British asset management firms find themselves in a challenging position. They do not possess the scale of large American companies like BlackRock, which can afford to offer significantly lower fees on a broad array of passive investment options. Additionally, they lack the specialized expertise of niche firms that can justify their elevated costs. Compounding these issues, interest from substantial investors in British equities has waned.

As a result, stocks from companies such as Schroders, Abrdn, and Liontrust are currently trading at low valuations. In the last five years, Schroders, the largest of these firms by market capitalization, has experienced a negative total return of 16%. Abrdn follows closely with a 15% loss, while Liontrust has recorded a modest gain of 6%. These figures are significantly overshadowed by the performance of the FTSE All-Share index, which has increased by 32% during the same timeframe.

The market’s lack of enthusiasm for these stocks is evident, with their recent downturns leading to an average dividend yield of 9%, compared to a five-year historical average of 6%. This trend raises questions among investors: could these low valuations present an enticing value opportunity?

Recently, both Schroders and Abrdn appointed new chief executives. Schroders’ new CEO, Richard Oldfield, will succeed Peter Harrison in November, while Abrdn has appointed Jason Windsor, who has managed the firm on an interim basis since Stephen Bird’s departure in May.

These executives face significant challenges. A primary concern for many London-listed asset managers is the growing popularity of passive investing, which has eroded the market share of actively managed assets. According to the Investment Association, over £300 billion is now allocated to tracker funds, accounting for 23% of total funds under management, compared to just 11% a decade ago. This trend is even more pronounced in the U.S., where around half of mutual funds are now passively managed.

Founded in 1804, Schroders has sought growth in private markets and wealth management sectors. While its assets under management have increased in recent years, profits have declined due to rising costs. Shareholders, including the founding Schroders family, which holds approximately 40% of the firm, have felt the impact.

Schroders has pursued acquisitions to diversify its portfolio, including the 2021 purchase of River and Mercantile Group’s solutions division for £230 million and a 75% stake in the renewable energy firm Greencoat for £358 million. However, these investments have come with high expenses, resulting in a cost-to-income ratio higher than its European counterparts, as reported by Jefferies, a brokerage firm.

Abrdn has also experienced a strategic shift, having been removed from the FTSE 100 twice in recent years. Since taking over as CEO, Bird has aimed to reduce expenses and increase profitability by expanding wealth management services and directly selling investment products through the £1.5 billion acquisition of Interactive Investor in 2021. The company has also merged or closed over 250 underperforming investment funds and divested from non-core businesses, although some divestitures occurred at losses.

Despite these efforts, Abrdn’s costs have remained stubbornly high, leading to the announcement of 500 job cuts earlier this year—around 10% of its workforce—in an effort to save £150 million.

Both firms are faced with persistent industry-wide challenges. Analysis by Morningstar shows that fee margins for Schroders have decreased by a third over the past decade, with no sign of improvement amid intensifying competition from passive investment strategies and regulatory pressures.

For smaller players in the market, consolidation may be a survival strategy. Alongside Liontrust, smaller asset managers like Jupiter, Premier Miton, and Polar Capital are also trading at diminished price-to-earnings ratios of around 11 to 12. Reports suggest that Liontrust has engaged in discussions with Artemis regarding potential mergers.

However, larger firms like Schroders might find consolidation less viable due to significant family holdings that complicate takeover scenarios. The company’s strategy to shift from traditional active management towards areas with structural growth—including private markets, complex investment solutions, and wealth management—appears to be a prudent approach. Optimists believe that falling interest rates may enhance the appeal of Schroders’ private market offerings.

Results have been mixed so far; for instance, the solutions division experienced a £7.8 billion outflow in the first half of the year. Wealth management seems promising, particularly with the expanding defined-contribution pension market, but many alternative investment opportunities exist without needing to invest broadly in Schroders’ entire management portfolio.

Nonetheless, the company exhibits characteristics of a quality investment. With a market capitalization of £5.7 billion and £774 billion in assets under management, coupled with a generous dividend yield, Schroders remains an attractive option for some investors. Fund manager Nick Train, known for his rigorous selection process, has significant holdings in Schroders within his £1.6 billion Finsbury Growth and Income Trust.

Schroders is projected to yield 6% in the upcoming year, with healthy cash payouts supported by profits, indicated by a forecast dividend cover of 1.3 times. While the current valuation and income yield suggest holding onto the shares, a reliable growth trajectory could catalyze a rapid stock revaluation.

In conclusion, maintaining investments in UK asset managers is advisable, as their strategies for building new growth areas or pursuing consolidation remain the most viable paths forward.