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• 2Overview
• 3Business review
  • Who we are & what we do
  • Our performance in 2007
  • Our plans & objectives
  • Our priorities for 2008
  • Corporate responsibility
• 4Governance
• 5Financial statements
• 6Other information

Our performance in 2007

2007 saw a 21 per cent. growth in income and a 35 per cent. growth in profit before tax compared with 2006. This strong performance was delivered despite turbulent market conditions, particularly during the second half of 2007.

In the first half of 2007, equities strongly outperformed fixed income, as they had done in 2006, with the major world stock market indices, especially in Continental Europe, seeing significant rises in local currency terms. However, in July and August, as credit spreads widened, the markets retreated and there was a flight to government bonds as investors sought safe havens in the unravelling credit crisis arising from fears over the recoverability of sub-prime debt. By the end of the year, all major stock markets were significantly down from mid-year highs.

In the UK, the economy slowed in the second half despite acceleration in household spending. Gross domestic product (‘GDP') growth was also restrained in the Eurozone. However, there was better than expected growth in GDP in the US, despite the weakness in the housing market. In Asia Pacific, excluding Japan, economies continued to expand.

The following table shows the movement in a number of recognised stock market indices over 2007*:

Local Stock markets	Movement six months to June 2007 %	Movement six months to December 2007 %
FTSE 100	6	-2
S&P 500	6	-2
Nikkei 225	5	-16
Broad Market Indices
MSCI World	7	-4
MSCI Europe ex UK	9	-5
MSCI Pacific	7	-10
Fixed Income: 10 year benchmark
UK Gifts	-5	7
US Treasuries	-2	7
Japanese Treasuries	-1	4
Alternatives	2	-6
UK Property Index,Capital Growth	2	-6
Credit Suisse/Tremont Hedge
Fund Index	9	4

* in local currency terms

The strength of Schroders' financial performance in these difficult market conditions reflects the benefits of the diversity of our business, by geography and client, combined with a very broad product range.

Strong income growth underpinned by solid investment performance

Asset Management income increased by 20 per cent., with growth in both Institutional (9 per cent.) and Retail (29 per cent.). This was driven by strong sales of higher margin products across both distribution channels.

Within the Retail business, net sales were exceptionally strong at £8.8 billion (2006: £3.8 billion). Asia Pacific had a particularly strong year, with the notable performance of our Korean business, where changes in the tax laws and regulatory environment provided us with an opportunity for growth. Across Asia Pacific, emerging market equity funds were the most popular investor choices. In the UK, well-established funds – such as the UK Mid 250 and the UK Alpha Plus – as well as newer funds – such as Income Maximiser and Agriculture – helped attract strong UK retail net inflows during the year. Adverse market conditions in Continental Europe led to net outflows, centred principally in Germany, Spain and Switzerland.

The Group's joint venture with Bank of Communications in China, in which we have a 30 per cent. equity investment, enjoyed a strong year reflecting a buoyant stock market in the first half of 2007 and notable gross inflows in the second half, including the Blue Chip Fund hitting its predetermined sales cap of RMB 12 billion on the first day of offer. The venture holds both QFII and QDII status in China and contributed £7.1 million to Group profit before tax. The joint venture funds under management are not included in total funds under management.

Our Institutional business continues to evolve towards new, higher margin asset classes: fees on business won in 2007 were on average more than 40 per cent. higher than fees on business lost. Income increased despite net outflows of £10.6 billion (2006: £8 billion), including continued outflows from UK balanced and UK equities and, to a lesser extent Japanese and Asian equities, the latter reflecting client driven asset allocation decisions.

In response to client requirements, we have continued to broaden our product range and won over 100 new mandates in the UK during 2007. Notable successes included the innovative Diversified Growth Fund, which attracted a further 44 clients with a net inflow of £0.5 billion during the year, and our Quantitative Global Equity product, with a net inflow of £0.7 billion during the year and 55 new institutional clients.

Private Banking income increased by 11 per cent. compared with 2006. In terms of funds under management, we achieved net inflows of £0.2 billion (2006: £0.4 billion).

Private Equity income increased by 67 per cent. in the year despite a reduced number of exits from investments in the second half. We expect further gains from our legacy private equity portfolio over the next three to five years.

The breadth of our product range is designed to meet the financial needs of our clients, in both retail and institutional channels. We launched 30 new products in 2007, including the Global Climate Change Fund, one of the first funds of its kind, and the Global Emerging Opportunities Fund.

During 2007 we continued to build up the life assurance company established in 2005 to help meet the demands of the defined contributions market in the UK. As at 31 December 2007 this business was responsible for over £2.7 billion of funds under management (31 December 2006: £1.5 billion).

Our acquisition during the year of Aareal Asset Management, a pan-European property asset manager based in Germany, enhanced our capabilities in European property funds and gives us a platform for further growth in this area. This business was integrated with our existing UK property business, into a single European property business in order to deliver a consistent level of service for our clients.

Investment performance

We have maintained our overall levels of investment performance in 2007. In total, 68 per cent. of funds under management have performed above their benchmark for the three years to end 2007, compared with 64 per cent. in 2006.

Three years to 31 December 2007

Higher margins

Gross profit margins on funds under management have continued to grow, reflecting the increase in Retail sales and more specialised Institutional products that command higher margins. In 2007 gross profit margins were 64 basis points (2006: 59 basis points) for Asset Management and Private Banking combined.

Gross profit margins for Asset Management were 60 basis points, an increase of 5 basis points from 2006.

Costs

2007 saw further improvement in our key cost ratios. The total costs to operating revenues ratio reduced to 70 per cent. (2006: 73 per cent.) and the cost to income ratio reduced to 61 per cent. (2006: 65 per cent.). Cost control continues to be fundamental to our business. We target long-term ratios for cost to income and compensation costs to operating revenues of 65 per cent. and 45 per cent. respectively.

Overall compensation costs have risen by £57.8 million (17 per cent.), reflecting higher revenues, with the ratio of total compensation costs to operating revenues reducing to 46 per cent. (2006: 47 per cent.). The use of this metric helps to ensure our compensation cost growth is consistent with the pace of revenue growth in the firm.

Non-compensation costs amounted to 24 per cent. of operating revenues in the year.

The primary drivers of increased non-compensation costs in Asset Management during the year were marketing and spending on infrastructure replacement projects. Marketing spend increased to £27.9 million in support of the growth in Retail sales.

Infrastructure project spend centred on replacing our existing portfolio systems with a single Book of Records system, which will support all aspects of our business, from portfolio accounting to client reporting. This project, due to be completed in Europe by the end of 2008, will provide a platform capable of supporting Schroders' business development for the next ten to fifteen years.

Private Banking costs decreased further following the successful project implementation of an integrated service centre providing a single back office function for our London, Guernsey and Zurich offices.

Group costs were lower in 2007, principally due to a decrease in spending on financial systems against 2006 and a release of provisions for vacant space in our London offices.

As part of managing our cost base, we operate an environment where costs are analysed, monitored and challenged, but also where expenditure that enhances the long-term performance of the Group is encouraged.

Profit before tax

Profit before tax increased by 35 per cent. to £392.5 million, a record result for the Group.

The segmental analysis of results is shown in more detail in note 3.

Profit after tax

Profit after tax also increased strongly, up by 37 per cent., with a net profit of £299.7 million attributable to shareholders, up 35 per cent. on the previous year.

The tax rate of 23 per cent. in 2007 is similar to the tax rate for 2006. This is lower than the current UK corporate tax rate of 30 per cent., principally because of the level of profit arising in jurisdictions with lower tax rates than the UK.

There are a number of key indicators that are reviewed by management to assist with monitoring the performance of our business. A five-year view of these is shown below.