Thank you for standing by, and welcome to the Australian Ethical Investment Limited Full Year Results Briefing Conference Call. All participants are in a listen only mode. There will be a presentation followed by a question and answer session. If you wish to ask a question via webcast, please enter it into the ask a question box and click submit. I would now like to hand the conference over to Ms.
Melanie Hill, Head of Investor Relations. Please go ahead.
Thank you. Ladies and gentlemen, good morning. My name is Melanie Hill. I'm Head of Investor Relations at Australian Ethical. I would like to begin by acknowledging the traditional owners of the country on which we work, the Gadigal people of the Eora Nation and recognize their continuing connection to the land, and Culture.
We pay our respects to their elders past, present and emerging. On behalf of Australian Ethical, welcome to our results presentation for the full financial year ending 30 June 2021. Before we get started with the presentation, I would just like to reiterate some brief housekeeping points. Note that today's presentation is being recorded and a
The recording will be made available on the Australian
Ethical website. The slides used in the presentation are also available on our website. We may also have media in attendance this morning. I'm joined this morning by John McMurdo, CEO and Managing Director of Australian Ethical and Mark Simons, our CFO, who will be sharing our results with you. The agenda this morning is as follows.
John will go through the business highlights, Mark will cover off the financials and give an investment update, And John will finish with the business update. Just another reminder that there will be an opportunity for Q and A at the end. So please submit any questions by the ask a question box. I'll now hand over to John.
Thanks, Mel, and good morning, everyone. Let me first acknowledge that as we deliver this presentation, half the country is currently locked down. And so On behalf of Australian Ethical, we do hope you're all keeping safe and well. It's very gratifying this morning to share with you Confirmation of another record breaking year. In fact, record breaking on nearly every dimension Despite the ongoing challenges posed by COVID.
And so I want to acknowledge at the very outset the extraordinary efforts of the Australian Ethical Many of whom are listening this morning and achieving the results Mark and I will now share. Mark will go through the financials shortly, but these are, of course, a very pleasing set of highlights. At our half year results, I said the pandemic had reinforced our investment philosophy and shown that ethical investing can deliver strong investment outcomes with positive impact in many market conditions. 6 months later, and this has been further reinforced, Our ethical approach is continuing to gain popularity for its inherent tilt toward quality, resilience and long term capital appreciation. Particularly pleasing were record net flows, up a full 56% on the prior year to over $1,000,000,000 These flows, combined with strong investment performance, have driven material uplifts And operating revenue, NPAT, underlying profits, all at new record high levels.
Notably, we've ended the financial year with $6,070,000,000 in funds under management, up 50% in a single year. What we're seeing is a convergence of factors that are driving our growth, including the seismic shift in consumer behavior, The ongoing relative outperformance of responsible and ESG funds, combined with the results of the strategic investments we've made in our business to strengthen investment capability, distribution and brand awareness. Our company results are underpinned by the continuing outperformance of our award winning investment team. The team continue to produce excellent results for our investors, testament to our unique investment process and our experienced team of investments and ethics professionals. In November, we were recognized by Morningstar is one of just 6 global leaders for our commitment to ESG and the only one in Australia.
The report singled out our Australian Shares Fund as setting the ESG standard for Australian domestic equity strategies. To receive global recognition for our authenticity It's especially important as ESG becomes the biggest buzzword in investing and even the most cynical of investment Just jump on the bandwagon as new products get launched and older funds are rebadged to sustainable. And the raft of local accolades reinforces our position as Australia's leading ethical investor. Because whereas once an ESG award might have been seen as alternative or even quirky, as competitors and other investors This rush to capitalize on this method of investing, these ESG awards cement our established leadership in what has Ethics is undoubtedly at the heart. With ethics embedded in the investment process, excellent investment performance goes hand in hand And here lies the real point of differentiation for Australian Ethical, A competitive advantage that's hard to imitate.
Other companies may talk about the positive impact they make, But is it really at the company's core? Does it add meaning to the day to day experience of their employees? Does it result in real world outcomes for an expanded group of stakeholders. Too often, these efforts feel tangential With purpose statements so generic that they do little to change business as usual. But our success and our impacts Prove that when purpose is part of your corporate identity and embedded in your strategy and your governance, it's possible to deliver impact that can be measured and managed.
Our market leading returns come from investments in companies that are less carbon intensive and more Towards the UN Sustainable Development Goals. Meanwhile, our inimitable ethics research team, led by Doctor. Stuart Palmer, engaged with over 500 companies last year, lending our ethical voice to support others' initiatives, engaging with companies directly and filing and voting on shareholder resolutions in pursuit of a better world. When we began in 1986, our constitution provided that we would give 10% of profits to charitable, benevolent and Conservation Causes. Thanks to this virtuous construct, it means the better we do as a company, the more we can support great causes.
This year, the Australian Ethical Foundation has allocated a further $1,800,000 for donation to charitable and philanthropic initiatives At a time when the pandemic continues to disproportionately affect the world's most vulnerable. We're also using the power of philanthropy to ignite early stage high impact ventures and have recently launched a new visionary grants program, which is open and looking to fund innovative climate solutions. And while we do this for genuinely altruistic It's another proof point of our authenticity that sets us apart from others. Mark, Can you update on our financials and investment performance?
Thanks, John, and good morning, everyone. I'm delighted to run through the FY 2021 financial highlights, another incredible year. John has already run through some of the key highlights and I'd like to focus Some other excellent financial results. Net profit after tax attributable to shareholders was up 19% over the last year. This was driven by strong revenue growth with operating expenses growing at a similar rate as we continue to reinvest in Operating revenue was up 18 percent to $58,700,000 which included a performance fee of $2,900,000 that was earned on the emerging Funds which significantly outperformed its benchmark.
Adjusting for this performance fee, our operating revenue was up 21%. This strong revenue growth has been driven by strong year on year fund growth of 50%, partially offset by impact of fee reductions in FY 2021 and late In the year, we had a deliberate increase in our operating expenses to drive business growth. We invested $4,600,000 in the business Various initiatives with total operating expenses up 18 percent to $43,600,000 Excluding the impact of this investment, operating expenses were up 5%. It's pleasing to see how our investment is yielding strong results in flows and fund growth. A final dividend of $0.04 per share has been declared, plus a $0.01 special performance fee dividend.
This brings total dividends to 0 point 0 8 for the year, representing a 33% growth over the prior year. We have maintained a net profit margin before tax of 26% or a cost to income ratio of 74% after performance fees during this year. In the year, we passed through another fund milestone ending the year on $6,070,000,000 Since 2017, our fund has grown The cumulative annual growth rate was 30%. Our portfolio investment performance for the year was just below $1,000,000,000 at $990,000,000 as compared to negative performance last year impacted by COVID market shocks. Our adviser channel now makes up 20% of our fund, up from 19% last year and passed through the 1,000,000,000 from milestone ending the year at $1,200,000,000 54% growth from last year.
Adviser net flows grew by a huge 168%. This uplift follows our targeted investment from growing this important channel. Direct fund now represents 73% compared to last year at 74%. On a product view, superannuation Makes up 64% of the portfolio. However, with managed funds growing at a faster rate in line with our strategy, this is down from 67% in the 2020.
This should be noted, 51% of our portfolio is invested in domestic equities. Customer numbers now exceed 70,000 and grew by 23% in the year. Managed fund customers increased 31% And super members expanded by 22%. Platforms FUM grew 75% in the year. And I note that each platform Managed fund net flows were up 122 percent to reach CAD420 1,000,000 Whilst in Supa, net flows were CAD 610 1,000,000 a 31% increase over last year.
These flows were achieved despite $41,000,000 in outflows relating To the federal government's changes to early relief super conditions, we continue to have one of the lowest super outflow ratios in the industry. We have customers who love what we stand for and know that their money is doing good. Our average revenue margin for the year was 1.04% following fee and threshold reduction implemented in October 2020 June 2021. At the end of June, our revenue margin was 1%. Our key strategy is to ensure ethical investing is as accessible and competitive as possible.
We'll continue to make strategic fee reductions to share the benefits of scale with current customers along with expectations that this investment will assist with new customer flows. While ensuring our fees are competitive, we believe returns and impact are even more important. Our 18% revenue growth is driven by the increase in our fund. Fund based revenue pre performance fees increased by 21% compared to the average fund growth of 31%. Comparing revenue with last year, our growth has come from both managed funds And Superfund based revenue.
The performance fee generated by the emerging company's fund while slightly less than last year was still Very strong $2,900,000 FY 'twenty one operating expenses increased 18%. The primary driver of this cost increase is our strategic investment to strengthen our distribution, Marketing and investment team capability, our refreshed brand identity and the successful execution of strategic projects to enhance the customer experience. The increase in fund related costs was driven by growth in our customer base and our fund and costs associated with implementing regulatory changes. The increase in external and other costs relate predominantly to increased third party costs, depreciation and Insurance Premiums. Pleasingly, we continue to strengthen our balance sheet with no debt and a We've been through many of the metrics that you'll see in the next few slides.
However, it is worth noting the strong compound annual growth rates referred to as CAGRs across all these metrics. Our underlying profit, which takes out one off items, has a full year CAGR of 27% or 22% if exclude Our shareholder dividend has grown at 32% CAGR over the same period. I'd like to now touch on the excellent investment performance in both managed funds and superannuation Next three slides. Starting with our balanced option, which is our MySuper product, it has achieved top quartile performance Over 3, 5 and 7 years, it was the only retail fund to make the top 10 list for 10 year performance. Our Australian shares, which returned 43.1 percent for wholesale investors this year and has a track record for outperformance all time periods for more than 20 years and our emerging companies fund which returned 51.1% for wholesale investors.
It is also worth noting that Diversified Shares, Australian Shares and Emerging Companies Funds Have all produced top quartile performance for periods of 1 year and longer. And because we only invest ethically, it means our customers can be Regardless of the product they're in, they're making their money matter by investing for a better future. In keeping with our ethical charter, Our largest sector position this year align with the forward looking sectors of the economy in areas where our team has deep domain expertise. We've seen the Healthcare and Information Technology sectors make significant contributions to our outperformance of our funds with companies such as COGS State, Immutet and Janesen doing well, as well as Pilbara and Orocobre, which are important players in the transition to renewables. I'll now hand back to John, who will go through the business update for
now. Thanks, Mark. As a Board and management team, we're acutely aware that the business and global context we operate in continues to evolve and quite Quickly, 2 weeks ago, the IPCC released its latest report, which laid out in no uncertain terms how the window of opportunity Faced with this code red for humanity, never has it been so important or urgent to invest for a better world. And while we're seeing a revolution in the way people invest, quicker progress is needed. We must make ethical investing the mainstay of our economy rather than an option.
In last year's annual report, we laid out our medium term strategy. Our ambition is to remain as Australia's leading responsible investor as we move towards a low carbon world. And we identified 4 strategic pillars to help us get there. Success, we said, would depend on how we turn our ideas and ambition into tangible solutions that generate financial returns and A Sustainable Future. 12 months on and rather than delaying or negatively impacting our ambition, We are emerging stronger from the pandemic.
Strategically, we have seen the green shoots we reported in our half year results continue to grow, which gives us confidence about the path our business is on. These green shoots are evident across our from operations through to investments and from marketing through to customer services. These wins, Combined with the extraordinary momentum we're seeing, tell us now is the time to extend our leadership. There's a confluence of factors that point to the opportunity that is ahead of Australian Ethical. We've seen our addressable markets, Frankly, explode on every measure and every independent research study we see.
Today's investors are increasingly seeking access to strategies across asset classes that are designed to deliver positive impacts for people and the planet as well as deliver investment performance. And with climate change driving activism at all levels, Capital markets are getting behind finding viable solutions, and the economics of climate change are shifting for the better. As Australia's largest pure play ethical investment manager and globally recognized for our approach, we have a considerable head start over our more recently And as a purpose driven organization, we have an unmatched authenticity and wanting to invest for a better world. These factors alone, combined with our products, people, strong balance sheet and positive momentum, already position us for success. But we will be more ambitious to safeguard and grow our market share on what we know will be a more heavily contested market.
To future proof our leadership position and amplify our positive impact, we are pursuing an aggressive growth strategy. Our goal is to build a much bigger, more impactful business, and we will be reinvesting strongly in particular aspects of the But what I can say is that we've enjoyed 30% compound annual growth over the last few years And even better in the last 12 to 18 months. We clearly have great momentum. Of course, continuing that growth rate off a higher base More challenging, and we do expect competitive pressure to intensify, but our addressable market has exploded, A once in a business lifetime explosion. With our current market positioning and planned investments, if we execute well, Australian Ethical may be 35 years old, a veritable veteran in responsible investing terms, But we are certain that our biggest opportunities are yet to come.
We will move at speed to capture the full growth opportunity for our stakeholders in the face of imminent competition. As such, our expense growth in the short term will reflect the reinvestment we will make into our business to realize these ambitious growth aspirations. We expect profit growth to be modest during this time. Our baseline assumption is that we will continue to grow profits, probably at high single digit to low double digits. But in the near term, Capturing growth is our primary objective, and that's primary over short term profit growth.
We do expect to see a strong increase in funds under management and revenue. Looking out to the medium and longer term, Benefits of investing in our business. Like all fund managers, we remain highly leveraged to financial markets in a time when COVID is concern and compounded by a slow vaccine rollout in Australia, and so we do expect market volatility to continue. Any performance fee generated by the emerging companies funded course is not guaranteed year on year. But as Mark said, we have a strong balance sheet, Strong profitability and even more importantly, we have a 35 year head start on the other managers who are rushing to capitalize on this moment.
We are committed to leveraging our leading position and continuing to drive positive impact for people, planet and animals at a time Thanks for joining us, everyone. Mark and I are very happy to take questions, which I'll remind you,
Thank you, John. My name is Tom May. I'm the company We've got a couple of questions, and I'll just advise everyone that we will be putting responses to these questions on the website, including, of course, this recording. John, first question comes from one of our long standing shareholders who I won't name, but I thank her for her support. And What are we doing to counter the increasing use of ESPs in the investment market?
Yes.
It's a good question. We are seeing growth in ETFs. No question about that. And it's interesting to understand why. Not all ETFs, of course, are equal.
Some are passive. Some Certainly, probably, we would argue not true to label in terms of the core underlying ethical or responsible investments approach. But As we see growing customer demand for ETFs, it's certainly something on our own product development roadmap. And so We do expect within a few months or certainly a 12 month horizon, assuming that client demand
And Another question from the same shareholder. Can the Australian Ethical Foundation look To use some of their annual distribution of funds to support protective covenanting of land for the environment.
I think it's a great question. And listen, we are so excited about the foundation and the opportunities to support great causes. And that particular thematic It's certainly one which is on the minds of the Board of our foundation. So again, I would expect us to be active in that sort of domain.
All right. Well, we don't have any more questions outstanding, but we'll stay online for just a short while to allow people Certainly anything that they have in mind. Okay. So another question has come in and that's just simply Where do you see the most potential for future return? And I'll ask John to answer that.
Look, our growth strategy will see us reinvest, as I said, where we see the most potential and future return on Shareholder capital. This means building on the green shoots we're already seeing and accelerating the strategic investments we've made to date. We have a planned pipeline of initiatives for each of the strategic pillars we have identified as being key to our ongoing success. Over the short term, our focus will be on deepening our investment capability, expanding our product offering, Growing our brand awareness and fully digitizing and upgrading the customer experience and significantly expanding our newer customer segments. And we are just excited about the opportunity.
As I said, with the exploding interest in this way of investing, We see real opportunity to really sensibly invest shareholder capital well and capture growth that will deliver Great returns for all stakeholders. And so we do imagine that creates tremendous opportunity for us to grow the business And leverage the scale that we already have.
Thank you, John. We have a question which I believe is directed at Do you have any comments around the growing cash on the balance sheet?
Thank you Yes, cash has grown. It's up to $27,000,000 Having cash is Obviously, good thing. We are mindful of how we return that back to the shareholders in the form of dividends and we've got a dividend payout ratio 80% at this stage. That cash gives us opportunities. As we've said, we're reinvesting to capture the growth And we want to keep that cash to enable us to give a great return to our shareholders.
We're obviously focused organically And we would consider other opportunities as they arise with that cash.
Okay. Thank you, Mark. Two questions that are broadly the same. So clearly interest in What products we're expecting to launch over the next 12 months? Yes, it's
a great question. As I said, we've got a growing product road map. The consumer testing and research we do says there's great interest for a variety of solutions we feel well equipped to deliver on. Within the next literally few weeks, you'll see us launch a high growth opportunity within the superannuation environment and also leveraging Our award winning domestic equities capability will be launching a high conviction fund. And so very, very pleased to
And again, we have 2 questions that have come from independent sources, but around the same theme, and they're both asking about whether M and A is The growth strategy to hit the FY 2025, twenty twenty six target.
I'll take that. So as John has mentioned, we are reinvesting for growth and that is an organic strategy. We are looking out and we see the multiples of our business 3 to 5 times. 2, we can see a pathway Quite clearly up to the 3 times. We will consider and are considering opportunities as they arise.
We When it comes to inorganic, we do look at what may add value to the shareholders.
And look, let me add to that. The Board has a willingness and preparedness to execute on inorganic opportunities, if and when the right Present themselves. And clearly, we have the financial capacity and balance sheet to entertain Those sorts of ideas. That said, we're even more excited about the organic opportunity for us given, as we said, That explosion in the addressable market and the momentum we have in our core business. Nice to not have to need to do M and A, But have the ability to do that, would it accelerates our opportunity in our growth journey.
Okay. Mark, I might throw this one was about the SMA. How has that performed in the last year?
Thanks, Tom, the SMA is an additional product that we've added to our product suite. We have it is a product that The advisers like to sell. The returns on the SMA have been fantastic. The actual fund growth is sort of still in its early stages. We believe that we're it's a great product to have to on sell and write ethical investment.
Right. Thank you. There is a question about targeted advertising by competitors in this particular space, the responsible investing space. How do we intend to deal with this sort of
competition? Look, we expect, as I said, Competition to intensify. You don't get this sort of seismic shift in the addressable markets and those interested in the style of investing And competition not look to participate in that. So in many respects, we welcome it where those Competitors are bona fide and they're responsible or ethical approach. We think that's good for the market to have a strong ethical approach.
We do, of course, warn and counsel about greenwashing and those who will dress themselves up as something Without perhaps the authenticity and DNA of a company like ours with 35 years of track record But look, we are just delighted with our own ability to market in a direct way. The core and mainstream of our business has been strengthened in direct to consumer acquisition. It's very strong, as you can see in our growth rates, plus 56% on net flows over the last year. We're very pleased with our own ability Compete well in an intensifyingly competitive market.
There's a follow-up question. So think we thought why not forget profit growth and reinvest more aggressively?
Look, it's a great question. And we actually think given our momentum, we can reinvest Very strongly and capture exciting opportunities and capture that growth and still continue to deliver Profit growth. But I think the question has the right bias. If the Board and we feel as we go, there are even more To capture growth for the medium and longer term benefit of all stakeholders, we will certainly prepare to do that. But we think we have a great To reinvest to get great return on that investment and continue to deliver strong profitability
for our shareholders. Drilling down a little bit on that, it's been noted that employee expenses are relatively stable. What can we expect on that front, Mark?
Yes. With the employee expenses, as we've discussed, reinvesting to capture the growth opportunity is Across a number of different initiatives and one of those is an investment in our capability. So as we build out our principal So as a result, we are planning to invest for the growth to capture the growth opportunity in strategic initiatives plus employee
Thank you. So perhaps coming out of the detail back to the strategic level, Question is how do we view our competitive marketplace in Australia and the U. S? And what do we see as our company Yes.
I think as I've alluded to, we expect that competition to grow and intensify. Again, as I said, we welcome that Where that's from legitimate people doing the right thing. Our moat is 2 things in my view. And I think I'll go back to Morningstar and their global assessment of the best ESG Providers globally, where we were 1 of 6. And that points to 2 things.
It points to our genuine authenticity. Ethical investing is our DNA. It's all we do. It's everything we do. It's not an add on.
It is our purpose. It is the reason our organization was founded, and that's what Morningstar and others recognize. And so that is a very difficult thing to imitate in a short period of time. And then, of course, we combine that and the other part of that motive is just the outstanding investment returns we have delivered But we now have a 20 year track record of our performance at our main funds. So this is something where we have deep Domain knowledge and expertise and comes from a genuine place of authenticity and strength.
So that's a significant moat, which part of the strategy is investing to Continue to accentuate those strengths and build on them.
Thank you, John. And that brings us to the closing It's an extremely busy day and I'm sure people have left or out need to leave to go to other briefings. I will say there has been one question about a
Thanks very much for joining us, everybody, and have a good day and keep safe. Thank you.
Thank you.