* Pretax profit beats consensus
* Shares hit 10-month high on better flows
* CEO says in no hurry to acquire
(Updates with share price high)
By Raji Menon
LONDON, Aug 6 (Reuters) - Better client money flows and a positive outlook pushed shares in UK fund firm Schroders to a 10-month high on Thursday, despite it reporting a sharp drop in first-half profits.
Profit before tax and exceptional items fell to 76.9 million pounds ($131 million) from 173.3 million pounds in the same period last year, compared with a market forecast of 75 million pounds provided by the company.
Asset managers have seen profits fall in the first half as clients moved to cheaper products or into cash and falling equity markets hit asset values, which hit both the management fees firms charge to run client money and the performance fees generated when higher-margin funds do well.
At 1154 GMT the company's shares were up 5.5 percent at 1,016 pence, a high not reached since October last year, while the FTSE 100 was up 1.5 percent.
Analysts at Cazenove, Singer Capital Markets and UBS all issued upbeat notes on the company on the back of the results statement.
Chief Executive Michael Dobson told Reuters that a strong investment performance across asset classes had driven net inflows of 3.9 billion pounds in the second quarter.
Cazenove said the flow performance was "materially stronger than expected".
"The shares have performed only modestly stronger than the market in the year to date, but these results should spur further performance," it said in a note.
POSITIVE OUTLOOK
Dobson said if current market conditions continued, Schroders would see further positive inflows this year.
"We have seen an extraordinary rebound in markets, and we have seen extraordinary flows as investors have come out of very low-yielding cash deposits and have started looking for yield initially in fixed income and then equities. We think the outlook is quite positive."
Dobson said lower profits over the first six months were largely down to lower equity markets.
Assets under management fell to 113.3 billion pounds from 130.2 billion at end-June last year, with declines in higher margin equity products impacting revenues the most.
"When funds under management for the equity component are 30-35 percent lower, then you get a 35 percent drop in revenues," Dobson said.
Pretax profits after exceptional items in the first half fell 73 percent, hit by charges of 40.6 million pounds including writedowns on asset-backed securities and mortgage-backed security investments, as well as costs linked to job cuts. The firm has shed 6 percent of its 2,600 staff this year.
Rival UK firm F&C on Wednesday reported a swing to a pretax loss, while Henderson has warned of lower profits.
Smaller players St James's Place and Rathbones also reported lower profits in recent weeks.
U.S. fund managers have suffered similar effects. Calamos and T Rowe Price both reported lower earnings at the end of last month.
ACQUISITIONS
Dobson said Schroders was in no hurry to make an acquisition and was content to bide its time.
"Unlike some of our other competitors who have less strong growth prospects and who have to make acquisitions, we don't really need to acquire," he said.
On Monday, sources told Reuters that Schroders had pulled out of the race to acquire Insight, one of the Lloyds Banking Group's asset management businesses.
The fund manager had also been reported to have looked at buying Credit Suisse's British fund business, and New Star Asset Management, which eventually went to Aberdeen Asset Management and Henderson, respectively.
"We don't feel we are missing out at all. If you look at the valuation multiples, New Star and Credit Suisse Asset Management were not that cheap," said Dobson.
"Bottom fishing and looking for incredibly cheap deals is not what drives us. We have enough opportunities in our business and we are happy to wait until we find the right fit." (Editing by Greg Mahlich/Will Waterman) ($1=.5890 Pound)