Schroders Targets U.S.
European brands that are well-established powerhouses in the U.S. include Nestlé, Volkswagen, and Heineken. London-based Schroders aims to attain a similar recognition in the investment-management space.
Schroders has worked in the U.S. for nearly a century, but only about one-eighth of its assets under management are from the world’s largest market, where it has been known primarily as a specialist in non-core strategies such as commodities and emerging markets.
It won’t be easy to break into the realm of BlackRock, State Street, Vanguard and Fidelity in stocks and bonds on their home turf, but Karl Dasher, chief executive of Schroders Investment Management North America, is committed to boosting the firm’s presence.
“We want to be seen as some of the large, well-known brand names in the U.S. are — as a competent partner in the core of the portfolio, as well as the periphery,” Dasher said. “This will be the defining strategic shift you see from us in the U.S.”
Schroders managed more than $435 billion globally as of December 31, 2013, of which about $55 billion was from U.S. accounts. The global asset base is split about equally between institutional clients such as pensions, endowments and foundations, and retail investors such as high-net-worth individuals and financial advisors.
Schroders’ best year in the U.S. was a $4 billion net add a few years back; Dasher wants to increase the annual run rate to $5 billion to $10 billion, or roughly the equivalent of adding a small-sized large hedge fund per year. U.S. annual revenue is about $200 million, up more than threefold from five years ago and now representing 10% of Schroders’ overall revenue; the goal is to double that percentage within five years.
The North American business, spanning the U.S. and Canada, is broken down across four platforms: global fixed income; global equity, including fundamental and quantitative strategies; emerging-market debt and commodities, which are categorized as alternative investments; and multi-asset. Equities generates about half of the revenue, while the other three platforms contribute about equally to the other half.
“The fixed income, multi-asset, and alternatives platforms have been faster-growing in the last few years, but I think we’re going to start to see growth reinvigorate in equities, given what we’ve seen in the market recently and given that we’ve had some really good performance in our quantitative and equity strategies,” Dasher told Markets Media in a March 26 interview from Schroders’ office in midtown Manhattan.
Dasher explained that Schroders’ process entails a framework called ‘bounded discretion’, which gives portfolio managers significant leeway in making decisions. “We’re not an organization with an all-seeing, all-knowing, singular investment leader who stands at the top and dictates to the underlying PMs, ‘thou shalt put this trade on and thou shalt put that trade on.’”
“We bring into our organization talented individuals who are domain experts in certain sectors of the market,” Dasher said. “Those individuals and their teams are given the remit to manage their risk budgets as their process and risk procedures dictate, but within a governance structure that Schroders oversees on the risk side.”
“Another theme is that in every single asset class and every single portfolio, there is a strong commitment to fundamental research and security analysis,” Dasher continued. “Even in our quantitative team, there is a much more fundamentally oriented approach then you will find in a lot of other quantitative strategies.”
Dasher became CEO of Schroders North America in July 2013, replacing Jamie Dorrien-Smith, who had held the position since 2006. Dasher had been Schroders’ global head of fixed income, a role he now shares with Philippe Lespinard.
A native of Savannah, Georgia, Dasher holds a bachelors degree in industrial engineering from Georgia Tech, and he attended Columbia Business School and London Business School for postgraduate studies. He enjoys spending time outdoors with his three children, ages 10, 14, and 16.
In a February 2013 statement announcing Dasher’s appointment as CEO, Schroders cited the then-pending acquisition of STW Fixed Income Management, a California-based firm that managed $12 billion of bonds. “We believe that Karl is the best person to help us realize the major opportunity we see to grow in North America,” said Schroders Executive Vice Chairman Massimo Tosato.
Schroders’ challenge is essentially to port its business model from London, Frankfurt, Hong Kong and Tokyo to New York, Boston and Chicago. “In Asia and Europe, they view us as a ‘hometown team’ that they entrust with significant allocations of capital from core asset classes like multi-asset, equities, and multi-sector bonds,” Dasher said. “With the acquisition of STW, we moved very aggressively into offering capabilities that are centered around the core, including things like long duration, which is our version of active LDI (liability-driven investing).”
Dasher said Schroders will leverage a more hands-on “solution-sale” approach in building its North American business. “When you migrate from providing highly standardized, extended-asset-class products such as commodities and emerging equities to multi-asset and active long duration, that typically involves a more consultative engagement process,” he explained. “Clients will have a particular idea about what they want in a more customized way. It is part a risk-management solution, and part an active alpha proposition.”
To be sure, capturing market share from entrenched competitors in the U.S. and Canada, which together comprise an estimated half of the world’s investable capital, is easier said than done.
“The main challenge is that is also probably the world’s most competitive asset management market, reflecting the scale,” said David McCann, who follows publicly traded investment firms as as analyst for Numis Securities in London. “Creating a differentiated enough product, getting distribution right and making acceptable margins will clearly be challenging. U.K. asset managers do not have a great track record in making a success of a U.S. distribution push, reflecting these real-world challenges.”
Schroders aims to capture market share from large U.S. investment managers, but Dasher noted the firm will blaze its own path rather than emulate any specific competitor. “Where we most clearly compete is in offering capabilities, on an actively managed basis, within our four platforms,” he said. “In that business the competitive landscape includes the big names, but just as importantly, a lot of the smaller, single-product niche boutiques.”
“We tend to not think a lot about the competition, because in our view the competition is the market overall,” Dasher added. “Our job is to beat the benchmarks by a certain magnitude consistently – if we do that and we do a good job of acquiring and managing client relationships, the rest will take care of itself.”
Regarding performance, about 70% of Schroders’ investment strategies outperformed their respective benchmarks over the past three years, according to Dasher. “We know that alpha is difficult, but it’s our firm belief that through the cycle we can generate enough outperformance to justify the confidence investors give us,” he said.
Schroders has historically relied on organic growth, but in addition to STW, last year the firm also bought London-based Cazenove Capital for 424 million pounds ($646 million), the largest deal in its 200-year history.
Dasher said Cazenove and STW have generated significant investment outperformance since coming under the Schroders umbrella. “In both cases we feel we did a reasonably good job in identifying an investment process that would deliver sustainable results, and more importantly, mesh well with us culturally,” he said.
Fixed income as an asset class is arguably under more scrutiny than ever, given the unprecedented influence of central banks’ monetary policy over the past half-decade, and the seemingly inevitable tightening that some expect to gain steam sooner rather than later. As a bond guy, Dasher not surprisingly has a lot to say on the topic.
Yields on benchmark U.S. Treasuries maturing within a few years have been compressed by the Federal Reserve’s easy-money policies, but Dasher noted that the ‘long end’ of the curve, i.e. beyond 10 years’ maturity, isn’t far out of whack vis-a-vis historical norms, excluding some anomalous years in the 1970s and 1980s. With an aging population needing to lock in reasonable income without taking undue risk, long bonds retain appeal.
“It’s difficult for people to simply boycott bonds because they think yields are too low. Liabilities are dictating a more conservative approach to portfolio management.,” Dasher said.
“You have one point of view that says because of all the stimulus, inflation is right around the corner, and the last thing you want to hold is duration in bonds,” Dasher explained. “The other point of view is that in the context of history, long bonds, especially corporates, are a lot more normal than people think.”
Rather than a ‘great rotation’ from bonds to stocks that’s often talked about in the media, Dasher said the trend afoot can be better described as a ‘great realignment’. “Investors have to get their structural alignment correct,” he said. “We think the losers in this realignment will likely be the intermediate and core-plus bond categories, which will become sources of funds for other categories.”
One of the worst-performing investment themes over the past dozen years or so has been expecting interest rates to rise, as multiple false starts and feints in that direction have been invariably followed by a settling and a return to lower rates. Just last week, Bloomberg News highlighted that long bonds defied gloomy expectations and returned as much as 30% in some leveraged strategies, year-to-date through April 23.
Dasher indicated the trend may have more room to run. “Everybody says the easy trade is to be short bonds and long other things,” he said. “We keep reminding people that that’s not necessarily a foregone conclusion.”
“Look at the economy today versus the last time rates where this low, which was around 2003-2004. When rates were in the low 3’s then, the economy was in a stronger position,” Dasher observed. “The interrelationship between the economy and interest rates is very tight, and it will be very difficult for yield on the 10-year bond to go back up above 4% and for the economy to continue to maintain a growth glide path.”
“It’s going to be a saw-tooth pattern back to a new equilibrium,” Dasher added. “I don’t know exactly what the new equilibrium is, but I do believe it’s relatively muted compared with some of the bigger upside expectations.”
Broad equity-market volatility as measured by the CBOE Volatility Index remains low by historical standards, but volatility has been elevated in certain pockets of financial markets, including fixed income. Passive money managers who track indices have gained traction with investors in recent years, but Dasher said the outlook for continued fluctuations support the pendulum swinging back toward trying to beat benchmarks via asset allocation and security selection.
“We’ve moved our platform much further down the curve of saying ‘this is the age of active management.’ This is where it’s really going to pay off, especially in fixed-income markets that are becoming less efficient,” Dasher said. “Our job is to take advantage of volatility and generate alpha, because frankly just buying the market is not going to generate the real returns that you need, certainly not in fixed-income markets.”
Liquidity in bond markets is deeper than it was two to three years ago, but it remains off 2005-2006 levels, before the global financial crisis and ensuing wave of regulation constrained the large sell-side banks who had been stalwart liquidity providers. As a response to this ‘new normal’, Schroders runs monthly stress tests to simulate liquidity runs.
In the event of forced selling of 10% or 20% of the portfolio, Schroders analyzes what liquidity and price distortions would be, as well as where the firm could provide liquidity. “It’s something we’ve indoctrinated in our group that didn’t exist before 2008,” Dasher said. “Schroders is one of the more risk-conscious firms you will find. Every single counterparty we trade with, around the world for each type of investment, is approved at the executive level and monitored very diligently by a centralized team as well as sub-teams within the platforms.”
The diminished liquidity in cash bond markets have pushed Schroders to derivatives, such as credit-default swaps, in some instances. “It may be easier to express a view in the synthetic market, as it actually reduces one level of risk which is liquidity, though It increases basis risk between the synthetic and the physical bond,” Dasher said. “We’re users of those instruments more to risk-manage the portfolio than to get leverage or anything else.”
Schroders traces its roots back to the early 19th century, when German brothers Johann Heinrich Schröder and Johann Friedrich Schröder founded a London-based firm to finance trade between Europe and America. The company made a splash by issuing bonds for overseas borrowers, and Dasher said the culture of innovation has endured.
He cited Schroders’ quantitative equity strategies, which have expanded from scratch to $40 billion in a little more than a decade, as an area of innovation. The firm also offers a so-called 150-50 strategy, which sets a 150% long exposure and 50% short exposure, as well as strategies pertaining to global unconstrained bonds, which give the investment manager more leeway to seek returns and manage risk.
“We are a very innovative shop, and part of my job is to get the message out there about what we’ve done as an innovator, and how we can partner with clients to drive innovation that matters to them,” Dasher said. “That predominantly comes around delivering outcomes. If I can deliver the investment outcome that a client needs more consistently, that in itself is probably the greatest innovation.”
Featured image via Fotolia365/Dollar Photo Club
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