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📰 UK Asset Managers: Eat or Be Eaten

📰 UK Asset Managers: Eat or Be Eaten

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Afzal Hussein
November 14, 2024

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Estimated read time: 3 minutes

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British fund managers are struggling to maintain profitability as rising operational costs and shrinking investor appetite for active management create challenging market conditions.

Schroders, one of the larger UK-listed asset managers, reflects these broader industry pressures with significant outflows and rising expenses.

CEO Richard Oldfield has already made moves to trim the firm’s executive ranks and could further explore expansion into private markets and institutional services to offset costs.

With UK investors favouring passive funds over active strategies, consolidation could be a necessary strategy for Schroders and other players to survive.

Here’s the article. Scroll down to read key takeaways, commercial implications, and an example interview question (with answer) on the topic.

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📰 Schroders: Eat or Be Eaten in UK’s Tough Fund Management Industry

Key Takeaways:

Cost Pressures and Fee Compression: UK fund managers are experiencing steep operational costs alongside fee compression, with average fees down to 22 basis points from 26 in 2010. This margin pressure is exacerbating profitability issues across the sector.
Schroders’ Strategic Adjustments Under New CEO: Richard Oldfield, Schroders' new CEO, has already reduced the firm’s executive committee, signalling a focus on cost containment. He may look further at optimising headcount and geographic focus to improve financial stability.
Investor Shift to Passive Funds: Investors continue to move away from active strategies, with £45.9 billion exiting active funds while passive funds saw an inflow of £14.4 billion this year, underscoring a broader shift that UK fund managers must adapt to.
Private Markets and “Solutions” as Growth Avenues: Schroders may pursue growth in private markets and “solutions” services for institutional investors. Recent acquisitions in renewable infrastructure signal a move toward higher-yield opportunities, though results remain to be seen.
Potential for Industry Consolidation: Given the fragmented nature of the UK fund market, Schroders could benefit from acting as a consolidator, but first their CEO must stabilise the firm’s position to make such an acquisition-driven strategy viable.

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Commercial Implications:

Profitability Pressure on Active-Focused Firms: UK fund managers heavily invested in active strategies are seeing profitability squeezed by outflows and fee compression. These managers must either adapt by diversifying their product mix or risk declining financial stability.
Operational Efficiency as a Key Differentiator: In a cost-sensitive environment, operational efficiency will be critical. Firms like Schroders that streamline executive structures and geographic footprints can manage costs more effectively and preserve profit margins.
Potential Revenue Upside in Private Markets and Institutional Solutions: Expanding into private markets and institutional solutions offers UK managers an alternative revenue stream. Schroders’ investment in renewable infrastructure demonstrates the potential of this pivot, but it requires patience to yield returns.
Increased Need for Industry Consolidation: The UK fund management landscape remains fragmented, and consolidation could allow firms to achieve economies of scale, reduce costs, and leverage combined resources. Schroders, as a larger player, could use acquisitions to build market share and enhance its competitive position.
Currency and Influence Requirements for Consolidation Strategy: For a firm to drive consolidation, it must first ensure financial stability and maintain a strong position in its existing markets. Schroders needs to optimise its current operations to secure the currency (both capital and influence) required for an acquisition-led growth strategy.

Example Interview Question & Answer On Today’s Article

Question: How would you advise a UK fund manager like Schroders to navigate the rising shift to passive and alternative funds while maintaining profitability?

Answer: To help a UK fund manager like Schroders navigate the rising preference for passive and alternative funds, I’d focus on a two-fold strategy. First, I would advocate for operational optimisation to reduce costs and streamline processes, freeing up capital to invest in growth areas. This might include reducing non-essential headcount, rationalising geographic focus, and leveraging technology to improve operational efficiency.

Second, I would recommend diversifying revenue streams by expanding into higher-yield, lower-volatility markets. For instance, growing a footprint in private credit, infrastructure, or other private asset classes can meet the demand for alternative investments. These markets not only offer resilience against economic volatility but align well with the needs of institutional clients looking for stable returns.

Lastly, I'd advise exploring selective acquisitions, as consolidation could provide access to scale economies and increase competitiveness. In summary, by strategically managing costs, targeting new growth areas, and consolidating, a UK fund manager can not only survive but potentially lead in a highly competitive market.

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See you tomorrow!

Afzal