OREANDA-NEWS. Fitch Ratings has affirmed Schroders plc's (Schroders) Long - and Short-Term Issuer Default Ratings (IDR) at 'A+' and 'F1' respectively. The Outlook on the Long-Term IDR is Stable.

These rating actions were undertaken as part of Fitch's global peer review of traditional investment managers. For more information on the peer review, refer to the commentary "Fitch Completes Traditional Investment Manager Global Peer Review" dated 9 June 2016.

KEY RATING DRIVERS

The IDRs primarily reflect Schroders' well-established and diverse international franchise, strong funding and leverage metrics due to the absence of wholesale debt, resilient and predictable profitability, sound investment performance and a robust risk governance framework.

The ratings also take into account incremental credit and liquidity risks from Schroders' wealth management activities and the sensitivity of Schroders' profitability to sudden market volatility. This is due to the company's above-average revenue exposure to equity products and fairly high operating leverage arising from a staff-intensive business model.

Schroders' franchise is centred around the asset manager's well-established and profitable UK, European and Asian equities businesses (equities assets under management (AuM) accounted for 41% of GBP324.9bn AuM at end-March 2016) complemented by fixed income (20%), multi-assets (25%), wealth management (10%) and other AuM (4%; including real estate). Globally, Schroders' franchise is weakest in the important North American market where management targets a representation 20% of AuM over the medium-term (Americas AuM accounted for 13% at end-March 2016).

Schroders' investment performance has been robust and has generally outperformed benchmark returns (in 1Q16 and 2015, 74% and 72% of products, respectively, outperformed their relevant benchmarks over three years compared with management's target of 60%). As a result, net new money inflows have been adequate (GBP2.7bn in 1Q16 and GBP13bn in 2015) and well-spread across asset classes and distribution channels. The company's AuM base is granular with limited reliance on individual funds or investors.

The vast majority of Schroders' revenues is asset-based (performance fees are negligible) and profitability metrics (both return on equity and EBITDA/operating margins) compare well with peers. The company's cost base is well-managed and cost efficiency metrics are adequate, including the company's compensation/net revenue ratio of 44% in 2015 (target 45%-49%). Fitch-defined operating profit improved in 2015 to GBP533m, from GBP498m in 2014) as a result of broadly stable management fee margins (just under 50bps), higher average AuM and strong cost control (operating expenses were up 3.3% yoy).

At end-March 2016, Schroders did not have any outstanding debt and as a result, all relevant leverage and funding metrics compare favourably with peers. Due to its wealth management activities (accounting for 10% of pre-tax profit in 2015), Schroders is regulated by the UK Prudential Regulation Authority (PRA) and has to comply with higher regulatory capital requirements than most peers. Schroders' regulatory capital base (GBP2,067m at end-2015) consists entirely of core Tier 1 capital (common equity Tier 1 ratio of 38.6% at end-2015).

We assess Schroders' risk management framework as strong. The company's risk governance framework is well-established and seed capital exposure, while increasing (60% yoy), remains moderate (GBP253m at end-1Q16), well-diversified and short-term. Schroders' remaining investment capital (GBP1,110m at end-1Q16), which is the capital held in excess of operating and regulatory requirements, is typically held in cash or invested in highly-rated securities or Schroders' funds. Client loans in the wealth management business (around GBP817m at end-2015) are almost exclusively secured by liquid assets, insurance policies or, to a lesser extent, real estate.

A new CEO, formerly Head of Investment, was appointed in early 2016 and we expect Schroders' strategy to remain unchanged. Schroders' previous CEO was appointed non-executive chairman of the Board and while this is contrary to 2014 UK corporate governance provisions it should, in our view, be mitigated by Schroders' plan to establish a majority of independent board members by end-2016.

The Stable Outlook on Schroders' Long-Term IDR reflects our expectation that the company will report adequate profitability in most markets while maintaining its current strong leverage, liquidity and capitalisation metrics.

RATING SENSITIVITIES

Given Schroders' high ratings compared with domestic and international peers, upside is limited. Ratings in the 'AA' category are typically difficult for investment managers to achieve given the sensitivity of investment managers' profitability to falling asset values as well as the declining benefits of asset class diversification in times of severe market stress (when asset classes tend to be more correlated). Nevertheless, Schroders' credit profile could benefit from further franchise growth, notably in the US, as well as general AuM growth, which could improve operating efficiency.

Downward pressure on Schroders' ratings, while also unlikely, could arise from a markedly higher risk appetite for seed capital exposure or wealth management activities, a sustained substantial increase in balance sheet or cash flow leverage, or sustained net fund outflows due to product under-performance or operational or reputational damage to the franchise.