Results

Man at a meeting (photo)

Assets under management and administration


Man at the computer (photo)

The acquisition of Benchmark Capital, which completed in December 2016, has introduced a new service line to our existing asset management services. Benchmark Capital provides a technology-led regulatory and administrative service to a network of third party IFAs which operate within the regulatory permissions of the Benchmark Capital group. These assets are not managed or advised by Benchmark Capital and we present them as assets under administration (AUA). We have chosen to update our KPI in respect of client assets to become assets under management and administration, which now incorporates our previous KPI of AUM along with these AUA.

AUMA increased by 27% during the year to £397.1 billion (2015: £313.5 billion), including £11.1 billion of AUA.

Assets under management

Assets under management outperforming over three years
74%
(2015: 72%)

Assets under management grew by 23% in 2016 from £313.5 billion to £386.0 billion. Investment returns and currency movements increased the value of the assets we manage on behalf of our clients by £64.7 billion, while acquisitions added £6.7 billion and we generated net new business of £1.1 billion.

Along with £11.1 billion of AUA, the acquisition of Benchmark Capital introduced £3.4 billion of AUM. This comprises advisory assets through Benchmark Capital’s own IFA business, along with assets managed through the Fusion wealth* platform, which provides investor access and custodian services. This AUM is included within the Wealth Management segment and operates as a separate division focused on IFA clients.

The remaining £3.3 billion of acquired AUM was in respect of the securitised credit business in North America, which completed in September.

Consistent with the trends we have seen over recent years, many clients have continued to derisk their portfolios and are allocating away from growth assets. We have seen strong demand for fixed income products with £4.8 billion of net inflows in 2016, with particular focus on European credit and securitised credit. Fixed Income now represents 21% of AUM.

We have also seen client demand for multi-asset solutions. We generated £4.1 billion of net new business, with flows into LDI, risk-controlled growth and income-generating products. We now manage more than £96 billion of assets within multi-asset strategies on behalf of our clients, which is 25% of AUM.

In the current ‘risk off’ environment, demand for equity products was subdued and we saw net outflows of £6.8 billion. This was relatively widespread across investment teams and regions, although we did see positive net inflows in EAFE, US small cap and emerging market equity strategies. Despite net redemptions, Equities remains the largest part of our business with £154 billion of client assets representing 40% of AUM.

Regionally, net new business was driven by clients in North America and continental Europe, with positive net flows across both channels in each region. North America generated £3.1 billion of net new business and has grown to 13% of AUM.

Asia Pacific saw net outflows of £2.9 billion but this was heavily concentrated in a small number of significant institutional mandates in Australia. In contrast, we have continued to see strong growth in the Japanese business with net new business of £2.4 billion.

The UK generated small net inflows this year, with Institutional demand for multi-asset solutions largely offset by Intermediary redemptions.

Across our business, the Institutional channel continued to perform strongly with £4.3 billion of net inflows. These were concentrated in multi-asset and fixed income strategies and from clients based in North America and the UK. Total AUM in Institutional increased by 25%, ending the year at £226.3 billion.

Intermediary saw clients across the world allocating away from equity markets in 2016. Despite positive flows in Fixed Income, we saw net outflows of £2.9 billion across the sales channel. Client sentiment in the UK and Asia Pacific has been unsettled for some time and both regions had net redemptions, principally from equity products. Investment returns, currency movements and acquisitions, partially offset by net outflows, grew Intermediary AUM by 19% to £120.1 billion.

Within Wealth Management, 2016 portfolio performance was strong with UK-based clients benefitting from diversification away from sterling-based assets. Total AUM increased 25% to £39.6 billion. However, net flows in early 2016 were impacted by clients’ preference for private assets after lacklustre market returns in previous years and also for property in the UK. There were total net redemptions of £0.3 billion.

 

 

AUM

 

 

£bn

Institutional

Intermediary

Asset Management

Wealth Management

Total

AUA

AUMA

*

See glossary.

1 January 2016

181.0

100.9

281.9

31.6

313.5

 

 

Gross inflows

33.1

43.4

76.5

4.3

80.8

 

 

Gross outflows

(28.8)

(46.3)

(75.1)

(4.6)

(79.7)

 

 

Net flows

4.3

(2.9)

1.4

(0.3)

1.1

 

 

Acquisitions

1.9

1.4

3.3

3.4

6.7

 

 

Investment returns*

40.0

20.7

60.7

4.0

64.7

 

 

Transfers

(0.9)

(0.9)

0.9

 

 

31 December 2016

226.3

120.1

346.4

39.6

386.0

11.1

397.1

Investment performance

It is only through delivery of consistent investment outperformance for our clients that we can continue to grow. Despite volatile market conditions, our shorter-term performance is strong with 75% of assets outperforming their benchmark or peer group over one year (2015: 53%).

However, the longer-term performance measures are more meaningful for us and these have also improved. Over three years, 74% of assets are outperforming (2015: 72%) and over five years the figure is 85% (2015: 76%).

Woman and man (photo)

Financial performance

The table below shows the Group’s net operating revenues, net income and profit before tax:

£m

2016

2015

1

Excludes exceptional items.

2

Previously referred to as net revenue.

Net operating revenue

1,712.8

1,600.7

Net income1 2

1,793.1

1,658.5

Profit before tax1

644.7

609.7

People at the computer (photo)

Higher average AUMA in 2016 compared with 2015 resulted in net income before exceptional items increasing by 8% to £1,793.1 million (2015: £1,658.5 million). Performance fees increased by 13% to £41.2 million (2015: £36.3 million), demonstrating strong investment performance. Along with the increase in net operating revenue, net income also included higher returns on the Group’s investment and seed capital portfolios.

Our share of profits from associates and joint ventures was the same as 2015 at £21.5 million.

The Group’s operating expenses, excluding exceptional items, were £1,148.4 million (2015: £1,048.8 million), resulting in a total cost ratio of 64%, which is below our KPI target of 65%. The increase in costs from 2015 has been driven mainly by a weaker sterling, with a proportion of our cost incurred in non-sterling denominations, along with investment in headcount growth and in technology.

The Group’s profit before tax and exceptional items increased by 6% in 2016 to £644.7 million. Basic earnings per share before exceptional items increased by 5%. After exceptional items, profit before tax increased by 5% to £618.1 million.

The effective tax rate decreased from 20.7% to 20.5% before exceptional items and increased from 20.6% to 20.7% after exceptional items.

Asset Management

Asset Management generated net income of £1,534.4 million (2015: £1,412.5 million) including performance fees of £38.8 million (2015: £35.7 million). Profit before tax and exceptional items was up 6% to £572.4 million (2015: £540.5 million). Profit before tax and after exceptional items was up 5% to £553.9 million (2015: £528.4 million).

Net income increased by 7% mainly due to higher net operating revenue of £1,489.5 million (2015: £1,393.4 million). Net operating revenue comprises fees based on AUM, including performance fees that are dependent on the performance of particular mandates and funds and transaction-related fees. Net income includes these items as well as gains on financial instruments and other income along with the share of post-tax profits from associates and joint ventures which increased from £12.8 million in 2015 to £16.7 million in 2016.

The increase in net operating revenue was principally due to higher average AUM, resulting in a rise in management fees, and strong investment performance, driving increased performance fees. The growth in management fees was partially offset by a reduction in the net operating revenue margin which, excluding performance fees, fell by 3 bps to 46 bps. The decrease in fee margins was in line with our expectations as the trend towards lower margin multi-asset and fixed income products and greater net inflows from Institutional investors continued into 2016.

Other income also increased, predominantly due to foreign exchange gains and higher levels of transactional income earned.


Asset Management operating expenses before exceptional items increased to £962.0 million (2015: £872.0 million). This increase was largely driven by higher compensation costs*. The Group’s fixed compensation costs have increased due to the weakening of sterling, which increased the costs of salaries paid outside of the UK, and due to the growth in employee numbers as we continue to invest to support our growth initiatives. Despite these fixed compensation cost increases, we maintained the Group-wide total compensation ratio of 44%. This reflected a reduction in variable compensation costs.

Within non-compensation costs, our technology costs increased, as we position ourselves for future growth, and we also saw an increase in market data costs. Additionally, non-compensation costs were impacted by the weakening of sterling, which increased our overseas cost base.

Exceptional items of £18.5 million mainly relate to the amortisation of acquired intangible assets and costs incurred as part of the development of the strategic relationship with Hartford Funds during 2016.

Wealth Management

Wealth Management generated net income of £224.0 million (2015: £207.2 million) including performance fees of £2.4 million (2015: £0.6 million). Profit before tax and exceptional items was up 8% to £66.4 million (2015: £61.3 million). Profit before tax and after exceptional items decreased by 7% to £56.3 million (2015: £60.5 million) due to the release of a provision in 2015 that was no longer required.

Wealth Management net income increased by 8% mainly due to higher net operating revenue which increased by £16.0 million to £223.3 million. Along with performance fees of £2.4 million, management fees increased to £161.5 million (2015: £155.2 million), transactional fees increased to £38.8 million (2015: £36.0 million) and net banking interest income was £20.6 million (2015: £15.5 million).

The change in business mix from net flows and markets reduced the net operating revenue margins but this was offset by increases in transactional income, resulting in the margin remaining unchanged at 65 bps.

Wealth Management operating expenses before exceptional items increased by £11.7 million to £157.6 million (2015: £145.9 million), driven by increased compensation costs from a weaker sterling and higher headcount.

Exceptional costs mainly comprise amortisation of acquired intangible assets in addition to costs incurred in relation to the Benchmark Capital and C. Hoare & Co. acquisitions, which completed on 15 December 2016 and 17 February 2017 respectively.

Group segment

The Group segment includes returns on investment capital, income from financial investments, including RWC Partners Limited, and net returns from seed capital after hedging. The Group segment net income was £34.7 million (2015: £38.8 million) and profit before tax and exceptional items was £5.9 million (2015: £7.9 million). Profit before tax and after exceptional items was £7.9 million (2015: £0.1 million).

Post-tax profits from associates reduced from £8.7 million in 2015 to £4.8 million due to one-off private equity gains realised last year.

Group costs reduced to £28.8 million (2015: £30.9 million) with the decrease being driven by lower governance and general management costs of the Group.

Exceptional items included the release of deferred compensation costs related to STW that were not required to be paid, partially offset by share-based payments related to the 2013 acquisition of Cazenove Capital which fully vested in the year.

Dividends

Basic earnings per share
Before exceptional items
186.3p
(2015: 176.9 pence)

Our policy is to increase the dividend progressively, in line with the trend in profitability, having regard to overall Group strategy, capital requirements, liquidity and profitability. This approach will enable the Group to maintain sufficient capital to meet possible risk scenarios, including the impact of possible periods of economic downturn, and provide surplus to fund future acquisitions. We target a dividend payout ratio of 45 to 50%, determined as the total dividend per share in respect of the year, divided by the Group’s pre-exceptional basic earnings per share. More information is set out on (PDF:) page 104.

The Board is recommending a final dividend of 64.0 pence per share, bringing the total dividend for the year to 93.0 pence per share, an increase of 7% from 2015. This represents a payout ratio of 50%.

2017 outlook and priorities

Although the asset management industry is undergoing a number of significant changes, we see growth potential across the areas in which we operate.

We will continue to focus on our core business of helping our clients to achieve their financial goals and build their future prosperity. Our focus will remain on organically growing our core business of managing equity, fixed income, multi-asset and alternative solutions.

In addition, we will seek to further diversify our business, both by region and product offering. We have already completed the acquisition of C. Hoare & Co.’s wealth management business in 2017 and we will continue to consider inorganic opportunities that deepen our investment expertise or broaden our distribution reach.

Despite the challenges the industry faces, we remain well placed to capitalise on these opportunities with a highly diversified business model, a strong financial position and the willingness to invest behind our business.

More information on the Group’s financial position and liquidity is set out on (PDF:) pages 102, 104 and 106.

* See glossary.