For a company whose fortunes have been historically linked to the performance of the wider stock market, Schroders – which regained its place in the FTSE 100 in March – has enjoyed a stellar 2007. Whereas Britain’s benchmark stock index has risen 7 per cent since January, shares in the fund manager have gained a hefty 39 per cent.

They rose nearly 5 per cent alone yesterday as Schroders beat quarterly profit forecasts for the third time this year. At £98.1 million, pretax profits for the three months to September 30 were 6 per cent higher than expected. Funds under management remained stable at £137.7 billion, no mean feat given the turmoil in world equity markets in July and August. Schroders, which manages around $40 billion (£19.3 billion) through global fixed income funds, also confirmed that it had no underlying exposure to sub-prime credit instruments. Revenue margins in asset management continue to improve – to 0.62 per cent, from 0.53 per cent a year ago – showing the benefits of the company’s move from running money for UK pension funds in favour of managing retail and overseas institutional funds. It is notable that two thirds of revenues now come from outside Britain.

Equally, the summer’s credit crunch appears to have had no ill-effects on private investor activity. Schroders’s retail business – which now accounts for 60 per cent of assets under management – actually managed to pull in £1.5 billion of net new funds over the quarter.

The latter figure best explains Schroder’s recent rerating. While its £900 million cashpile has created the perception that it will expand by buying rivals – a model exemplified by Aberdeen Asset Management – it has actually been achieving vigorous organic growth itself. This has largely come through “white label” deals, through which it is providing fund management products to retail banks, which distribute them under their own brands.

Yesterday’s numbers do not include its joint venture in China with Bank of Communication, which manages £3.9 billion of retail money.

But the numbers were not flawless. About £20 million of the pretax profit came from private equity, which will be difficult to repeat. And costs continue to rise in line with revenues, which is disappointing for a business that is supposed to benefit from operational gearing. Further outperformance in the shares, which at £15.47 trade at 15.2 times 2007 earnings, a premium to the sector, would appear to require both continued international growth and unfaltering equity markets. On the view that they are likely to pause for breath, now is a good point to take profits.

Morse

With 40 per cent of its sales drawn from the financial services sector, this small-cap IT consultancy might appear sorely exposed to the fallout from this summer’s credit crunch. An environment in which some banks have stopped recruiting or have begun to lay off staff would not seem auspicious for a company whose services tend to fall under the category of discretionary spending.

So it was something of a relief that Morse – whose clients include Barclays Capital, Citigroup and Deutsche Bank – confirmed yesterday that trading remains in line with management expectations. That reassurance provided more comfort after share-buying by its chief executive and finance director in recent weeks.

Morse said that its integration of the newly acquired Xayce, which serves insurance, retail banking and local government, was progressing well and it flagged the potential to win further public sector work after its success in a £23 million, five-year schools IT project on Tyneside. At 88½p, or 12.5 times current-year earnings, against its sector’s 17 times, and offering a 4.8 per cent dividend yield, Morse might seem unjustly cheap, given its management’s aim of doubling operating margins to 7.2 per cent over the medium term. Yet while Morse has come a long way from its days as a low-margin IT reseller, the adverse sentiment that has recently hurt the IT recruitment sector is likely to keep a lid on the IT consultancy sector, too. Avoid.

Eros International

The case for investing in India needs no rehearsal, but one less conventional way to play this burgeoning economy is in media. The AIM-listed Eros International is the leading distributor of Bollywood films overseas and has grown as it expands in its home market.

That may sound counter-intuitive, but until recently it was very difficult to recoup box office revenues in India. The change makes it viable for Eros to distribute up to eight films in India in the year to March and double that internationally. It makes more money from television syndication and has hopes for new media deals, including a subscription video-on-demand service in America.

Profits are expected to rise from $32.5 million (£15.7 million) this year to $58 million in 2009. The argument is that this will be helped by growth in India, with higher budget films generating greater returns, and the hopes that video-on-demand will lift off now DVD sales are easing.

The worry is the increase in risk. Eros committed $90 million in investment last year; bigger films can lead to bigger flops, while the fall-off in proven DVD sales is replaced by faith in on-demand delivery. Then there is the danger that wealthy foreign – make that American – competitors may wade in.

However, at yesterday’s 427½p, that is priced in at 12 times 2008 earnings and just over ten times 2009. With the Lulla family holding 70 per cent, the shares may get squeezed, too. If you have faith in Indian business, Eros is a good place to invest. Buy.

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