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Investing.com -- BofA Securities has downgraded Schroders (LON:SDR) to "underperform" from "neutral," lowering its price objective to 300 pence from 425 pence, citing weaker earnings expectations, muted investor sentiment, and limited valuation upside.
The revision comes as Schroders faces persistent headwinds across public markets and foreign exchange.
BofA has cut the company’s earnings per share forecasts by 10% to 13% through 2027, reflecting top-line pressures, lower market performance, and currency translation effects.
Schroders now trades at approximately 9.5 times estimated 2026 earnings, compared to its long-term sector average of around 13 times.
BofA does not expect a re-rating until sustained improvement in net flows, which it currently forecasts at just 1% annually through 2027.
Net flows are expected to remain under pressure. BofA estimates outflows of £300 million in the first quarter, falling to £1.3 billion in the second quarter excluding a £5.2 billion mandate from St. James’s Place.
Outflows are concentrated in mutual funds, institutional mandates, and solutions, while alternative investments show limited traction.
Schroders’ revenue outlook is weighed down by its significant exposure to equity markets, particularly in emerging markets and Asia-Pacific, where performance has lagged.
Equities account for 36% of its asset management operations, a higher proportion than peers. Recent U.S. tariffs on Chinese goods and volatility in global equities have further dampened sentiment.
Public market revenues, which make up 60% of Schroders’ total, are projected to decline 8% by 2027, undermining its stated goal of stabilizing these revenues.
Fee margin attrition adds to the challenge. BofA expects a 2 basis point drop in fee margins between 2024 and 2027, driven by asset shifts from high-margin equities to lower-margin fixed income and global funds.
This trend is further exacerbated by the firm’s limited exposure to passive products, a segment that continues to gain share.
Cost efficiency targets are also at risk. The company has already delivered £150 million in cost savings, equal to 8% of its base, and BofA sees little room for further cuts.
The cost-income ratio is now forecast to be 71% in 2027, slightly above Schroders’ sub-70% target.
Schroders' dividend yield, at 7%, is below the sector average of 8% and lags peers offering yields of up to 13%.
With no anticipated increase in dividends through 2027, the stock offers limited income appeal.