As the asset management industry is undergoing a number of fundamental changes, we have continued to evolve our business to ensure we are well placed to deliver for our clients and to generate continued growth for shareholders. We have seen an orderly and managed succession process for a new Group Chief Executive and welcomed two new independent non-executive Directors to the Board. The composition of our GMC has changed and expanded, ensuring we have the right focus on strategy, technology and people, alongside our core business.
We have adapted our business structure, invested in technological improvements throughout the Group and entered into a number of strategic partnerships.
In recognition of the importance of product innovation and the ability to offer complete investment solutions for our clients, we have adapted our business structure this year. We have created a new Product division within Asset Management, distinct from Investment and Distribution, to articulate our value proposition and develop our product strategy. We have also adapted our Solutions function, which had previously been part of Multi-asset. This is now a stand alone, asset class agnostic function, dedicated to working with investment teams across the business to construct solutions for our clients’ changing investment objectives. More information is in chapter Asset Management – Product.
In today’s world the pace of technological innovation is accelerating and there are sizable competitive advantages for those who embrace these advances. Our Data Insights team has continued to grow and is embedded within our investment teams, providing analysis and insights derived from non-traditional data sets. We are in the process of implementing a new Investment technology platform, which will simplify end-to-end processes and achieve operational efficiencies in our business across the world. Applying technology effectively in other parts of our business is also a key priority and we are investing now to ensure we continue to provide the highest quality client service and to support continued business growth.
We are also investing in the development of our new headquarters in London, where we will relocate in 2018. The building will bring together our London employees into a single location and will deliver the tools and environment for continued growth and maintaining a positive client experience into the future.
Strategic partnerships and acquisitions
We have entered into a number of strategic partnerships this year to expand our investment expertise and to broaden our distribution reach.
Within Wealth Management, we acquired a significant stake in Benchmark Capital, a technology-led, high quality adviser support business based in the UK. Benchmark Capital increased AUM by £3.4 billion at 31 December 2016, as well as bringing AUA of £11.1 billion. More information regarding AUMA acquired through Benchmark Capital is set out in chapter Results. This business represents an important strategic step in widening our access to the UK advice market and providing a high quality fund platform* for advisers. Benchmark Capital operates as a separate business within our Wealth Management segment.
In North America, a key area of strategic growth, we entered into a relationship with Hartford Funds to manage and distribute a ‘Hartford Schroders’ branded fund range to intermediary clients in the US. There is strong potential for this partnership to expand to a significant size over the medium term and we have already seen the benefits, with positive net inflows and reduced operating costs.
We also strengthened our investment presence in North America with the acquisition of an asset-backed securities business which completed in September. The business comes with a strong track record and the team has been integrated into our existing New York business, greatly enhancing our capabilities in securitised credit. £3.3 billion of assets were migrated to Schroders’ platform and we have already seen positive client momentum, with £1.6 billion of net inflows following completion.
We made selective investments to expand our capabilities in private assets. We entered into a strategic relationship with NEOS Finance Group (NEOS) in April. We acquired a 25% stake in NEOS, which is a specialist Dutch direct lending firm providing institutional investors with access to a debt financing platform for small and medium-sized enterprises. We also increased our stake in Secquaero Advisors AG to 50.1%, which provided us with a controlling interest in this Swiss-based insurance linked and catastrophe bond business.
In October, we announced that we had reached agreement to acquire the wealth management business of C. Hoare & Co., which completed on 17 February 2017 and brought around 1,800 clients representing approximately £2.3 billion of AUM.
Economic, political and regulatory uncertainty
2016 has seen a significant shift in the political and economic environment, combined with ongoing regulatory scrutiny. As a Group headquartered in the UK, the most prominent event was the result of the referendum in June, when it was decided that the UK should begin the process of removing itself from the European Union (Brexit*). This was later followed by the unexpected outcome of the US presidential election. These and other factors have resulted in significant uncertainty in financial markets, which have impacted upon investor demand and market returns.
One immediate impact of the UK referendum result was a devaluation of sterling. This had a significant effect upon the Group’s AUMA and profits, with the majority of client assets denominated in US dollars or dollar-linked and other currencies, all of which appreciated in sterling terms. This also led to an increase in the sterling value of our net operating revenues. Our cost base has a lower weighting towards such currencies, and although it has been impacted, it was to a lesser extent than revenues.
We are well placed to support our clients and to adapt our business to the market environment as it evolves. The Group is also well positioned, from an operational perspective, to deal with many potential outcomes of the Brexit decision. We have a long standing and substantial presence in continental Europe with over 700 people operating across 13 offices and managing over £70 billion of assets on behalf of clients.
Our existing product range is also suitably positioned to deal with any likely change in marketing restrictions. We have broad and diverse fund ranges domiciled both in the UK and Luxembourg, with limited cross-selling between jurisdictions. We have assessed the possible changes that may be required and will take appropriate actions as the UK government’s negotiated position with the EU becomes clearer.
The FCA’s interim report on its asset management market study, which was published in November, also has potential implications for the industry and for Schroders. We are contributing actively to the dialogue with the FCA in order that any changes promote a positive outcome for clients.
The outcome of the Brexit negotiations as well as changes in the US market continue to be areas of uncertainty both for investors and for our business. We are well placed to support our clients and to adapt our business to the market environment as it evolves. We expect this uncertainty to be a continuing focus over the next few years.
* See glossary.