Schroders plc - half-year results to 30 June 2022 (unaudited)
“We have built a diversified and resilient business that has weathered difficult market conditions, can fund growth and has put us in an excellent position to serve our clients."
- Our business showed resilience in the first six months of 2022 with net operating income increasing by 3% to £1,240.3 million.
- Operating profit increased by 2% to £406.9 million.[1]
- Our investment performance[2] remained strong with 77% of client assets outperforming their relevant comparator over three years and 79% over five years.
- We generated net new business of £8.4 billion, which helped increase assets under management to £773.4 billion. Excluding joint ventures and associates, we generated net new business of £4.4 billion and assets under management reached £637.5 billion.[3]
- We have maintained our interim dividend of 37 pence per share.
Peter Harrison, Group Chief Executive, commented:
“We have built a diversified and resilient business that has weathered difficult market conditions, can fund growth and has put us in an excellent position to serve our clients. The fact that we can report positive net new business in this period is testament to this. Our investment in sustainability has been a critical contributor to our success. It was particularly evident in our mutual fund business where, despite a stock market sell-off, our equity funds saw positive client inflows.
"Our private assets, wealth and solutions businesses are growing well, reinforcing the value of our strategic focus. It is this diversification that enables us to continue to meet our clients’ evolving needs.”
Management statement
Our diversified business model enabled us to deliver resilient results. The first half of 2022 was dominated by sharp market declines caused by a combination of the war in Ukraine and a shift in the outlook for inflation and interest rates. The result is an increased risk of a global recession, and that has had an inevitable impact on our business. Despite the headwinds, our operating profit increased to £406.9 million (H1 2021: £399.6 million). Our returns from balance sheet activities were impacted with net losses on financial instruments and other income of £35.2 million (H1 2021: net gains of £32.6 million). This led to a 16% decline in profit before tax to £312.8 million (H1 2021: £373.9 million).
We have a clear strategy for delivering growth: building closer relationships with end clients; expanding our capabilities in private assets; and growing core asset management through geographical expansion, strategic partnerships and by leading in sustainable investing. This strategy continues to drive growth, enabling our business to generate positive net new business (‘NNB’) in the first half of the year. Wealth Management generated NNB of £3.8 billion and Private Assets and Alternatives gathered £4.8 billion. Our Solutions business benefitted from the acquisition of River and Mercantile’s solutions business and ended the period with NNB of £6.3 billion. In total, the Group saw net inflows of £8.4 billion, £4.4 billion excluding joint ventures and associates. Our more traditional business areas felt the impact of negative market sentiment: Mutual Funds and Institutional saw net outflows of £2.9 billion and £7.6 billion, respectively. Counter to industry trends, it was particularly pleasing to see positive inflows into our equity mutual funds which were largely due to our strong sustainability offering.
We have made significant investments in data, our proprietary tools and in enhancing our active ownership and engagement capabilities. As a result, our brand now ranks 5th for sustainability globally.[4] SustainExTM, our award-winning tool, estimates the costs and benefits companies would face if their externalities were recognised financially. We can now measure the social and environmental impact of our portfolios and are pleased that 83% of our public AUM has a better SustainExTM score than their benchmark.
We have also created a set of new products which are relevant to our clients’ needs. Our Global Sustainable Value fund has been our second best-selling in the first half of this year. These new products are delivering growth and contribute to the resilience of our business.
Our investment performance remains strong with 77% of client assets outperforming their relevant comparator over three years and 79% over five years. Short-term investment performance was impacted by a rotation of markets with 51% of client assets outperforming over one year. We remain confident in the strength of our investment platform.
Assets under management (‘AUM’) increased to £773.4 billion (FY 2021: £766.7 billion) despite sharp falls in equity and bond markets. Excluding joint ventures and associates, our AUM reached £637.5 billion. Market falls reduced AUM by £87.9 billion in the first half, whilst currency movements contributed £34.2 billion. The acquisitions of River and Mercantile’s solutions division, Greencoat Capital and Cairn Real Estate added £51.9 billion to AUM.
We completed the acquisition of a 75% stake in Greencoat Capital, a leading European renewable infrastructure manager, in Q2 2022, adding £7.7 billion of AUM. Given the urgent need for economies to accelerate the transition to renewable energy, we foresee significant growth opportunities for the business in the US and Europe. To further build out our fiduciary management capabilities, we completed the acquisition of River and Mercantile’s solutions business, which added £43.1 billion of AUM. The acquisition adds a leading UK fiduciary management business, that has built a well-respected team and strong track record, to our existing investment and asset allocation expertise. The enhanced capabilities of Schroders Solutions will help it grow as a trusted adviser to clients in the pensions market. The acquisition closed in Q1 2022. At the start of the year, we acquired Cairn, a Dutch real estate investment specialist, which expanded our real estate offering in a key European growth market. The transaction added £1.1 billion of AUM and means that Schroders Capital, our private markets business, now has a true Pan-European real estate capability for our clients.
Net operating revenue was 2% higher than the previous period at £1,178.0 million (H1 2021: £1,149.7 million). This was driven by higher average AUM of £779.2 billion (H1 2021: £709.1 billion), reflecting the growth we delivered in the second half of 2021, the benefit of the acquisitions completed in 2022 and higher net banking interest of £12.9 million (H1 2021: £5.3 million). The decline in markets meant performance fees and net carried interest income were lower at £21.5 million (H1 2021: £43.4 million). Net operating income increased by 3% to £1,240.3 million (H1 2021: £1,209.5 million).
Reflecting the acquisitions of Greencoat Capital, River and Mercantile’s solutions business and Cairn Real Estate, operating expenses were £833.4 million (H1 2021: £809.9 million). We continued to invest for future growth in China, the regional build out of wealth advisers in the UK and the cloud migration programme. Our operating cost to operating income ratio was in line with the previous period at 67% (H1 2021: 67%).
The Board has declared an unchanged interim dividend of 37.0 pence per share (H1 2021: 37.0 pence per share). The dividend will be paid on 25 August 2022 to shareholders on the register on 5 August 2022
Asset Management
Asset Management net operating income was marginally up at £1,037.8 million (H1 2021: £1,023.7 million), due to higher average AUM of £547.1 billion (H1 2021: £511.9 billion). The segment benefitted from the continued stability and strong performance of our joint ventures and associates, which contributed £37.9 million (H1 2021: £37.9 million). Operating profit was £329.0 million (H1 2021: £334.1 million).
Private Assets and Alternatives
The investments we have made over previous years into Private Assets and Alternatives have continued to provide positive momentum. AUM increased by 29% and closed the period at £69.4 billion (FY 2021: £53.7 billion), supported by the completion of two acquisitions and positive NNB. The business area generated NNB of £4.8 billion, of which Greencoat Capital contributed £0.5 billion of NNB. In addition, non-fee earning dry powder[5] increased from £2.5 billion at the end of last year to £3.8 billion at the end of June 2022.
Net operating revenue (including performance fees and carried interest) increased by 23% compared to the first half of 2021 to £193.2 million (H1 2021: £156.7 million). The net operating revenue margin, excluding performance fees and carried interest, remained stable at 62 basis points (FY 2021: 62 basis points). Including performance fees and carried interest, the net operating revenue margin was 64 basis points (FY 2021: 72 basis points).
Solutions
AUM was supported by the strategic acquisition of River and Mercantile’s solutions business (£43.1 billion) and ended the period at £225.7 billion (FY 2021: £198.1 billion). The combined Schroders Solutions business experienced net inflows in the first half of the year of £6.3 billion (H1 2021: net outflows of £0.4 billion). NNB was largely supported by our fiduciary management capability, demonstrating the strength of the new combined offering. Schroders Solutions won two notable strategic client mandates since the acquisition completed, our appointment by Centrica and a new strategic partnership with Lloyd’s of London.
Solutions net operating revenue including performance fees and carried interest ended the period at £147.4 million (H1 2021: £131.6 million), representing a 12% increase. The net operating revenue margin, excluding performance fees, decreased to 13 basis points (FY 2021: 14 basis points) due to the lower margins of the newly acquired business.
Mutual Funds
The first half of the year was characterised by a ”risk-off” environment which, along with significant market falls, resulted in curtailed demand from retail investors. Mutual Funds saw £2.9 billion of net outflows (H1 2021: net inflows of £6.4 billion), driven by redemptions from fixed income products. Despite the challenging market environment we generated inflows of £0.6 billion through our equity products in the first half of the year. AUM in Mutual Funds at 30 June 2022 was £102.6 billion (FY 2021: £116.0 billion).
Mutual Funds net operating revenue declined by 6% to £379.7 million (H1 2021: £401.9 million). Despite seeing positive NNB into our equity funds, the sharp decline in equity markets meant the net operating revenue margin, excluding performance fees, was 2 basis points lower at 70 basis points (FY 2021: 72 basis points).
Institutional
The Institutional business area saw net outflows of £7.6 billion (H1 2021: net inflows of £1.0 billion), due to several clients restructuring their asset allocations, particularly in Japan and North America. Our Wealth Management Company venture with BOCOM launched its first products during the second quarter and started generating positive NNB which contributed to the Institutional business area. Institutional AUM closed at £143.8 billion (FY 2021: £166.2 billion).
Institutional net operating revenue including performance fees and carried interest declined by 7% to £263.1 million (H1 2021: £284.0 million). The net operating revenue margin excluding performance fees improved to 32 basis points (FY 2021: 31 basis points).
Wealth Management
Our Wealth Management segment comprises three service lines: wealth planning and advice (including discretionary management and banking services); platform services; and investment management. We are now separately reporting the AUM from each of these service lines to provide greater transparency of the associated revenue streams. We have restated our AUM to reflect this change based on the contractual relationships through which we generate revenues.[6]
Total AUM in Wealth Management ended the period at £96.0 billion (FY 2021: £101.6 billion). This comprised £59.1 billion of advised AUM, £17.2 billion of platform AUM and £19.7 billion of managed AUM.
The AUM advised by Schroders Personal Wealth is now reported within the AUM of joint ventures and associates. This new presentation removes the need to proportionally consolidate the results of Schroders Personal Wealth on a line by line basis. The results of Schroders Personal Wealth have been re-presented within the share of profits from joint ventures and associates.
We continued to see good momentum across Wealth Management, with good revenue growth and continued client demand in the first half of 2022. Net operating income increased 9% to £202.5 million (H1 2021: £185.8 million), principally driven by higher management fees and net banking interest. Operating profit was up 19% at £77.9 million (H1 2021: £65.5 million
Client demand for our wealth offering grew as we generated NNB of £3.8 billion in the first half of the year (H1 2021: £2.1 billion). This comprised of £3.0 billion of advised, £0.3 billion of managed and £0.5 billion of platform NNB.
The net operating revenue margin before performance fees increased by 2 basis points to 40 basis points (FY 2021: 38 basis points) mainly due to higher net banking interest.
Joint ventures and associates
We have long-standing strategic partnerships with Bank of Communications (BOCOM) in China and with Axis Bank in India. Our existing BOCOM Schroders associate in China continued to perform well, despite the ongoing impact of the pandemic and a hard lockdown. AUM increased by 29% over the last twelve months leading to a 15% increase in management fees. However, our 30% share of profits was slightly lower than in the previous period at £29.9 million (H1 2021: £32.6 million) due to lower performance fees and higher operating expenses. Total revenue from our partnership with Axis in India, of which we own 25%, increased to £46.6 million (H1 2021: £36.2 million). As a result, our share of profit after tax increased to £4.9 million (H1 2021: £4.1 million).
Within our Wealth Management segment, Schroders Personal Wealth built on the momentum it gained in 2021 and saw net inflows of £0.2 billion and contributed £3.2 million (H1 2021: £5.0 million) to net operating income. Total joint ventures and associates contributed £41.6 million (H1 2021: £43.4 million) to net operating income during the first half of the year. AUM reached £135.9 billion[7] (FY 2021: £131.1 billion), supported by positive NNB of £4.0 billion (H1 2021: £7.1 billion).
Outlook
Currently, the environment we operate in is challenging and we anticipate the backdrop for public and private markets to remain difficult. We have built a strong, diversified business, both in terms of geographical reach and product offering, while our strategic initiatives have delivered growth and improve our resilience. We remain focused on growing our broad investment platform that enables us to respond to our client’s evolving needs. We will continue to invest in these capabilities. We remain on course to deliver on our stated growth targets in Private Assets and Alternatives and Wealth Management.
On 26 April, we announced proposals to simplify the Group’s dual share class structure of voting and non-voting shares through enfranchisement of the non-voting shares. We are holding shareholder meetings to approve the proposals on 15 August 2022. The proposals require the approval of 75% of votes cast by each class of shareholders. If approved, the enfranchisement will have created substantial value for shareholders and enhance the liquidity of our share capital.
To read the full details of the announcement, including the various footnote references below, please refer to the full news release.
Forward-looking statements
This announcement and the Schroders website may contain forward-looking statements with respect to the financial condition, performance and position, strategy, results of operations and businesses of the Schroders Group. Such statements and forecasts involve risk and uncertainty because they are based on current expectations and assumptions but relate to events and depend upon circumstances in the future; you should not place reliance on them. Without limitation, any statements preceded or followed by or that include the words ‘targets’, ‘plans’, ‘sees’, ‘believes’, ‘expects’, ‘aims’, ‘confident’, ‘will have’, ‘will be’, ‘will ensure’, ‘likely’, ‘estimates’, ‘foresee’ or ‘anticipates’ or the negative of these terms or other similar terms are intended to identify such forward-looking statements. There are a number of factors that could cause actual results or developments to differ materially from those expressed or implied by forward-looking statements and forecasts. Forward-looking statements and forecasts are based on the Directors’ current view and information known to them at the date of this statement. The Directors do not make any undertaking to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Nothing in this announcement or in the Annual Report and Accounts or on the Schroders website should be construed as a forecast, estimate or projection of future financial performance.
[1] The consolidated income statement has been reformatted to present separately the operating profits of our business segments (see note 1). Profit before tax and exceptional items was £350.2 million (H1 2021: £407.5 million).
[2] Please refer to page 8 for more information about investment performance.
[3] We have updated our policy for recognising assets under management and net new business to better reflect the contractual relationships and incremental revenues generated (see page 7).
[4] NMG Consulting Global Asset Management 2021 Brand ESG Rankings Report.
[5] Committed non-fee earning assets not yet recognised within AUM and NNB.
[6] As a result of these changes, historic Wealth Management AUM, NNB and margins have been restated.
[7] Joint venture and associates AUM includes £13.4 billion of Schroders Personal Wealth advised assets.
Important Information: This communication is marketing material. The views and opinions contained herein are those of the author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results. The value of an investment can go down as well as up and is not guaranteed. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. Regions/ sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this material include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change. The content is issued by Schroder Investment Management Limited, 1 London Wall Place, London EC2Y 5AU. Registered No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.