I'm shopping for shares again, and I'm anxious to get to the checkout. Should I pop fund manager Schroders plc (LSE: SDR) into my basket?
Schroders, so good
If you're feeling bullish about stock markets, one way to play them is to invest in the shares of fund managers. Schroders is one of the last family-owned firms on the FTSE 100, and it's in an acquisitive mood, recently announcing plans to buy fellow fund manager Cazenove Capital for £424m. I'm in an acquisitive mood myself, so should I buy Schroders?
The Schroders share price is up 105% over the past five years, compared to just 10% for the FTSE 100 as a whole. Talk about a geared play on share prices. It is up 35% over the past four months, against 10% for the FTSE 100. Markets have been volatile in that time, but Schroders has charted a steady upward course. Yet the full-year results for 2012 tell a mixed story. Tough competition, private banking client exits and reduced performance fee income slashed revenues. Profits before tax fell 11.5% to £360m. Group revenue fell 5.1% to £1.43bn. But expectations are all, and the share price pipped up 3%. Who said markets were rational?
Fun with funds
I'm a little worried by the sharp drop in performance fees, from £36.6m in 2011 to £28.4m. I suspect this area of revenue will remain under pressure: investors don't like performance fees, nor do I. The investment industry regulatory overhaul, the Retail Distribution Review, will continue to squeeze fees. Schroders needs to sort out its private banking business, which is leaking customers. But I can also see plenty of positives. Money is flowing into its institutional and intermediary businesses. Assets under management have hit a record high of £212bn, up from £187bn in 2011. Fund managers have beaten their benchmarks. Better still, Schroders earns two-thirds of group revenues outside the UK, always a plus these days. The market has welcomed the Cazenove acquisition, as its funds should slot nicely around Schroders range.
So are you bullish on stock markets? Right now, they seem to be underpinned by a government guarantee, in the form of limitless quantitative easing. The dismal returns on cash will also attempt more people into stocks and shares, especially as the truth dawns that we must invest for our own retirement, because governments can't afford it. Schroders may be a good way to play that trend.
Schroders has a healthy balance sheet. The dividend is unremarkable, yielding just 2%, although management did hike it 10% recently. Covered 2.4 times, there is scope for further progression. Forecast earnings per share (EPS) growth is a smooth 17% this year and 16% next. Its PEG of 1.0 isn't too demanding. The downside is a spiky valuation, at 20 times earnings. Credit Suisse recently lifted its target price from £21.50 to £22.85 (current price: £21.25), but stuck to its neutral rating. Yes, I am bullish on stock markets, but I suspect there may be more exciting ways to play them.
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