Schroders' (SHNWF) CEO Peter Harrison on Q2 2016 Results - Earnings Call Transcript

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Schroders Plc. (OTCPK:SHNWF) Q2 2016 Earnings Conference Call May 28, 2016 4:30 AM ET


Peter Harrison - Chief Executive Officer

Richard Keers - Chief Financial Officer


Peter Lenardos - RBC Capital Markets

Toni Dang - Barclays

Haley Tam - Citigroup

Hubert Lam - Bank of America Merrill Lynch

Anil Sharma - Morgan Stanley

Gurjit Kambo - JPMorgan Cazenove

Paul McGinnis - Shore Capital

Peter Harrison

Thank you all for coming. I hope the new time works a bit better for everybody. But today is a busy day, so we're going to go through the results quickly in terms of flows. And I will spend a little bit of time talking about longer-term growth drivers because I think that's important at the moment, and then Richard will take you through the financials. I think I could do with this – this podium can now be lowered a bit as well.

I think it was clearly – there was a challenging element to the period, but I think overall our profit before tax was down just 2.7% to GBP282 billion and assets under management actually grew 10% to GBP343 billion in an environment where clearly sterling was weaker. But for me the issue was that our diversification paid off and so some of those long-term investments came through. And I'll talk more about that in more detail as we go through. But perhaps if I could start with flows, which I know is a subject of great interest.

I put a longer-term context on this chart because I think that is important, but overall during the period our flows were positive. Asset management actually saw inflows of 1.1 billion, and there were some outflows of 400 million from wealth management. And that was driven primarily by three things, the UK, by continental Europe, and by Asia-ex-Australia. And if I just go through those in turn.

In the UK, the institutional business has actually performed very well. Overall we saw flows of 1.2 billion, and institutional flows over the period were 2.8 billion. They were offset by intermediary outflows of 1.6, split roughly equally between first quarter and second quarter. And the main feature of the UK outflows was clearly around equities, which as you would expect in this environment. The institutional flows by contrast were into multi-assets products.

In Europe, we saw flows in of GBP1.6 billion, again all of that was institutional with intermediary being a wash. It came in across quite a wide range of different areas actually, emerging markets, infrastructure debt, real estate, bonds. For me that balance was – that breath of inflow was very encouraging.

And it Asia we saw an outflow, which as you can see from that chart isn’t something that has happened before, but actually if you break that down into its constituent parts what we saw across Asia was flows in of 1 billion, but within Australia we saw outflows of 2.2 billion, and that was driven really by a one-off commercial issue for one significant multi-asset client, and some outflows from Australia that produced business which as we have highlighted here before had some performance challenges, which actually have now turned I believe, but those are the two contributing factors to that Asian outflow, but I think broadly speaking it felt better than those numbers suggest.

And then in the Americas, lots of small numbers, but I think the number which pleased me most was you all have heard us talk before about the investment we have been making in turning around our institutional business, and in the second quarter we saw flows that are positive, which I think is a good achievement. So although North American flows were flat, actually in institutional they were in somewhat and intermediary they were the small outs, so those two offset each other and some small outflows in South America. So regionally I think the page shows a skew towards the places, which have been traditional drivers with one change in Asia.

If I turn now to the intermediary marketplace, clearly there has been a general risk aversion around risk assets. That is not new to anybody in here, but I think what I would say is there hasn't been a notable deterioration post-Brexit. And in fact if you look into July there were some positive days, negative days, but there is a much more balanced tone to it, which I think is an important point.

So overall we saw GBP3.3 billion out of intermediary over the period as against the GBP4.4 billion into institutional. And if we split that down by asset class, we saw outflows of 2.2 billion in the equity sector, and really that was across a wide range of different – so UK, global, Japanese, I mean pretty well all areas suffering a little bit. No one area standing out.

And in fixed income we saw continued inflows of about GBP0.5 billion. Multi-asset, we talked about in the first quarter had seen some outflows, particularly around global multi-asset income products and our open architecture GAIA fund range. Those slowed considerably in the second quarter, but overall there was an outflow of 1.3 billion in contrast to the significant inflows in institutional. So in aggregate 3.3 billion out of intermediary over the period.

Institutional is always lumpy, but I put the longer term period here and you can see the distorting effect of the Friends Life mandate in there, but we again should break it down into the constituent asset classes. Equity is a solid outflow of a little over a billion, 1.1 billion and I have mentioned Australian equities was the major feature of that, and clearly there is still a tail of UK equities, which are going through derisking. So that was again a small drag. But interestingly positive flows into emerging markets, for example, during the period.

Fixed income was again a story of continued growth. I think it is something which has been a feature for a while, but we saw 2.4 billion in a wide range of things, everything from infrastructure finance, and I will return to it on a little more detail through US and Europe. So both quarters seeing very good inflows. And multi-assets have further inflow of 3.5 billion mainly into risk controlled growth, LDI type mandates, the changing structure of the UK particularly.

There was a one-off outflow, as I mentioned, in Australia, which depressed that number somewhat, but still an inflow of 3.5 billion. What I would say is the timing of fundings in institution is always difficult. I mean, we inevitably experienced a lumpiness there, but I do feel a comfort when I look at the pipeline. Looking forward, I think we are in a good place there as ever.

If would be incomplete if I didn't talk about Brexit, but I suspect you have all heard quite enough of it already. I think there is a few points I would make, and we are a genuinely global diversified business and I think it is really, really important point if I just take you through what I actually mean by that. In the UK we have a broad fund range, 149 different funds, GBP59 billion of assets, which we sell to UK holder, UK mutual fund buyers. Only 1% of that is sold into Europe.

Conversely in Europe, we have 169 funds, GBP79 billion of assets, which we sell to Europe and the rest of the world. Only 9% of that is sold back to the UK. And we have real substance in continental Europe. We have over 370 people working in the EU, ex-Switzerland, ex-UK. So we feel that there is genuine substance in Europe and in Europe we feel genuinely European, where we have strong local businesses in 10 different offices – 12 different offices across Europe and that is – for me that genuine substance is really important.

There is obviously one other aspect to this and that is freedom of movement to people. And I should say that 13% of our investment professionals are EU nationals in the UK. 8% of our UK staff are EU nationals, and continuing access to their skills I think is certainly on the government’s agenda, but it is absolutely critical to us that that continues, but I think as a business structure this feels to be as near right as it possibly could be for the Brexit scenario, which we are dealing with.

So, for me, it would be wrong not to talk about it, but I do feel well placed. Clearly, obviously the biggest single issue in the short term has been the weakness of sterling, which boosted assets to 343 billion and of that 28-ish billion was currency impact. So that is the big short-term impact, but is 343 billion of assets that we will be earning profit on in the second half. So that is not necessarily a bad thing either.

So it is an important factor, but we feel well placed for it. This room, of all rooms, is very well versed in the pessimism that seems to surround the asset management industry at the moment, the greater passives, the switch to lower cost products, et cetera, et cetera. I thought it was just worth taking a moment because I think there is a number of growth opportunities, and there is certainly a number of things we have been investing in for the long term, which need focusing on in this environment.

So I just want to take a moment just to go through what we see those growth drivers are. And we would broadly say they were seven, and I just want to take a moment just to go through them. First of all product, I think what you sell is absolutely critical and product we have actually stripped out as a separate division, it is a third division of the business with asset management, so that we have a real focus on it.

We separated out our multi-asset and portfolio solutions business because we think given more oxygen they are more likely to succeed better, and you will be aware from the past that product innovation has been a big part of what has driven Schroders. We see that being ever more important, whether it be in the DGF’s range years ago or the Maximiser range, but perhaps looking forward in the insurance products on the fiduciary sectors.

So there is a lot of work going into product, but I do feel it is mission-critical to get it right. I think also making sure we have got a diverse talent base is one of the big drivers of that and is something that we also made a big investment in the second quarter.

Fixed income was a business that – those of you who are students of history, ten years ago fixed income was 10% of Schroders Group. Today it is 21% of the Schroders Group, and actually 73 billion of assets, which is up 12 billion since the beginning of 2015. Scaling this business further is going to be a big driver of growth. The world we live in with Solvency II with derisking, this is an important business to us, and the capabilities we put in are important.

You would have seen that we added a couple more during the quarter. We added a team of ABS specialists from Brookfield, but that deal hasn’t closed yet, but we have announced it. And we also announced a stake in a company called Safe Harbor, which will give us long-term access to community derisking, which again is going to be a major feature we think throughout major DB markets of UK, US, Canada, and Japan.

So, again future investments, but that breath of capability will be a big driver of growth. An old theme, but North America we think obviously it is 12% of the Schroders Group. It is 48% of the world’s assets. We have given you a stated intention that that should be 20%. We made an important step during this quarter. We announced the partnership with Hartford Funds. They previously partnered pretty well solely with Wellington. We have joined that partnership whereby 350 of their advisors will be selling to 85,000 independent advisors around the country. That gives us access to a far larger pool of talented people on the road, and I think that for us is a major step in terms of getting our intermediary business scaled in the US.

And I mentioned already, our institutional business where we have made both a big investment in terms of the sales force and the consultant sales force that pipeline has filled nearly nicely and we have seen positive flows coming through. So I think in North America that is nicely on track.

Asia is obviously an area, where we are widely associated. I think it just bears a little bit more looking beneath the lid. There are a number of markets that are very significant, Hong Kong, Singapore, Indonesia, where we have got intermediary market shares well over 10%. This is an area where mutual fund penetration is still really low, savings rates is still really high.

And from my perspective it is an area where we will continue to invest significant effort. We have got good standing both with institutions and in the intermediary market, and the structural drivers of this are going to go on for many years to come. I think it is an area of continued growth.

Technology much talked, if we are a data processing industry, which in crude terms we probably are, having good data-processing technology must be caught with. This quarter we have signed to take in the Aladdin system, which will give us real scalability in our fixed income multi-asset capability.

I think long-term it also helps to drive down our cost base. I think as importantly there is a whole raft of other technology initiatives the way in which we engage with clients. I am very pleased we actually came second across financial services in terms of digital engagement in the survey the other day, but I think digital engagement with clients is mission critical in terms of the long-term of the business in the way in which we work and our personal technology, but also in terms of alpha insights.

We have made a big investment in the data insights team of data scientists to help get equity and fixed income alpha, which is different from the run of the mill, [Indiscernible], but a group of people who look in different places for data insights, and I think that investment is something which will stand us in good stead, particularly in a post-MiFID, broker commission environment.

So again that investment is already in place, but technology is critical to the future. We have talked in the past about wealth. I want dwell on it here, but I think it is worth saying that we have a leading position in the UK charity sector. We have a very strong position with offering multifamily offices to some of the largest families in the country and that business has got the potential to carry on growing nicely, although obviously in the last quarter we did see a small amount of outflows.

And then finally, private assets and private assets for me is a theme, which isn’t going to be disrupted by passives, where you still see good – really good longevity. Our real estate business we have rebuilt over the last couple of years we see a number of interesting partnerships coming through there. We made investments in an interesting direct lender, small business in Holland called NEOS, obviously in insurance linked securities where we increased our stake in Secquaero to over 50%. That business having gone from GBP200 million is now well in excess of GBP1 billion.

And we will continue to look for – so the final one I should mention was infrastructure finance. The team we took on at the end of the fourth quarter last year has already got under management 360 million of assets, and again a good pipeline. So the growth in this area I think has got a long way to go and interesting longevity characteristics. So perhaps to draw that together, there is a pessimism around I do think the diversity of this group and the opportunities we have are still material.

Not easy to predict the next week or the next month, potentially what we can continue to do is invest for the long-term in this sort of area. I will take questions at the end, but if I could just hand over to Richard, who will take you through the detail of the numbers.

Richard Keers

Good morning everybody. Peter has taken you through our flows, our position following Brexit, and where we see our growth drivers in the business. I would now take you through the numbers and update you on our outlook for the rest of 2016, but to begin the usual highlights.

The business has continued to perform well. Despite the market conditions and economic uncertainties that we have seen, net income was up 2% compared to the same period of 2015 increasing to 844 million. Profit before tax is down slightly to 282 million. This reflects the continued investment in the business that Peter has just referred to and I have talked about previously. But before exceptional items of 11 million, profit before tax was 294 million. That is ahead of consensus but down 4% compared to last year. Basic EPS was down 4.5% to GBP 0.845 before exceptional items.

We have maintained our half year dividend at GBP 0.29 per share, which is in line with our progressive dividend policy. Overall these are a robust set of numbers in what is a challenging market environment. Now let us look at net income in a bit more detail. As I mentioned, our net income was up 2% to 844 million. Net operating revenue was down 4 million mainly due to lower management fees.

Net new business generated throughout 2015 and the first half of 2016 increased our management fees a little for the six-month period, but the mix of flows has pulled down the revenue margin. Some of that will come through in the second half. The volatile market conditions gained throughout 2015 and in this last six months mean that our average AUM excluding the impact of FX and flows was lower than for the same period of 2015.

This reduced our management fees by around $33 million. However, this was largely offset by FX, which we estimate increased fees by about 25 million. For H2, the important thing to note is that AUM is now at a record high of 344 billion. That increase mainly came through in June, in fact the last week of June. So we have not yet seen the full impact on our run rate management fees.

This should more than offset the margin decline that I just referred to. So with management fees down a little the growth in net income comes from gains from financial instruments. That is 19 million of higher gains on our investments, and is included within 23 million you see on the screen. 10 million of this gain was from financial instruments held to hedge employee fund awards. There is an equivalent increase in our comp cost, which match this. I would love to net those off, but accounting rules dictate I have to show them gross.

A further 5 million FX impact makes up the rest of the 23 million. This time when I refer to FX it is principally on the retranslation and settlement of fee deters and takes the total increase in our net income due to FX to 30 million. Our investments in associates and joint ventures continue to perform well and now includes our investment in NEOS that Peter has just mentioned.

Profits are largely unchanged year-on-year with strong contribution in both the periods. The weakening of sterling increased AUM by around 28.5 billion; that is a 9% increase most of which came through in June. What we got here is the usual breakdown of AUM that we provide in your data packs. This analysis is based on currency of the underlying securities. It shows that over 70% of our assets are in non-sterling with 30% in US dollar and US dollar paid currencies.

But it doesn't reflect the full complexities of FX. They used to be a reasonable proxy to understand the sensitivity of our revenues to FX movements. But given the significant FX changes this year I have given you more detail of how assets are impacted by currency, by segment and channel. I hope this additional information will be helpful for your models.

Our diverse business model means that we manage local business in a wide variety of locations but always have in your mind that we are a significant exporter of investment solutions out of the UK. This means that our costs are not as sensitive to FX rates as our revenues. Of course, our people costs are determined by the common comp ratio and our non-comp cost are only around 40% in non-sterling currencies.

The weakening of sterling has had some impact on these, around 3 million increase for the half year, but a much lower impact than on our revenues. The overall impact of FX on our profits is therefore an increase of 14 million. Clearly there is a lot of complexity when dealing with FX. But I hope this gives you an understanding of the positive impact this has had on our outlook.

Now let us look at what has happened in the net operating revenues from each of our channels in the first half of the year. Starting with institutional, net operating revenues were up 2% at 316 million. Average AUM was up 9 billion from market and FX movements and positive net new business. As we discussed last year and Peter has just highlighted, we generated strong levels of new business within the institutional channel. These net inflows are mainly into lower-cost products.

Fixed income has again delivered strong sales and we continue to see high demand for our multi-asset products particularly risk controlled growth. This contrasts with less demand for equities in the current [risk of] environment. The impact to this sales trend is a change in the mix of the business. And this is the main driver for our margin compression together with some limited repricing given the competitive landscape.

The institutional revenue margin declined from 34 basis points last year to 32 basis points in the first half of this year. We had anticipated a 1 point reduction but the change in mix has pushed margins down a bit more than we anticipated. So the growth in average AUM has been offset by this margin reduction with some other one-off fees pushing up net operating revenue compared to last year.

Looking forward, we expect the trend towards lower-cost products to persist and this is likely to drive margin decline further, particularly if the move away from equities continues. But our focus is on growing total net operating revenue. There have been some short-term challenges here, but our long-term strategy has not changed.

Turning to intermediary, net operating revenues were down 3% to 372 million. Average AUM declined by around 3 billion mainly due to market declines in 2015 with outflows in 2016. But of course AUM increased significantly in June and started H2 at a record high. Revenue margins were largely unchanged from the full year 2015 at 74 basis points, and only 0.5 point down on H1 2015, but we are seeing a longer-term trend of underlying margin pressure and expect the margin to be approximately 1 basis point lower for the rest of the year, so maybe 0.5 basis point impact for the year as a whole.

Moving to wealth management, net operating revenues were up 1% to 107 million. The main driver was our net banking interest, which increased as a result of high cash deposits being placed with us, and the enhancements to our treasury activities that I mentioned at year-end. Within wealth management revenue margins were 65 basis points. These are difficult to predict given the importance of transaction-based commissions, but at this stage we expect a 1 point decline in the second half, so perhaps again a 0.5 basis points for the full year.

Right, now let us look at operating expenses. As you know comp costs make up approximately 70% of our cost base. We are continuing to accrue comp costs at 45% of net income. That is in line with our budget but is around 1% higher than it was last year. The increase from prior year reflects the impact of currency as well as the additional headcount I have talked about at year-end is driven by our commitment to invest in the business for the long term.

As I mentioned earlier FX does not have a direct impact here as we manage to our total comp ratio. But some 55% of our people are likely to go overseas, and they represent about 40% of our total comp cost. We are currently not expecting any change to our comp ratio at 45%. The increase in the ratio compared to last year combined with higher net income represents 9 million of the increase in our total comp costs.

The remaining 10 million arises as a result of the changes in value of the fund awards that I referred to earlier. So you can see the total comp costs were up 19 million. Non-comp costs were 166 million compared to 155 million in the first half of 2015. That is a little lower than the guidance I gave you at the beginning of the year but that is simply due to the timing of costs. Again it reflects the strategic investments that we have been making in the business.

Around 3 million of the increase was a result of foreign currency movements. It won't surprise you that we have been expecting a greater impact from FX in the second half of the year and as a result our best estimate of non-comp cost is now 347 million for the year as a whole. That is 7 million higher than guidance I gave you at March due to the further weakening of sterling.

Obviously this depends on how markets behave for the rest of the year. So we are on track to deliver our total cost ratio of 65%, which is in-line with our long-term target and KPI of between 65% and 70%. Finally, we have 10 million of exceptional items, which includes 1 million in respect to associates. That is slightly higher than previously forecast mainly as a result of the investments we have made in relation to our US business that Peter has already talked to you about.

We are now expecting full-year exceptional [Indiscernible] costs of approximately 25 million. So putting that all together net income was up 18 million, which is offset by increases in our operating expenses. Comp costs were up 19 million and non-comp costs up 11 million. Profit before tax and exceptional items was therefore 293.7 million. We have a tax rate before exceptional items of 20.9%, and we expect the full-year rate to be the same.

That results in a tax charge of 61 million and gives a profit after tax but before exceptional items of 232 million. After exceptional items, profit after tax was 223 million. Turning to our balance sheet, it won't surprise you that we continue to maintain a strong capital position and here is the normal breakdown. We believe that this gives us a competitive advantage particularly in challenging markets. It means we can invest where we need to and take advantage of opportunities as they arise. As you have already heard from Peter we are starting to deploy more of this and we see more opportunities ahead.

So, in summary, a robust set of results and record AUM at 30th of June. Yes there is more uncertainty around, but our diversified business model means we are well placed for the future. Thank you and I hand it back to Peter.

Peter Harrison

Thanks Richard. In terms of outlook, we do see this market volatility continuing for potentially quite a long period. It is very hard to call. But I think what is as important is the institutional business continues to perform well, and within the intermediary business we have a very broad spread of risk-off products in fixed income, multi-asset as well as risk-on products in terms of equities. And I think that spread and balance is very important looking forward.

So it is hard to make short-term predictions, but as I said I would tell, we have not seen deterioration in July in the post-Brexit world. I think it's an important point to make. We do have in place a strategy to address the headwinds of the industry. I think that is again something where we do see a number of areas for growth. What I would like to do is take questions. If I could ask that you give your name and your firm before asking your question, I would be most grateful. And wait for the microphone before doing so for the benefit of those online.

Question-and-Answer Session

Q - Peter Lenardos

Hi. Good morning. It's Peter Lenardos from RBC. Two questions, please. The first one would be on your growth initiatives. Are those all organic initiatives or do you anticipate also M&A opportunities in there to achieve those growth initiatives, and the second one would be on the potential impact to demand that you referenced in your statement this morning. I was hoping you could give us an update on how the quarter has progressed so far? Thanks.

Peter Harrison

On the opportunities, as you know, we have always had a mixture of organic and inorganic, but we have made sure that anything inorganic is very culturally accretive and is of the size that can be easily assimilated, and that doesn't change. So we in this period the Brookfield team was a team we bought, so you could say inorganic it felt very organic to my mind because of the cultural nature of that fit.

So I suspect you will continue to see that it is a combination of the two. And in terms of this quarter, I would say there is positive days, there is negative days, but I would say there hasn't been a deterioration post-Brexit, and the institutional pipeline is comfortable, so it feels all right.

Toni Dang

Good morning. Toni Dang, Barclays. Three quick questions from me. First, you mentioned risk of environment you are having particular sort of fixed income products, can you highlight ones particularly where you think the performance is strong there where you could see the demand come in. Second, Michael Dobson, I think in February-March time spoke of periods of dislocation being relatively good for Schroders, with your balance sheet have been able to take advantage of them, are we already sort of seeing evidence of teams being more prepared to move, any more color you can give about areas you might want to invest there, and lastly, the second most popular question of asset management teams after Brexit seems to be on the FCA industry review, and the response from the management team seem to be one of not expecting any nasty surprises, which seems I have never heard of a regulator’s review where they conclude everything is absolutely fine. So are we not in danger of being a little bit complacent here, if you had to put your devil's advocate hat on where might we be surprised, what particular areas could there be some wobblies thrown?

Peter Harrison

Let me start with that. The timing of the review I think we just don't know. My suspicion is that we lost a chunk of our lives joining the Brexit carry on, so it wouldn't surprise me if I was pushed back a little bit but we have no information to say that that this the case. I think the reality is we just don't know. And the FCA is clearly in the midst of doing a lot of analysis. There is a lot of detailed work going on. And I just think it is wrong to speculate whether positive or negative, the industry is highly complicated and I think more importantly the asset management piece is a small piece of a much bigger value chain.

And I think this often gets lost, but what we do is a business-to-business opportunity where we are an intermediary, than then sells onto people who give advice et cetera. And the FCA is trying to get its head around that full value for consumers and I think it is wrong for us to draw too many conclusions just about asset management when one needs to look at the whole ecosystem. So there is a long way to go in this. And it is only an intermediary report, but I wouldn't be trying to speculate positively or negatively, I just don't think we know at this stage. Remind me of your second question?

Pretty broad spread actually. I mean, I mentioned that the inflows in infrastructure where we see there is really good demand, simply because it worked so well with Solvency II for insurance companies. But the big driver of late has been European credit, where we both got a good track record and an environment where people wanted to put money to work.

Buy and maintain mandates I think is another interesting one where there is clearly a weight of money, people wanting to park long-term assets in fixed income for derisking or matching liabilities. But I would say it is across the piece where there is a number of interesting things. There is clearly some areas like high yield where the appetite isn't there yet, but I would say that is probably a more risk-on asset class rather than risk-off one, in any event.

Yes, my sense is there is always a bit of dislocation somewhere in the word, but you are right in the general thought that having a strong balance sheet and having the ability to invest when everyone wants to row back is it feels very good and I think that we have seen. For example, we are looking to make really high quality hires as a result of the pessimism in the world and we are in the process of bringing in a couple of people at the moment. And I think it is those sort of things which are opportunistic. There will be teams as well.

And it is absolutely right, we are on the front foot by looking for them, but this last quarter we hired the ex-CFO of Nomura, Kashiwagi to run our Japanese business. Now to get the CFO of Nomura to come and do that for the group CFO it is a great, great coup from our perspective to really drive our Japanese strategy. So it is that sort of opportunity which I think we are in a position to take.

Unidentified Analyst

[Indiscernible] A couple of quick questions please. First on M&A, you did highlight that you are looking at non-organic opportunities. I'm wondering with the market dislocations we have been through, whether there is and we have perhaps seen a mismatch between buyers expectations and sellers expectations, whether that is an issue in the short-term for you got to move on and compete on some of your non-organic opportunities you might see. Perhaps if you can also flush out what you are thinking about – I think last time you talked about realizing other investments, whether you can discuss maybe what opportunities you are currently looking at and secondly I am wondering on UK wealth management, I understand the business is very exposed to charities and small institutions, but if we exclude that from the piece I'm wondering what the flows are looking like and if I can apply that to other UK wealth managers, perhaps could you discuss why the flows might not be as good as what we are seeing elsewhere?

Peter Harrison

Let us take the wealth management piece first. There was 400 million of outflows, about half of that was charities. But if we look at the – and some of it was people spending their income, which is entirely understandable. When you haven't got much income, you tend to draw down a bit more heavily. And we report our assets after that income drawdown. Now the underlying trend actually I think is pretty good of growth in that business. But there is always going to be the sort of bigger distortions, movements of low-margin money et cetera that come in and out.

I don't feel it is materially different from its peers actually. It is an area where we are making – putting a lot of attention just for opportunities, and you said I highlighted inorganic, actually I highlighted the opportunities generally rather than inorganic, but I think that that is a world, which has been going through quite a lot of change and it is an area where we feel we have got a very, very strong brand in Cazenove, an attractive place for people to come and work. So, I think it is – the opportunities are as organic as anything.

And more broadly in private assets, you have seen we have done a couple of things. I feel that that could go on in a small way. The mismatch between buyers and sellers is very much a public market thing. When you start talking about teams and the rest of it that is about the strength that Schroders can bring and this is an attractive place for people to work. And I think that is really the way in which we bring people into the firm rather than it being about valuation. People tend to come here because they look at our distribution capabilities, they look at the environment, they look at what we are able to do for them. That is the reason people come in rather than the fact that we are prepared to pay more than the next guy. I just don't – that is not the way to do it.

Haley Tam

It is Haley Tam from Citigroup. Two questions please. The first one in terms of the structural growth opportunities you outlined on Slide 6, I don't know to what extent you can, but could you give us some idea perhaps if any of those seven are more important to you than others, or whether there is any sort of change in timing expectations from that perspective. And then the second question perhaps more tactically, you have seen very good institutional inflows from the UK and into LDI and fixed income recently. Given the fact that interest rates expectations have changed materially, you are going to expect them to go down, what is your feeling for demand there, given that perhaps now it is more expensive for institutions to match their liability to this stage? Thank you.

Peter Harrison

First of all on the growth, I think the issue is actually one of timing. So either Asia or the US is very much an opportunity now. I think private assets is going to be a longer slow burn, but because of the nature of building that market position the derisking opportunity has been postponed somewhat by the collapse in bond deals. I think you are right. But the opportunities in multi-asset and fixed income there is still a lot of conversations. I was with a big client yesterday, where they have a challenge brought about really by the structure of the UK consultant market changing. And that is allowing firms like ourselves to step in, and fill the gap where consultants have left. So I think there is a lot of changes going on, but if you have been in the business for a long time and you are seen as a good advisor to businesses, there is always somewhere and that is the point about diversification.

So I wouldn't say one is more important than the other. I think I mean the technology is quite hard to lay your fingers on precisely where it is, but that being a thoroughly modern company with really good data insight to people will yield good outflow over time, which will ultimately drive fund flows, but the connectivity between the two is quite hard to nail down.

So I wouldn't want to speculate really and try and scale them. We have nailed our colors to the mast on the US, but I think that has turned quite nicely, and validated that. And I think the Hartford deal is a good step along the way. That would probably close October time, so we won’t see the impact of that probably until first quarter next year, but nevertheless it is in the pipeline. Your other question tactically about derisking, yes, but I think that it does mean that people want to have more multi-asset conversations. The purpose of splitting out our solutions team I think is quite important here. We used to run multi-asset and portfolio solutions as one group, and what we are seeing is that not every solution is an multi-asset solution. And more and more of the big schemes want a strategic partner to help them work through that problem.

So it is not about whether they derisk today or tomorrow, it is can we help them with that bigger picture of understanding their liabilities and how they match those off. So that is the process which goes on anyway and there is a role for us in all time environments today.

Hubert Lam

Hi, good morning. It is Hubert Lam from Bank of America Merrill Lynch. Just one question on your property assets, you have a significant amount of property assets, how much of that is in the UK and should we expect a markdown on that, as well as what has certainly been changed on these type of assets?

Peter Harrison

Of the 10.4 billion – I don't have the exact number, but I would say that north of 60% of them will be in the UK although an increasing portion has been into Continental Europe of late. The client base however is increasingly global. It has grown from a UK business into an international business, and particularly some partnerships in Asia and in Continental Europe. So it is a more international business.

It is now 10.4 billion having been reworked under the leadership of Duncan Owen. I think it has got a more international flavor to it. We didn't play in the daily priced real estate business, and that was painful for growth whilst we deliberately decided not to do it, but that has now come through, and I feel it was right not to have played. There is no evidence that there was a major markdown in NAVs. In fact, I think if you look at the recent transactions that have been going on they have been going 3% or 4% below pre-Brexit valuations.

So there hasn't been that big a drop. Although our next valuation point is at the end of September for our quarterly cycle funds, obviously we have got some REITs that are out there, but there isn’t a big sense from the team that there is a major drop, and in fact, most recently people cutting their haircuts back quite a long way.

Anil Sharma

Good morning. It is Anil Sharma from Morgan Stanley. Just two questions please, the technology piece which you talked about, I was quite interested as to whether or if you could potentially quantify the cost saving opportunity as you roll onto the Aladdin platform and the other things you are doing, and whether that is going to be sort of 2019, 2020 or possibly sooner, and then secondly, just in terms of the institutional pipeline, you mentioned you are obviously quite encouraged as to where it is today, but was there anything sort of one-offish in nature in Q2 then as to why the flows were perhaps a bit weaker than what consensus expected and as to whether, the conversations you are having with clients, presumably the behavior has changed a little bit, and you are probably expect those mandates not to fund for long there, if you could give some color there, it will be helpful?

Peter Harrison

Yes. There was a one-off, and it was the Australian multi-asset outflow, which was the surprise as it were, and I think there is always, real uncertainty as to when mandates fund, but it does feel that if I look at the pipeline and I look at where the conversations we are having and what is in transition at the moment. That is the thing that gives me comfort. But I think it is very wrong to speculate quarter-to-quarter.

This is the ultimate long-term business. So, where it turns out is always hard to know, and your first question was – remind me – technology yes. So it is very hard to know. I mean, I think what technology gives you is two things, well, three things. One is obviously the alpha piece. The second is the ability to do complicated things. So as we go into clearing and collateralization, the ability to run more and more sophisticated mandates for more sophisticated clients drives your revenue. That's not an efficiency thing. But I think long term, having one process which you drive through the organization and you really get the benefits of scale does drive out cost.

Quantifying that is very hard. What I would say in the short term is extra-cost, not extra, you have got double costs for market data, for example, over [during] transition period. We have got the cost of the changed teams going in, doing that process, but actually if you look further out, those with come out and the ability to do that extra business is the real opportunity I think. I mean we need to be capable of running real scale in multi-asset and fixed income because that is – there are multi-year opportunities there that are very different.

Running a long-only SEDOL equity business is something that has been very simple. The new world is much more sophisticated and I think stepping up to that investment is critical.

Gurjit Kambo

Hi, good morning. It is Gurjit Kambo from JP Morgan Cazenove. Peter I guess, over the last few months since you have taken over the role, I guess you have been meeting with local management teams and also clients, are there any sort of particular surprises either positive or negative that, perhaps you can share with us?

Peter Harrison

Yes, I have clocked up a few air miles in the last three months, and I think what has been – I mean, it wasn't my first visit to all these offices. So in that sense there wasn't surprises, but I do think the strength of our distribution platform and the quality of our Asian businesses is really – I think the thing that probably I took away most where you have got really good market shares in places like Hong Kong and Singapore, you are shaping the change and helping shape the future markets.

The opportunities in China, the opportunities in Japan, I think that is the bit where I sit and look at it and think, yes, [Indiscernible] things that we can do there. Our European offices are also well placed. The other thing I probably draw out is the sheer breath and diversity of the group. There is a lot of different things going on in different places and that gives me great comfort that in terms of finding areas that you can invest in for the future, there is a lot of them. And I think that is helpful in an environment where there is some structural headwinds coming that you can find things with a high ROI to get behind, but nothing shocking thankfully.

Paul McGinnis

Good morning. Paul McGinnis from Shore Capital. Question on the unchanged dividend. Just wondered given the Schroders policy is already a relatively conservative versus the peer group, and given you, as you said, even though it was currency induced had a high level of AUM going through the second half of the year, just wonder whether the board considered putting out the dividend anyway?

Richard Keers

There is no change in our dividend policy. We have said very clearly we are moving to a 50% payout ratio. It is a progressive policy. Profits are down for the first six months. So actually I thought it is a very straightforward decision. Profits are down. We want to move to 50% payout ratio, no change in that guidance. If the profits come through in the second half you should expect the payout to reflect that and the dividend to move upwards. But half year on half year it was down. So holding the dividend we thought was a very sensible move.

Peter Harrison

Great. Well, thank you all for coming. I really appreciate it, and look forward to meeting you all over the coming years. Thank you.

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