is a low-margin business that is exposed to headwinds as higher interest rates have driven up pension scheme funding levels and pushed them towards buyouts.

It is not all bad. Oldfield takes over a business where investment performance is solid: 69 per cent of client assets outperformed their benchmarks over a year, 62 per cent over three years and 78 per cent over five years, according to the group’s half-year results. Led by its ultra-high-net-worth brand Cazenove, the wealth business is performing strongly, with £3.7bn of net new business in the first half, and benefits from long-term structural tailwinds.

Harrison is credited with overhauling the firm’s ownership structure, ensuring shareholders’ economic interest in the group matched their voting rights. His proponents say investments on his watch should pay off in future and his successor may well reap the rewards of his strategic repositioning — as long as he can keep costs under control.

The firm’s traditional business is well positioned to capture flows into mutual funds when interest rates come down and clients move out of money-market funds. And, notwithstanding the geopolitical risk, joint ventures in China — where others have retreated but Schroders remains the fifth-largest foreign asset manager through a two-decade joint venture with Bank of Communications — and India present a big opportunity to tap into large savings pools in Asia.

Some people have questioned whether a newcomer to the asset management industry is the right person to lead one of the UK’s most prominent investment managers. Oldfield is seen as straight-talking and capable of making difficult decisions, even where these are divisive, according to people who have worked with him, and is expected to bring a commercial discipline to the group.

While Schroders has a strong brand in Europe and Asia, it has never cracked the US, the world’s largest market. Consolidation is sweeping across the industry on both sides of the Atlantic as traditional players try to combat margin pressure, and clients look to do more with fewer asset manager relationships. Illustrating the push for scale, BNP Paribas is buying French insurer Axa’s investment management arm for €5.1bn to create a €1.5tn asset manager.

Schroders has always been distinct from its UK-listed peers for its family ownership, which is a deterrent to a hostile takeover.

The death in 2019 of patriarch Bruno Schroder, who sat on the asset manager’s board for more than half a century, could herald a shift.

“For Bruno, Schroders was his life,” said one person who was close to him. “It was incredibly important to him that it stayed independent.” The Schroder family’s two current board representatives — Bruno’s only daughter Leonie Schroder and Claire Fitzalan Howard — are more removed from the coalface of the business.

Bold strategic options could include exiting the declining mutual fund business and focusing on wealth management, which is much less affected by the rise of passive investing. There are also precedents for Schroders selling off a core business: in 2001 it sold its investment banking arm to Citigroup for £1.35bn.

The first insider suggested the “logical thing” would be to secure a sale of Schroders to a big US player, adding: “The elephant in the room in all of this is, are we just the wrong size?”

The chief executive of a rival asset manager said the outgoing CEO “should have been more aggressive about changing the strategy or stayed the same. His successor needs to double down on Harrison’s strategy and be more aggressive, or privatise the business and shrink to greatness.”

Additional reporting by Michael O’Dwyer and Owen Walker in London