Schroders, Britain's biggest listed fund manager, reported a 27 per cent fall in profits yesterday and gave warning that demand from individual investors would slow as they shunned the financial markets.

Retail investors have taken £700 million worth of assets out of the company in the second quarter of 2008 as the volatility of the financial markets and the economy made them reluctant to commit their money.

The 200-year-old company was also hit by writedowns and a decline in its profits from private equity. It does not expect the situation to improve soon.

Michael Dobson, chief executive of Schroders, said: “These conditions will continue for the balance of the year and certainly into the early part of 2009. I think volatility will continue for a while. Investors want to see a bit more visibility on the economy before they commit money.”

Products for retail investors usually command higher margins for fund managers such as Schroders than those targeted at large institutional investors.

In the first half of last year, the firm had £3.6 billion of net inflows into retail products, but recorded a net outflow of £200 million over the same period this year.

Schroders's total assets under management fell to £130.2 billion from £139.1 billion at the start of 2008 due to market falls and £1.1 billion of net outflows, mostly from institutional investors.

This represented an improvement on the same period last year, when net outflows from institutional investors were £4.1 billion. New business won from institutional investors was up 28 per cent as companies went for more expensive but less risky products for their pension funds, such as liability-driven investments, in which the main goal is to gain sufficient assets to meet all current and future liabilities rather than to make huge profits.

Philip Middleton, an analyst at Merrill Lynch, said: “In the second quarter, institutional seems to have had inflows of around £600 million - a significant about-turn from previous quarters. The higher-margin retail, though, has seen second-quarter outflows of about £700 million — not surprising given the difficult industry backdrop, but nevertheless not what people would have wanted to see.”

Gross profit margins in Schroders's asset management business rose to 65 basis points, up from 57 basis points in the first half of 2007, as the company sold higher-fee products.

In the group's private banking income division, income increased by 18 per cent to £55.9 million and profit before tax increased 40 per cent to £22.3 million.

Profits at its private equity business plunged almost 80 per cent to £7.4 million, hit by unfavourable market conditions.

Overall, pre-tax profit at the group came in at £135.7 million, down from £185.6 million a year ago.

Many analysts had anticipated that Schroders's profits would decline as the equity market got worse. Rae Maile, analyst at JPMorgan Cazenove, said: “Profits are comfortably ahead of our expectations and in the right places with outperformance in asset management.”

In April, Schroders announced writedowns of £25.8 million on US mortgage and asset-backed securities, and £7.7 million on seed capital invested in new funds in the first quarter of 2008.

Schroders also announced that George Mallinckrodt, its president, will retire as a director on December 31 after 54 years at the company.

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