Will the other shoe drop? Seven years after the illustrious City house of Schroders stunned the Square Mile by selling its merchant banking arm to Citigroup, the intriguing question is being raised of whether the controlling shareholder, Baron Bruno Schroder, might now offload what he then retained – the fund management side.

Rising valuations and the increasing interest of private equity investors in the sector have fuelled a fever of speculation about the future of Schroders.

Rumour is rife, even within the 203-year-old company, that it might be the subject of a bid, despite continuing improvements in profits. Among rival fund managers, Schroders crops up alongside F&C when the most likely targets for acquisition are mentioned. One said: “Schroders has been a basket case. It’s hard to see where they’re going.” Another said: “People at the company think that there is something going on.”

Schroders has struggled to recover from the loss of balanced fund management mandates. It has not made as many acquisitions as hoped with the £800 millon generated by the sale of its investment banking business in 2000. A 30 per cent rise in pretax profits to £93.2 million for the three months to March 31 was overshadowed by the withdrawal of a net £2.5 billion of institutional funds under management, which came on top of a net outflow of £8 billion last year.

But analysts and bankers cautioned that any sale would have to be sanctioned by the Schroder family, which owns about 47 per cent of the company and is still closely connected to its day-to-day activities.

Bruno Schroder, the head of the family, sits on the Schroders board as a nonexecutive, as does George Mallinckrodt, the 76-year-old former chairman and Mr Schroder’s brother-in-law. Both retired from the board and were reelected at the company’s general meeting last month. Mr Mallinckrodt’s son, Philip, runs the private banking arm of Schroders.

Bruce Hamilton, a Morgan Stanley analyst, said: “Any approach to Schroders has to be with the family’s blessing.”

Sources insist that the family is “100 per cent committed” to the company’s strategy. “They’ve owned it since 1804 and have absolutely no interest in selling,” the source said. “We’ve had private equity in the sector, so people will talk about anything that comes to mind, but I don’t think any sensible person thinks that Schroders is part of that.”

Private equity firms, with options for acquisition narrowing elsewhere, recently have turned to the fund management sector. TA Associates backed a management buyout at Jupiter for £740 million last month, and Hellman & Friedman acquired Gartmore for £522 million last year. Schroders, with a market capitalisation of almost £4 billion, would be a significantly bigger mouthful to chew.

However, Schroders is likely to be keeping any eye on Harris Associates, the activist US hedge fund that over the past two years has gradually increased its stake in the fund manager to 8 per cent, making it the biggest individual shareholder after the Schroder family. Harris, best known for ousting the Saatchi brothers from their own advertising agency in 1994, is expected to be keenly interested in how Schroders uses its £800 million acquisition pot. The fund manager bought NewFinance Capital, the London funds of hedge funds manager, last year for £80 million and paid £19 million this year for Aareal Asset Management, a German property fund manager.

Michael Dobson, the chief executive of Schroders, says he is keen for further acquisitions but will not be pushed into the wrong deal. Since his appointment, funds under management are up from £86.2 billion at the end of 2002 to £128.5 billion at the end of last year.

Despite the improvement, shareholders do not rule out the prospect of a bid. One said: “In this market, anything can happen. I could say ‘no’ today but have every chance of looking a fool tomorrow.”

Two centuries of banking history

1804 Johann Heinrich Schroder becomes a partner in his brother’s London-based firm

1818 J Henry Schroder & Co is established in London

1923 J Henry Schroder Banking Corporation (“Schrobanko”) set up as a commercial bank in New York

1959 public offering of shares in J Henry Schroder & Co. Ltd on London Stock Exchange

1962 Helbert, Wagg & Co, a leading issuing house, is acquired

1986 Disposal of Schrobanko, its commercial banking arm, in New York and acquisition of 50 per cent of Wertheim & Co, a mid-tier New York investment bank

1980s Plays a leading role in the privatisations of British Gas and other state monopolies

2000 Schroders sells its investment banking division to Citigroup, whose European investment banking arm traded as Schroder Salomon Smith Barney from 2000 to 2003

2006 Pretax profits of £290m and net profits of £22m on revenue of £967m

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