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US ‘Largest Growth Opportunity in the World’ for Schroders

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“For Schroders, the United States represents by far the largest growth opportunity in the world,” Karl Dasher, head of the firm’s North America business and co-head of fixed income, told ThinkAdvisor on Tuesday.

The United States currently represents about 10% of Schroders’ business overall, and Dasher thinks it can grow to a “much more significant portion of the overall balance.”

“It’s the smallest market share for us in the world, yet it’s the largest market,” he continued. “Our view overall is that we have a platform that today is poised to take market share because we’ve expanded the platform to more core-to-the-client strategies.”

Schroders already manages about $57 billion for clients in the United States, including strategies for clients here that are managed from other areas. Dasher said the firm manages “a similar amount of money” for clients in the United States and globally.

“We have investment teams on the ground in the United States who actually tend to have their largest client base outside the United States overall, and we have services that we provide to U.S.-based clients,” he said.

Historically, Schroders’ success in the United States, where the firm has been doing business for almost a century, has been in extended asset classes and niche strategies like emerging market equities and commodities, Dasher explained. “Those are still very strong areas for us in the States and areas that continue to be a focus for us, but in addition to that, where we’re winning additional new business is in areas that are more core to the clients’ portfolio.”

By “core to the clients’ portfolio,” Dasher means “more holistic mandates such as multi-asset mandates, broader range mandates such as global equity mandates and fixed income.”

“What we’re seeking to do in the United States is to continue to build upon our strengths in some of the more extended asset classes and bring to the market our capabilities in the more core asset areas such as global equities, multi-asset and unconstrained bonds,” he said.

In April 2013, Schroders completed the acquisition of STW Fixed Income Management, Dasher said, and fully integrated the team by September. With that acquisition, “we brought into our capability sphere a very high-quality tax-aware capability and a very high-quality long-duration capability to accentuate our multi-sector offering and those tend to be core investment areas,” he said.

One big area of focus for Schroders in the United States will be global unconstrained bonds. The firm launched this year a global absolute return strategy, called the strategic bond strategy, that has “one of the longest track records you’ll find in unconstrained absolute return investing” outside the United States, Dasher said.

The firm also launched a “mirror image of our most successful strategy in the world in the last few years,” the global multi-asset income strategy. That fund has raised more than $6 billion in the last two years outside the United States, according to Dasher.

It was developed about three years ago, Dasher said, with collaboration between the firm’s equity, fixed income and multi-asset teams. “It was built with the idea that in order to generate superior risk adjusted yield-based returns, where yield is a large driver of the overall total return experience, it’s necessary to build a portfolio where you are constructing it with a somewhat unconstrained but collaborative approach.”

That means the underlying components are not “benchmark-like,” Dasher said. “We have an overarching portfolio manager who has comprehensive control of the risk budgeting process and works with the various equity and fixed income teams to determine how best to allocate risk capital given where the best sustainable comparative advantages are in the yield-driven universe.”

A good example, he said, is when global clients benefited from overallocations to U.S. municipal bonds late last year when those products were significantly oversold.

“It’s very fluid across the opportunity set in terms of where it goes within capital structure, where it goes across the global opportunity set. At no point in time is the portfolio very benchmark-like and yet we’ve been able to generate a very high sustainable yield with very good drawdown characteristics.”

One way the U.S. market differs from other markets is that investors less willing to buy products based on their concept, “which is a surprise because the United States tends to be a more entrepreneurial market overall,” Dasher said. He said that some “asset allocators and wealth managers outside the United States are more willing to make allocations to a strategy based on the strength of its concept and the investment process behind it,” whereas in the States, products typically need “a little bit more time and proof statements in terms of realized performance or asset gathering momentum to break through.”

Of course, regulations in the United States are very different from those in other areas. “The U.S. regulatory structure requires a more diverse range of product structures to address all the various aspects of the market,” Dasher said. “UCITs are much more flexible in terms of fees, both in terms of the ability to do zero-fee share classes where you do institutional pricing on a segregated account basis, to performance fees, to various fee share classes to meet client and distributor needs. The United States is much more rigid in that area, so we end up with more clones of our strategies in ’40 Act funds, collective investment trusts and 3C7 partnerships.”

Correction: An earlier version of this article incorrectly stated that U.S. business accounted for about 20% of Schroders’ global business. The correct percentage is 10%. 

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