Half yearly result conference call. I am joined today by my colleagues, Melodie Zakaluk, our CFO, Charles Falck, our Deputy CFO who's going to be taking over for Mel when she retires at the end of the year, Steve Ford, our Global Head of Distribution, and of course Rajiv Jain, our Chairman and CIO. If we can go to the next slide, I'll give the highlights of our financial result. We had a very strong first half of the year. We saw net flows of $8 billion that brought our funds under management at the end of June to $172.4 billion, a record for us for quarter end. I note that as of yesterday our funds under management was estimated at $171.3 billion. Now that's an estimate because we don't have final numbers yet and they're not audited.
As you'll note, our FUM as of yesterday was quite close to the record FUM that we ended Q2 with. Net revenue for the period was $403 million, an increase of 11% from the year ago prior same period, and net operating income grew 12.3% to $306.8 million. The board has declared a dividend in the second quarter of $3.56 per share, a 90% payout ratio of our distributable earnings. If we go to the next slide. As you know, I always say that this business begins and ends with performance. Obviously in the short term we've had some challenging relative performance. The good news is that over the long run, our inception to date numbers remain very, very strong. Our risk adjusted numbers remain very, very strong. As we'll get into in great detail here, these are markets where we expect to underperform markets.
We say as much to our clients. Our clients have those expectations as well. I think that explains largely why the business has held in as well as it has given the headwinds in relative performance in the shorter term. If we go to the next slide, you know that I always like to be judged by what we call our operational value added. I think that you should hold me to account and our team to account for how we add value to you as shareholders as compared to a static GQG. As you can see, again, over the long run, I think we've done a fine job of adding value to the tune of $122 billion between flows and excess returns. Again, in the shorter term, you see of course the headwinds from the short term relative performance.
I'm very confident that our portfolio positioning, which is very intentional for the market that we're in, will position us well to continue to add value both from investment returns and continued value added through distribution over time. If we go to the next slide, I'll provide a few highlights from the first half. First of all, again, just to reiterate on performance, all of our four primary strategies are ahead of their benchmarks from inception to date and have top quintile alpha and Sharpe ratios since inception. 10 of our 14 mutual funds carry Morningstar Gold ratings. In terms of distribution, we remain a top 10 active mutual fund family ranked by net flows and we are the top net flow earner for global equities in Australia. Our UCITS complex ended the period with over $8.5 billion of assets, an increase of 6% since the end of the year.
Strategically, I'm going to hand to Charles here in a minute to talk a little bit about a new product area, our launch of our first ETF. I want to frame it to recognize that one of the strengths of this business has been the very broad operational infrastructure that the team has built that's enabled us to be active in many markets and many different fund structures. Clearly, the fastest growing parts of the market in retail are retail separately managed accounts and actively managed ETFs. We've had retail SMAs for a couple of years now and in this period we launched our first active ETF. Charles will walk you through both the market statistics and the reason for our launch into that market. With that, Charles, I'll hand to you.
Thanks Tim. If you switch to the next slide please. Starting with retail managed accounts, I want to just touch on the industry trends as Tim mentioned and how we leverage that over the course of the last three years. On the left hand side you see the chart of the historic development of that particular segment and how it's forecast to grow. As Tim mentioned, we launched retail managed accounts in the summer of 2022 and currently that business has grown from $0 to $7.4 billion over the course of three years. We were able to leverage an existing operating model and infrastructure to expand our business and add this to what I would argue is a broad lineup of Australian managed funds, Irish UCITS, and then domestically in the U.S. mutual funds as well as collective investment trusts and private funds.
It's an extension of that sort of product lineup that we were able to do without significant capital expenditures or investments or a change in cost structure, but really helped us address a retail segment and benefit from this growth trajectory. If you switch to the next slide. Similarly, but more recently we launched our first active ETF. I think we're all aware of the attractiveness and growth that ETFs overall globally have experienced. As Tim highlighted, we're focused on the active ETF space which similarly has gone through strong growth. With the launch of GQGU which happened on July 14, we look forward to growing that business and potentially launching future ETFs as well. The same story really holds here with the existing infrastructure, the existing team, we were able to do that. With that, I'll hand it over to Melodie Zakaluk for comments on the mid year financials.
Thank you Charles. If we could go to slide 9 please, we're pleased with our financial results for the first half of 2025, and in the wake of an environment of volatility and uncertainty, GQG experienced double-digit growth year over year on key metrics including net operating income, net income after tax, and diluted earnings per share. As a result of 16.8% average FUM growth from the prior year period, FUM growth was driven by $8 billion net flows in the first half of 2025 with the tailwind from equity markets that were mostly positive around the world. GQG's operating margin for the first half of 2025 was 76.1%, an increase of 90 basis points from the first half of 2024, driven by an 11% increase in our net revenue versus a 7.1% increase in operating expenses. Slide 10 please.
As a result of the strong growth, we saw net revenue increase 11% from the first half of 2024. Our revenue continues to be primarily driven and constituted by management fees, which represented 96.6% of our net revenue in the first half of 2025. During this period of market and relative performance volatility, we said that a high proportion of management fees as compared to performance fees provided a foundation for stable earnings. Our average management fee during the first half of 2025 was 48.2 basis points compared to 49.6 basis points for the first half of 2024, primarily due to a shift in strategy and vehicle mix. Operating expenses increased 7.1% compared to the prior year period, primarily as a result of growth in our FUM and investments in human capital.
As expected in a human capital business, we believe the greatest investments we can make are in our current team and in attracting other talented people as needed to operate the business and serve our clients. Compensation expense increased primarily as a result of new employee additions. While our sales were strong in the first half of 2025, sales commissions were lower relative to the prior period as a result of certain plan changes in 2025. Compensation and benefits as a percentage of net revenue decreased modestly to 13.7% from 14.1%. Third-party distribution servicing related fees are primarily related to the wholesale channel and are a FUM-based expense, which increased from the prior year driven by higher FUM in vehicles where these fees are incurred.
General and administrative costs in the first half of 2025 decreased by $1.6 million as a result of lower professional fees, which was partially offset by an increase in middle office fees due to higher FUM and increases in other general business expense including occupancy fees. Non operating income increased $2.2 million, primarily driven by a favorable foreign currency revaluation in the current period. With regards to our income tax expense, our U.S. GAAP effective tax rate decreased from 27.4% to 26.44% due to changes in state and local taxes. The net income attributable to non controlling interests is a 40% minority ownership of the private capital solutions asset management business by our PCs portfolio managers. Please go to slide 11. GQG Partners Inc.'s financial condition continues to be strong with no debt and in excess of $100 million in cash.
The primary use of cash is for working capital and dividend payments. Growth in cash and accounts receivable are aligned with growth in revenue. Liabilities increase from the seasonal timing of payment of annual bonuses and service provider expenses. Let's go to slide 12 please. As noted on the balance sheet, the primary use of cash continues to be working capital and dividends. GQG Partners Inc. has distributed in excess of 90% of distributable earnings in the first half of 2025, resulting in $224.1 million in dividends paid during the period, which is a 33.6% growth rate from the half year 2024. Now Steve will take us through a performance and distribution update. Steve.
Thanks Mel. Operator, if we can start on slide 14. Appreciate the opportunity to update everyone on performance as well as the asset base and flows. Before we dig into that in a bit more detail, I actually want to start with our investment philosophy because I think this is key to understanding performance both when we outperform and when we underperform. We talk to clients about our philosophy. Investing as forward looking quality, and I could talk to you about it for a long period of time. To boil it down in summary, I would say forward looking quality is all about compounding. It is not about style box investing, whether you're trying to be a growth or value manager. The underlying point of that is that investors then expect a certain return pattern from us over time.
Any of our long running sophisticated investors, if I were to ask them, if the markets were to rally 20%, 30% quickly in a short period of time, would you expect our strategies to outperform generally? Of course they would love if that was the case, but most of them would say no, we would not expect you to outperform. They do generally expect us to outperform in periods of market weakness. This aligns with our more adaptable, compounding, focused, higher quality overall strategy that we bring to market. It is important to understand what investors are actually sold and educated on when they purchase our strategies, which will give you a good understanding of what their tolerance is for underperformance on a go forward basis. As I take you through the performance metrics, I think it'll give you more context. Let's move to slide 15.
This is a look at very shorter term performance that Tim highlighted earlier on a one year basis as well as our inception to date performance. This looks at it relative to benchmark and relative to peer group. The shorter term performance, you do see some headwinds, but despite that being included in the longer term performance, we're still amongst the best performing managers in the world. I would remind everyone that you don't have to look very far back at our history to find very similar periods of one year underperformance. Investors who stuck with us through those times have generally been rewarded over the longer term periods for buying us or sticking with us during periods of underperformance. Let's move to the next slide. Of course, the shorter term period of underperformance versus longer term periods of outperformance.
It's important to look at that from an element of persistency. These graphs give you the rolling three and five year persistency of outperformance by each of our four core strategies. What you see is that you're talking about 100% or very high 90% percentiles in terms of outperformance relative to benchmarks in all of our strategies. As an allocator, it's very hard to pick, you know which strategy is going to outperform when on a short term basis. I have another visual that'll help you understand that. It's those longer term numbers that really drive both new allocations as well as, you know, ability to retain assets. Let's move to the next slide please. Risk adjusted returns. I think the point here, many of you have seen this before, we like to show this northwest quadrant picture.
The important thing here is to realize this is including the one year number where we just underperformed. Despite that, if you're an allocator looking on an intermediate to longer term basis on a risk, risk to reward standpoint, these strategies look extremely compelling. Let's move to the next slide. This is a new visual I wanted you to take a look at. This is taking a look on the X axis at market relative risk or beta. On the Y axis it's taking a look at risk adjusted returns, alpha, and the blue dots are every one year period for those strategies. I think it's fair to say there is a good amount of noise in the one year, so the dots are kind of all over the map. If you go to the three year numbers, the gold dots, it starts to narrow in.
If you go to the five year picture, the green, it really focuses in on the northwest quadrant. Again, if you think about it from the allocator's perspective, if you think about it from what the performance pattern expectations should be around, our strategies help give you a picture of what clients are experiencing relative to expectations. Let's move to the next slide. That of course translates into other risk adjusted return rankings and different ratings like Morningstar. We always want to share these. We continue to have strong both star ratings and medalist ratings as Tim highlighted earlier. Next slide. Now let's look at the asset base and flow based picture. Not a lot of change now in client diversification, whether that's by region, strategy, or channel. Flows continue to be dominated by North America given the size of the market.
We also see a lot of bright spots in other areas, in particular our wholesale business in EMEA. Next slide please. Let's try to break down those flows just a little bit more. First half 2025 actually saw some redemption pressure moderating in the institutional channel and continued strength in the wholesale channel. To give you a sense of what impact flows may or may not be having on those channels with near term performance, obviously if you're following along, we posted an outflow number for August already. What we're seeing in the institutional channel is those decisions, if there's redemptions, are really largely at this point not based upon performance. It's more about structural changes that may be occurring in a mature client base where there's changes to programs, asset allocations, consulting, actuarial, a bunch of other things that can have influence.
Not to say that shorter term performance doesn't pose a headwind, but allocators in the institutional channel are typically very long term focused and very focused on understanding whether underperformance is expected in a given period of time relative to style and strategy. The wholesale channel, where we've had continued strength, you are more likely to experience short term flow headwinds because of shorter term performance, in particular if the client is a newer client where they may have just had an entry point with us and may experience some of that. There's a bunch of positives and kind of offsetting negatives in our flows right there where I think we have a lot of strength continuing in the intermediary or wholesale channels. Institutional I think will continue to be kind of mixed based upon some factors in and out of our control on a go forward basis.
Let's move to the next slide. This shows that strength that's continued in first half of 2025 for our wholesale business around the world. What excites me about that is there's huge market penetration opportunity that remains here. There are many platforms where we either are not on today or we're just getting on. In particular with the SMA business that Charles mentioned earlier and now the ETF coming behind it, there's wide open greenfield there for us to get new product approved, to open new sales pipes that we'll be able to capitalize on. Obviously it takes time to continue to accelerate some of those new platforms, but our headroom to grow is extensive in this channel. Let's move to the next slide. As always for this audience, I want to make sure that we highlight our Australian efforts.
While H1 2025 is a little bit slower than some of the prior periods, that's much more a function of what we see as broader Aussie equity flows. If you look at the last three years, we still maintain the number one net flow position relative to peer groups and feel we're in a particularly strong position to capture flows as they exist on a go forward basis. Next slide. Finally, I'll simply end with one of the things that we take pride in, which also I believe to be quite a leading indicator of our ability to capture flows and is the amount of work that people are doing to review our firm and our strategies. This takes a look at eVestment, the largest database of investors and their activity in that database in our strategies relative to our competitors.
Of course you can see we kind of dominate the views by investors in this. I think that means that our client base is extremely engaged with us. We are seeing green shoots despite some headwinds in certain areas with short term performance. As that turns and as our performance is likely to experience a mean reversion if that occurs, I think we're in a very strong position to capitalize on flows on a go forward basis. With that I'm going to pause, I'm going to turn it over to Rajiv Jain, our Chairman and Chief Investment Officer, to give you some thoughts on current markets and portfolio positioning.
Thanks, Steve, and thanks everybody for joining. Obviously, particularly the second quarter has been disappointing. However, I think it's important to put the performance in sort of bigger picture context. We've always said that there are two types of market conditions where we are likely not to do very well. Number one is when the markets are very frothy, and number two is when they're very cyclically oriented. If you go back to 2021, second half of 2021, we underperformed almost by similar magnitude in the second half, particularly last quarter. If you go back to earlier periods of my career, you've seen similar performances or underperformances when the markets are very frothy, going back to 1999, for example. The second part of this is the underperformance can be broken up into two types of underperformances.
One is where the stock picking has been bad and you've kind of been bleeding slowly performance wise over the long run. The second one is kind of much more conscious decision to pivot the portfolio, which we feel is necessary part of a longer term sort of better downside protection. We feel it's very different to have underperformance because the first one versus the second one, because the second one we can easily pivot back into other areas, which we have done from time to time depending on the conditions. Having lived through the dot com bubble and some of the other ones, we feel this one is actually dot com on steroids.
If you look at the valuation parameters, like information technology as a sector, which is almost a third of, a little more than a third of the S&P, and meaningful part of emerging markets and other indices, on a price to revenue basis today the valuations are in most cases almost 2x the valuation you saw at the peak of the bubble. Anybody says that we might be two years too early, we're basically saying that this bubble would be maybe more akin to what happened in Japan.
Which i s kind of really extreme scenario, not to mention that conditions are hardly similar. The second part is that if you look at the underlying economic conditions, we feel they already begin to soften in so many different areas. You've seen that. The third part is the focus on earnings revisions or earnings growth. If you look at what happened in 2000 or 2007, the more recent ones, and a bunch of other sort of similar periods, earnings almost always lags. In fact, if you go back to 2000, earnings revisions were positive till almost September or October 2000 while the Nasdaq was already down more than a third. Our view is that the underlying conditions are far worse in terms of revenue being generated because of AI.
I mean, looking at under $50 billion cumulative outside the infrastructure build out, and not to mention there's a massive competitive intensity in the hyperscalers. It's hardly a monopolistic position that we have seen or that we were seeing in 1999 and in 2000, where Microsoft, for example, in 1999 grew earnings at 70%, revenue was growing at 30%. It was a true legitimate monopoly. Now you had companies like Oracle actually undercutting pretty aggressively, and they have said specifically between 35%- 40% price, you know, price competitiveness versus some of the hyperscalers. You've already seen signs of slowdown in AWS, where the margin decline was more than 500 basis points last quarter on the AWS side. We feel that you already begin seeing, you know, you're seeing signs of cracks appear in so many different areas. The problem is that these things are notoriously difficult at times.
They could be entirely be very early. The other side of the mountain, the sell off can be pretty sharp and swift. If you look at the examples, whether it's 2007 post-Lehman or the dot com bubble or some of the other environments like emerging markets in 1994, the sell offs can be very strict. Our view is that we need to stick to, as a fiduciary, deliver to what our core proposition is, which is better risk-adjusted returns over the long run. We feel that we ultimately will get paid for that. In the meantime, the portfolios are actually compounding at fairly steady rate of sort of high single digits with the fairly attractive dividend yield. It's not that the portfolio is not growing, its portfolio is growing, except we are not buying what we feel fairly cyclical learning schemes, a lot of check names. Tim.
Thanks, Rajiv. Thanks, team. I think we can now open it up for Q&A.
Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you're on a speakerphone, please pick up the handset to ask your question. Please limit your questions to two questions at a time. If you wish to ask a further question, please rejoin the queue. Your first question comes from Nick McGarrigle with Barrenjoey.
Hi team. Thanks for taking questions. I think we can obviously appreciate the discussion around market positioning and the view that you're expressing through the portfolios. Maybe just a question around the client understanding, appreciation of that. We've obviously seen some outflows of late, just some client perceptions on that and kind of a view on how much they understand that message.
Yeah, Nick, look, I'll take the first sort of high level of that and then Steve can add to it. As Steve's comments were getting at, we do a lot of work to condition clients that these are the frothy markets like these. As Rajiv said, this is as frothy as we've probably lived through. Clients should expect us to underperform on a relative basis. I think clients expected of us. That doesn't mean that clients are always happy with it. I think that where you're seeing the outflows will tend to be clients who are maybe newer with us, maybe have less of a relationship with us, maybe entered at a period where they've experienced absolute loss in their portfolio. Those clients I think are greater or more risk.
For the vast majority of our business, I think the clients really do understand what we're doing and when we have the opportunity to explain the portfolio positioning, I think clients really appreciate the rigor with which we are positioned and the fact that it's different from many of their other investment measures or in fact than their passive exposure they may have in the S&P. I think, Nick, that where we are today, I feel pretty confident the clients understand the positioning, are not surprised by it, even if they're not thrilled with short term performance.
Yeah, I agree with all that. Our communication strategy has been to be extremely proactive and present with clients on this. We were communicating the positioning prior to our last quarterly client investment update. In that update, where there are literally thousands of people who register and either attend the live or attend the on demand version, this was rolled out in great detail. There have been several follow on communications, both formal and informal, with the client base across channel. I feel really confident that our messaging is out there to them about what and why. I think, by and large, most of them agree with the positioning, but over time they expect it to work.
Yeah, thanks, that's helpful. I mean, there was a bit of compression on management fee margins. Is that just a pure mix shift or is there anything we need to consider in terms of that? I think it went from 50 basis points down to kind of 49. Anything to think about on that side?
Yeah, no, it's just pure mix shift, Nick. You know, increased SMAs in the U.S. equity strategy as a percentage of the total, total assets.
All right, cool. Thanks for those two questions. Appreciate it.
Yep.
Your next question comes from Scott Murdoch with Morgan's Financial.
Thank you. Thanks for taking the questions. Firstly, a little bit more around the client side, obviously really diverse space across channel and client sets. Can you maybe just give us an idea of concentration or diversity around the asset consultant side of the business? Obviously you've been strong there in early days. Just an idea of how much FUM is tied to decisions of certain asset consultants and what the concentration might be of those consultant decisions.
Yeah, Scott, look, we haven't provided exact numbers, but what I'd say is we have very broad support from asset consultants. If you go all the way back to our earnings roadshow, I think we had nine of the top 10 and 20 of the top 25 asset consultants in the world supporting us. It's a pretty broad base. We have certain consultants who are obviously larger than others. I don't view any one particular asset consultant as being, you know, providing a client concentration risk. I would say that, of all of the clients, the question Nick asked just a second ago, the asset consultants more than anybody truly understand the positioning of the portfolio and the expectations that these are periods where we would have relative underperformance. I don't view that the strict nature of the short-term relative underperformance puts us at risk with asset consultants.
Now look, to Steve's point, we ultimately have to perform and you don't have forever, but I don't think we're anywhere near a period where our performance would put us at risk with the asset consultant community.
Okay, thanks Tim. Just the second question. Obviously, PSC division's really at its early stages, but more broadly, I guess just an update on your thinking around or intentions to leverage your strong distribution operational infrastructure that might not be necessarily through PSCs, but other intentions to bring on other teams or the like and expand the diversity of the business. Can you just update there?
Yeah, yeah. I think, look, right now my view is that we need to be hyper focused on communicating clearly to clients, make sure the portfolio positioning is right. I'm not looking for distractions of M&A of any sort. As we always say, I want to know what's going on, I want to be aware and we want to be nimble and reactive. I think the point that Charles was making earlier in the presentation is the important one here. We can leverage this both infrastructure and distribution capability that we have with other product sets that are within the core strategies that we run today. That's the way we're choosing to leverage the infrastructure and distribution today. I think that there's really very significant upside on a three, five, seven year basis to continuing to drive both active ETFs and retail separately managed accounts.
I'm very excited about that, that we can just do from an organic standpoint and with very little risk and no distraction to the business. PCs continues to go well. As you know, as we've always said, it's not going to have a material impact on our financials, but the team's performing well. They've added a couple portfolio companies to the portfolio, continue to bring on new limited partners. I'm very, very pleased with what we've been able to do there, albeit in an immaterial way from an overall financial picture.
Okay, thank you.
Your next question comes from Shreyaz Patel with UBS.
Hi guys, two questions from me. Firstly, just on the performance fees which are obviously coming through a bit stronger, is there any color you can give us around the look back period around those?
It sure is. You know, as you know, we don't give the details of our performance fee structures and so I don't have any comments that I can give that would be at all useful right now. You know, like I've always said, I think that we should assume that, you know, performance fees are, you know, low to mid single digit % of overall fees. Obviously in a year like this where performance has not been as strong on a relative basis, you would expect that unless our investment performance comes back, we wouldn't have as much contribution in the go forward period for this year end.
All right, second question. Just on your headcount growth. If I sort of back solve for it, it looks like you added kind of mid single digit headcount during the half. Just keen to hear about what the outlook for that is and if there's any further areas where you need to be adding investment in headcount.
Yes, Shreya. I think we've added seven people year to date to the team, you know, and I would assume that you have similar very low level headcount growth. Where we see opportunities, we will make investments. As we said before, the good news is that almost all of our headcount growth these days is with more junior staff. It's lower cost headcount or it's in a specific opportunity where we see a real opportunity to go drive revenue with something. In terms of infrastructure and core business, I don't see, you know, certainly I don't see meaningful expensive headcount. We're always going to be, you know, we're super disciplined about expense growth as you know, you can see it in the margins.
We're obviously super disciplined in periods where we're seeing less robust fund growth, you know, and we will invest if we really believe that there's a return on investment. We're very disciplined in that.
Great, thanks.
Thank you.
Your next question comes from Julian Braganza with Goldman Sachs.
Good morning, guys. Thanks so much for taking our questions. Just your first question on the sales commissions. Can you maybe just clarify what changes were made to the sales commission plan? Has it led to the reduction in sales commissions? You're flagging that. If you can, understand that this will have any impact on new flows and just how the structure's changed. Thank you.
Thanks, Julian. Yeah, we don't comment for competitive reasons on the structure of comp specifically. What I'd say is that I think our sales team feels very, very good about the way they're compensated. I do not expect any of our compensation structures to have any negative impacts on selling or client service. I think the team is hyper focused on both service and selling right now. No, I don't see anything, any negative impacts with respect to sales comp.
Okay, great, thanks. The second question, in terms of the investment performance, has this started to flow through the long term? You flagged a lower long term incentive compensation. Is that a reflection of the weaker performance coming through the expense numbers or should we see more benefit come through depending on performance in the second half? That's the first question. Also, just in terms of the investment team, has there been any changes to the investment team given the performance pressures and impacts on compensation? Thanks.
I'll take those in reverse order. In terms of the team, no, absolutely no changes to the team. I think we're very pleased with the work that the team has done and to be clear, we believe very strongly in our portfolio positioning. We believe that our clients will be rewarded for the way that we're invested right now. We're extremely happy with the quality of the work of the team. I've said this in past periods, you know that we have to be careful when projecting out how compensation works because you can have periods where the performance may not be there, but the quality of the work is quite high and you still pay people well. You may have periods where we get exceptional performance, but we don't feel the quality of the work really drove that performance and so people may not get paid well.
It's not as tight a tie to either investment performance or flows. We are much more qualitative in the way that we think about the overall formulation of compensation for the team in terms of how that impacts. I'm not sure that I fully understood your first question, but if you're asking whether we're seeing that in the expense line item related to compensation, I don't believe I can say definitively. We have not changed the expense line in compensation, for example, in the way we accrue for bonuses based on investment performance.
Okay, great. Thanks so much for that.
Your next question comes from Elizabeth Miliatis with Macquarie.
Good morning and thanks for taking my questions. Just the first one, just around cost, you know, the cost to income was better than where the consensus numbers were. How should I think we've talked about previously sort of maintaining similar levels going forward, but are you still comfortable with that? How should we think about those cost to income number in the new and over the medium terms?
Thanks, Elizabeth. What I always say is that the margin that we achieve is an outcome of the decisions we make. We don't make decisions to achieve a margin. It's an artifact of how we decide we're going to invest in business. We do not have a goal to maintain a 76% margin. Having said that, if assets continue to grow, the math is pretty straightforward that margins will grow. The number one impact on margin at a business of our scale is investment returns in the portfolios. If market's up 10%, we're going to have margin expansion. If markets down 10%, we're likely going to have margin contraction because we will not, in all likelihood, have incremental expenses, changes to operating expenses that would keep pace with either of those types of magnitudes of changes on revenue.
Having said all that, I think that it's reasonable to assume that we're not going to see, if assets stay flat, I don't see a reason that our margins would deteriorate. I equally don't see them expanding meaningfully from here.
Okay, thank you. Just on the ETR, less exciting questions, you know, was a little lower this period just given those tax changes. What you achieved this period, is that a safe bump from going forward or do you see a bit more benefit to come through next half?
I'll give my response, but defer to Mel to disagree with me. I think the best way to approach the effective tax rate is to simply take the most recent print and extrapolate it forward because it is unpredictable. The complexity of the overall tax expense is inherently unpredictable. Different states with different rules that get adjusted all the time. The mix of businesses happens to come from those different states is unpredictable. I don't know any other way than to take the most recent print and carry it forward, but recognizing that it will in all likelihood be different at the end of the period.
Yeah, Tim, I agree. That's the best way to go in terms of how you think about it.
Thank you. If I can sneak in a really quick one just on the base management fees, we talked about it earlier, but exit fee and something we should be looking to for the nature.
Sorry, I didn't. Can you ask the question again? I'm not sure I understood the question.
Sorry, just the base management fee has come down this half versus last half. What's the exit fee, you know, as of June?
I'm not aware of any exit.
Tim I think the exit, as I understood it, I think the exit fee. I think it's as simple, as much as I understood the question, it's all about the weighted average. If the U.S. grows faster, the weighted average goes down. I think the exit would be, it would be a number, but I don't think one should extrapolate that it's a function. If EM grows faster, the weighted average will creep up, and if the U.S. goes faster, the weighted average goes down.
Yep. Okay. All right. Thank you.
Once again, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. Please limit your questions to two questions at a time. If you wish to ask a further question, please rejoin the queue. Your next question comes from Andrei Stadnik with Morgan Stanley.
Good morning. That's right. Can I ask around performance in August to date? I see you've given that FUM figure, which is, I think, quite a pleasant surprise in terms of where the FUM is through halfway in August. Can you also talk a little bit about your performance, performance August to date? Given what you said earlier, it sounds like performance should be also more encouraging during August.
Yes. You know, we don't, you can go look up. It's all obviously public, the mutual fund performance in aggregate. What I'd say is across the strategies in general, we're slightly better than market for months to date. Rajiv, you can extrapolate if you want on that.
Yeah, look, I think even more than that, I would say that when markets are as constant as they are now, and they were not in, for example, GFC, but they were during the dot com, what you do see is when things reverse and we saw, and again, I don't want to definitely not extrapolate what has happened last few days, but you see, because these names are very crowded. I mean, the gross leverage level in hedge funds I believe is running around 300% gross and net is 60%. When things turn sour, gross is net because the shorts have to be covered. In that environment, we feel you saw an early glimpse of that. We feel last few days the reversal is going to be vicious because all these, I mean, Nvidia trades $30 billion, $40 billion a day when the money leaves.
These names, as you know, we were, by the way, very bullish on these names not that long ago. When these names reverse, there's a lot of money that'll go out, but the funnel to get in is actually pretty narrow. Our view is that it will not be simply everything goes down. Who knows, right? We talk about market prediction, which is always, you know, we gotta be careful about doing that. I think last few days, if it's any indication, look, we are actually, I mean, just to be clear, we feel this is the time to go offensive in terms of how we're positioning, simply following the trend. I mean, it could kill shops. I've seen that first time during the dot com bubble burst and what happened after GFC, a lot of shops which had the best performance didn't exist.
We saw that recently in 2020 and 2022 because we got similar question 2021 second half, we underperformed almost similar margins and it unraveled in months. These things, when they unravel, it could be months, not years. Who knows. I think what you want to see is that as the air comes out of the, you know, out of this, the AI bubble, we feel it is actually bubbles now because of, look at ChatGPT-5. Right. I mean, seems like it's not going to be as effective. I think it would be quite exciting, frankly.
Thank you. Thank you. For my second question, can I go back to the base C? Can I check in on the channel vehicle mix effect? I think some of us are a little bit surprised with the two basis points sequential decline given the flows were going more into wholesale. You've pointed out hopefully that SMAs are really taking share. Can you give us a feel for what is relativity of fees on your SMA versus your mutual funds?
You know, Andre, we haven't disclosed that historically. I don't want to get into that on a conference call. What I'd say is that it's not just the vehicle, and I think that's probably less of an impact than it is the strategy going from EM to U.S. Equity. I think that's the bigger impact that's driving the average basis point down.
Thank you.
Your next question comes from Sean Lowe with Morningstar.
Hi everyone and thank you for taking my questions. I just had a couple of them. The first one is just on your sub advice mandates. Could you please remind me on how sticky they are compared to your institutional mandates? What obstacles would these clients face if they were to switch away from GQG Partners?
Yeah, you know, I'd say that generalizing my view is that sub advisory is actually, at the institutional, at the platform level, more sticky even than institutional business because not only do the sub advisory partners we have underwrite us in the same way with the same rigor that an institutional investor would, but they also have business interests and lots of operational infrastructure involved in being in business with us. I think it's pretty rare for a sub advisory partnership to go away. In terms of the big sub advisory relationship, obviously the one that dwarfs everything else is Goldman Sachs. In that case, I think that we have such a deep relationship, it is co-branded. Our PMs are the ones presenting when we have large, you know, large opportunities. It is so tied to GQG Partners Inc.
that it's very, very hard for me to imagine how Goldman would ever choose or why Goldman would ever choose to try to go away from GQG Partners Inc. with that mandate.
All right, thanks. Maybe the second one is also on your firm. Sorry, but could you please remind me across your strategies, do your products tend to be used as a core product or as a satellite in a core satellite strategy? Did you find the conversations with clients easier or harder as a core product or as a satellite product, or are they broadly the same?
Yeah, you know, I think by and large, where we are used for global or U.S. equity, we would be viewed as a core manager. When we get into international and EM, it will tend to be, to use this terminology loosely, more satellite. Even within those buckets, we would be a core manager for an international allocation or a core manager for an EM allocation. I am generalizing, obviously different clients think differently about this. I think that for most of our clients, they would view us as one of the main approaches that they would use to get exposure to the particular asset class they were looking to get exposure to. Certainly, that's how we position ourselves. Is it easier or harder? I think that what I say is the scrutiny is deeper, which is good in that clients really understand who we are and what we do.
In periods like we're having where we've got relative underperformance, they're more likely to stick around with us because they have done the work, they've underwritten us, they've made this a core allocation and they understand what it is that we do. Steve, I don't know if you'd add to that anything.
Yeah, all that's correct. I mean, I think what is uncommon is that we are the sole manager, whether it's core or satellite. Not to say it doesn't ever happen across thousands of clients. That would be probably the most acute situation where somebody has used you as a core. You're the only manager, and of course you've underperformed in a period where they would like to have some performance, but that is just incredibly rare. Typically, if it's core, there are multiple managers making that up, playing different roles of that core. Satellite is certainly the easier one because people expect more diversification coming out of satellite. It's just hard to generalize across so many clients. Typically, we've been built or hired as part of a broader portfolio to play a role, and that kind of goes back to that performance pattern that we were talking about earlier.
All right, got it. Thank you. Yep.
Your next question comes from Siddharth Parameswaran with J.P. Morgan.
Good morning. Two questions if I can. One, just going back to the issue of revenue margins. You do say that most of the impact was basically because of, sorry, the reduction in average fee was due to mix, but that suggested there were other factors as well. I think you said primarily due to mix, sort of understanding. Are you having more conversations about, you know, relating to average fees for your strategies just in a period of underperformance? If you could just give us some idea of.
Yeah, no, we're not having any conversations on pressing us on fees. That's just not, I mean, perhaps one conversation somewhere, you know, amongst 1,500 clients, but not that I'm aware of and certainly not material to the overall fee level.
Okay, thank you, that's very clear. Just a second question, just around some of your earlier distribution initiatives. I think, you know, opening up the Abu Dhabi office, I know it wasn't just for distribution, but if you could just comment on whether there are any early signs of wins and likely additional inflows that might come from that.
Yeah, you know, again, I remain sort of bullish on that region as we've said all along. I think that we have to take a three to five year view and it will take time, but we have several billion dollars of client assets in the GCC already. It's already a fairly meaningful segment for us geographically. You'll recall, one of the areas that I think that we really want to drive distribution in that market is in the high net worth, ultra high net worth family office market. There have been early signs of interest, although not material new net flows to date, but I continue to believe over an intermediate period of time, that that can be a meaningful market for us.
Okay, thank you very much. Yep.
Thank you.
There are no further questions at this time. I'll now hand back to Mr. Tim Carver for closing remarks.
Thank you. Thanks, everybody, for joining us. Appreciate the interest and appreciate the support. We will look forward to seeing folks in Australia when we come down for a road show here in a few weeks and wish you all the best.