Barclays downgrades Schroders, bumps up Ashmore

The bank downgraded Schroders to 'underweight' from 'equalweight' and cut the price target to 2,975p from 3,200p. It pointed out that the stock is trading at 15x 2018 estimated price-to-earnings but is projected to deliver an earnings per share compound annual growth rate for 2017-19 of 7% on its estimates versus historical EPS CAGR for 2011-16 of only 7%.

"This is despite assets under management growth over those five years averaging 16% per annum," Barclays said, adding that revenue margin declines have been a headwind to EPS growth.

It said first-half flows are projected to be relatively weak with the headwind of a publicised sub-advisory mandate loss of £5.6bn. In addition, Barclays argued that with £150bn of UK AuM, Schroders is heavily exposed to heightened UK regulatory risk.

It upgraded Ashmore to 'equalweight' from 'underweight' and lifted the price target to 370p from 300p. Barclays noted that Ashmore's share price has strongly outperformed year-to-date on the back of improving emerging market sentiment, up 24% versus the FTSE All Share up 4% and average UK asset manager peers up 17%.

"We rate Ashmore equalweight on improving fund performance and flow outlook balanced by potential risk of headwinds from rising US yields and full valuation," the bank said.

As far as the wider sector is concerned, Barclays highlighted that flow momentum in the UK and Continental Europe has improved as the second quarter progressed.

"However, sentiment still remains fragile, particularly for the UK, which is exposed to Brexit risk/election fall-out. UK regulatory risk also still appears elevated, in our opinion, with remedies delayed rather than avoided."

AT 1045 BST, Schroders was up 0.5% to 3,337p and Ashmore was up 2.6% to 363.80p.